UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)
	☒	Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended: February 1, 2014

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 Number)
1778 McCarthy Boulevard Milpitas, California	95035
(Address of principal executive offices)	(Zip code)

Registrant’s telephone number, including area code: (408) 262-9003

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, no par value	The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ☐    No  ☒

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  ☒    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  ☒    No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

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 definition of “large accelerated filer”, "accelerated filer" and "smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer  ☐     Accelerated filer  ☒      Non-accelerated filer  ☐      Smaller reporting company  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  ☐    No  ☒

The aggregate market value of the registrant’s common stock, no par value, held by non-affiliates of the registrant on August 3, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $166,481,882 based on the closing sale price of $5.26 per share on that date.  Shares of common stock held by each executive officer, director and shareholder known by the registrant to own 10% or more of the registrant’s outstanding common stock based on Schedule 13G or 13D filings and other information known to the registrant, have been excluded because such persons may be deemed to be affiliates.  This determination of affiliate status is not necessarily a conclusive determination for other purposes.

There were 34,447,417 shares of the Registrant’s common stock outstanding on April 11, 2014.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference information from the registrant’s proxy statement or as an amendment to this Form 10-K to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this report on Form 10-K.

1

Sigma Designs, Inc.

2014 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

		Page No
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	11
Item 1B.	Unresolved Staff Comments	23
Item 2.	Properties	23
Item 3.	Legal Proceedings	23
Item 4.	Mine Safety Disclosures	24
PART II
Item 5.	Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	24
Item 6.	Selected Consolidated Financial Data	26
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 8.	Financial Statements and Supplementary Data	42
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	76
Item 9A.	Controls and Procedures	76
Item 9B.	Other Matters	76
PART III
Item 10.	Directors, Executive Officers of the Registrant and Corporate Governance	76
Item 11.	Executive Compensation	77
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	77
Item 13.	Certain Relationships and Related Transactions and Director Independence	77
Item 14.	Principal Accounting Fees and Services	77
PART IV
Item 15.	Exhibits and Financial Statement Schedules	77
Signatures		78

2

FORWARD-LOOKING INFORMATION

Throughout this report, we refer to Sigma Designs, Inc., together with its subsidiaries, as “we,” “us,” “our” or “Sigma.”

This Form 10-K for the year ended February 1, 2014 contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are contained principally in the sections entitled “Risk Factors,” “Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

• anticipated trends and challenges in our business and the markets in which we operate;

• our expectations regarding our expenses and international sales;

• plans for future products and services and for enhancements of existing products and services;

• our research and development;

• our ability to attract and retain employees;

• our anticipated cash needs and our estimates regarding our capital requirements and our needs for additional financing;

• our anticipated growth strategies;

• our intellectual property;

• our ability to attract customers; and

• sources of new revenue.

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 statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in this Form 10-K in greater detail under the heading “Risk Factors.” Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Form 10-K. 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.

You should read this Form 10-K and the documents that we reference in this Form 10-K completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

PART I

ITEM 1.      BUSINESS

Overview

Our goal is to be a leader in intelligent media platforms for use in home entertainment and control. We focus on integrated system-on-chip, or SoC, solutions that serve as the foundation for some of the world’s leading consumer products, including televisions, set-top boxes and video networking products. All of our primary products are semiconductors that are targeted toward end-product manufacturers, Original Equipment Manufacturers, or OEMs, and Original Design Manufacturers, or ODMs. We sell our products into four primary markets which are the Digital Television, or DTV market, the home networking market, the set-top box market, and the home control market. We derive a portion of our revenue from other products and services, including technology licenses, software development kits, engineering support services for hardware and software, engineering development for customization of chipsets and other accessories.

3

Products

Media Processor SoCs

Our media processor SoC product line consists of a range of functionally similar platforms that are based on highly integrated chips, embedded software, and hardware reference designs. These highly integrated chips typically include all the functions required to create a complete system solution with only the addition of memory. The integrated functions include applications processing (CPU), graphics processing (GPU), media processing (audio and video decoding/encoding), display processing, security management, memory control, and peripheral interfaces. 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 SoC products deliver industry-leading performance in video decoding, picture quality, and software breadth and this value proposition is why manufacturers select Sigma products.

Our SoCs are generally configured for a specific market, either digital television (DTV) or set-top box (STB), the latter of which includes related products, such as connected media players. The primary difference between these devices is the interfaces they support. SoCs created for the DTV market obtain inputs from high definition multimedia interface (HDMI) and analog video and provide outputs to flat panel interfaces. SoCs created for the STB market obtain inputs from Ethernet and other broadcast interfaces and provide output to HDMI and analog video. Core components are therefore shared across these products while their configured hardware/software platforms and support are offered separately.

Home Networking Controllers

Our home networking product line consists of wired home networking controller chipsets 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 reliability 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 (HPNA), HomePlug AV (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 International Telecommunications Union (ITU) standard ratified in 2011 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 high definition television services (HDTV) and other media-rich applications throughout the home. To date, we have not generated significant revenue from our products based on HPAV or G.hn technologies.

Home Control

Our home control product line consists of our wireless Z-Wave chipsets and modules. These devices 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 home networking security, monitoring and automation solution. We derive most of our revenue from these devices in the form of a module, which includes a chipset plus additional circuitry and an antenna and provides our customers with a ready to use communications capability. Our Z-Wave chipsets and the protocol they use to communicate commands have been built into an ecosystem of over 1,000 certified interoperable products, mostly intelligent appliances for use within the home.

Other Products

We also offer certain legacy products that are sold into prosumer and other industrial applications. These products include 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. These products account for a minor portion of our revenue.

Target Markets

DTV Market   

Starting with the first quarter of fiscal 2014, we have defined the DTV market to include all products that are sold into digital televisions or “SmartTVs” as well as other adjacent markets using chipset products that are designed for video post-processing. We believe DTV products complement our existing set-top box products, which will provide substantial research and development leverage and improved operating scale to augment our ability to develop innovative solutions for the anticipated convergence of IP-video delivery across any device within the connected home. We serve this market with our media processor SoCs and dedicated post-processing products.

4

Set-top Box Market 

Also starting with the first quarter of fiscal 2014, we have defined the set-top box market to include all set-top box products delivering IP streaming video, including hybrid versions of these products. We have also eliminated the connected media player market as a separate revenue market as the majority of demand accruing from these sales will be represented in the set-top box market. We serve this market primarily with our media processor products.

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 or wireless connectivity. We serve the home networking market with our wired home networking controllers that are designed to provide the most reliable connectivity solutions between various home entertainment products and incoming video streams.

Home Control Market 

We define the home control market to include all the gateways and interconnected appliances that provide home monitoring and control for the management of security, safety, energy, health, and convenience. Our home control product line consists of our wireless Z-Wave modules and chipsets, which consist of wireless transceiver devices along with a mesh networking protocol.

License and Other Markets 

This market includes other products and services, including technology licenses, software development kits, engineering support services for hardware and software, engineering development for customization of chipsets and other accessories.

We have presented our results in the historical periods consistent with our new presentation of markets so that the presented information is comparable.

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.  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 fiscal 2014, 2013 and 2012, we recorded provisions for excess inventory of $0.8 million, $7.1 million and $9.0 million, respectively, primarily as a result of the end of life of certain products.

For our set-top box business, 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.   Our business is substantially dependent upon being designed into set-top boxes and we must spend a considerable amount of resources to compete for these design wins. 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.  However, if we are not designed into a particular generation of set-top boxes for our large target end customers, we stand to lose that portion of our market for the entire deployment time, which is typically 2-3 years.

Our digital TV (“DTV”) business is based on the annual cycle of product launches that is typical of the consumer market. Major new consumer products are designed during the spring, produced during the summer and launched in the fall to take advantage of the holiday selling season. As such, our DTV business is subject to seasonality of semiconductor sales into customers who manufacture products for the consumer electronics market.  We expect our DTV business to experience seasonality typical of the consumer electronics markets, wherein the holiday selling season commands the highest sell-through of end-products, making the third quarter the strongest selling season for components such as our SoCs.  Therefore, we expect to experience lower sales in our first and fourth fiscal quarters and higher sales in our second and/or third fiscal quarters as a result of this seasonality of demand. As a result, our operating results may vary significantly from quarter to quarter.

Many of our target markets are also 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.

5

Industry Background

The growth of the internet, proliferation of over-the-top content, advances in communications infrastructure, digital video and audio compression technologies, home networking technologies and improvements in television displays have resulted in significant demand for products in the markets that we primarily target.

Consumer multimedia entertainment applications are increasingly requiring video and audio data to be processed, transmitted, stored and displayed in an efficient and secure manner while simultaneously maintaining high resolution, multi-channel audio/video functionality and providing the end-user a variety of interactive options.  In order to provide this increased functionality in a cost-effective manner, manufacturers of consumer electronics demand semiconductors that integrate more features on a single chip as well as reduce their costs, time-to-market and power consumption.  A challenge to manufacturers of digital media processors is to balance the integration of more functionality with lower costs and shorter development cycles.

The Internet Protocol television, or IPTV, portion of the set-top box market is primarily driven by video service providers, such as telecommunication service providers, who utilize video servers and set-top boxes to deliver television services based on streaming video over broadband connections using IP streaming. IPTV has become an important consumer multimedia application as it allows telecommunications carriers to deliver advanced video services to consumers using existing telecommunications infrastructure.  These carriers are actively pursuing the deployment of IPTV because it enables them to offer attractive video, voice and data, or triple play, services and increase their revenue per subscriber.  A challenge faced in delivering high-quality video content to end users across existing copper-based telecommunications infrastructure is the limited data carrying capacity of the existing wiring.  This challenge can be addressed by advanced video compression technologies along with advanced high-speed communication technologies, which together can overcome the capacity limitation to allow the delivery of high definition video service throughout the home.  IPTV set-top boxes currently use one of three platforms based on software developed previously by Microsoft and now purchased by Ericsson or various Android or Linux providers, each of which offers certain advantages and disadvantages.

In the home networking market, devices are involved in routing digital entertainment streams to ensure that television service and other shared media resources are accessible throughout the home.  Currently, the vast majority of home video networking uses wired connections to distribute entertainment streams under one of the many networking standards that exist.  Although wireless networking products are making inroads for use in home video distribution, wired connectivity is still the predominant method in the vast majority of segments.

Home control products enable remote control and monitoring of a wide variety of home appliances, such as thermostats, lighting and door locks.  Much of the early adoption for home control and energy management products has been driven by installations in new home construction.  We believe potential deployment by an increasing number of larger system integrators and service providers in the future could drive a cycle of broader adoption.  Low frequency, low power solutions can offer consumers cost efficient ways to monitor and conserve energy usage, protect homes from theft and damage and improve the convenience of performing certain household activities.

 Our Strengths

We have developed or acquired core technologies, expertise and capabilities that we believe are necessary to provide a comprehensive chipset solution or platform that includes media processing, communications and control.  We believe we have the following key strengths:

• Differentiable value with our DTV technology. We provide our customers with a broad and rich portfolio of IP.  Our set of core technologies coupled with the convergence of OTT services and broadcasting provides us an opportunity to be a leading vendor of SmartTV solutions. Our experience in IPTV and software development creates a unique combination of cloud-based application delivery while providing industry leading picture quality, mature video processing, frame rate conversion and market leading demodulator technology.

• Strong Position within IPTV Market.  We are a leading provider of digital media processors for set-top boxes in the IPTV market in terms of units shipped.  We have built this position, in part, by being one of the first media processing semiconductor providers to work extensively with IPTV set-top box manufacturers, including Ericsson’s Mediaroom ecosystem, as well as telecommunications carriers to design solutions that address their specific feature and performance requirements.  Additionally, we deliver some of the leading IPTV connectivity solutions for set-top boxes and residential gateways.  Through these experiences, we have gained valuable insight into the challenges of our customers and carriers and have gained visibility into their product development plans.  As a result, we believe we are able to provide our customers with a stable and reliable source of field-proven solutions.

6

• Highly Integrated Chipsets Leveraged Across Multiple Consumer Applications.  We have developed a proprietary chipset architecture that allows us to integrate high-performance digital video and audio decoding, graphics processing, security management and home audio/video networking and advanced image processing.  Our chipsets can replace a number of single function semiconductors, which can significantly improve performance, lower power consumption and reduce total system cost to our customers.  Furthermore, all of these functions can be performed synchronously at high processing speeds.  Our ability to integrate these multiple functions into a single, high-speed semiconductor allows us to address many different consumer multimedia entertainment applications with the same hardware platform.

• Differentiated Software Development Capabilities.  As a result of over 15 years of experience in delivering video and audio solutions, we have developed expertise in real-time software that synchronizes and controls the playback of video and audio from a variety of sources.  This software translates the complex silicon architecture of our chipsets into a much simpler application programming interface.  Using this interface, our customers are able to design their products under industry standard operating systems, enabling them to customize our solutions and reduce their time to market.  The majority of our engineering personnel are dedicated to software development.

• Multi-Standard Functionality.  We design our chipsets to support multiple industry standards that are used across most consumer entertainment applications.  For example, there are over a dozen different video and audio standards used in current consumer applications, including video standards such as H.264, MPEG-4, MPEG-2, MPEG-1 and WMV9, and audio standards such as Dolby, DTS and MP3.  Beyond this, there are a range of digital rights management security standards such as AES, RSA and MSDRM.  Additionally, there are three primary operating systems, Android, Linux and Microsoft Windows CE, each of which has its own middleware standards.

• Breadth and Depth of Relationships within the Set-top Box Industry and Service Providers.  In order to provide a complete system-level solution for the IPTV market, we have developed strong relationships with industry leaders that form the ecosystem required to deliver an end-to-end solution, from content creation to content display.  The IPTV ecosystem consists of providers of middleware, encoders and security solutions.  For middleware, server software must be successfully integrated into our products to provide effective system solutions for the service providers.  For security solutions, there are also a range of providers, including Microsoft and Nagra.  Our strong position in the IPTV market has enabled us to develop and maintain relationships with these providers and offer solutions that are interoperable with their products.

• Z-Wave Standardization and Ecosystem.  Our Z-Wave technology provides system integrators access to over 600 products complying with the same standard and with guaranteed interoperability which we believe creates an attractive ecosystem.  This makes our Z-Wave technology unique in the home control market, and a prime candidate to be selected by new service providers entering this emerging space.  Because the International Telecommunication Union, or ITU, has developed a new sub 1GHz narrow band wireless standard which is largely based on Z-Wave technology and defines backwards compatibility to the Z-Wave standard, and because of the large ecosystem of products based on the Z-Wave standard, we believe our Z-Wave products will be one of the preferred solutions for telecommunication and multi-service operators.

Our Strategy

Our objective is to be the leading provider of chipsets used to deliver entertainment and control throughout the home.  To achieve this objective, we expect to continue to pursue the following strategies:

• Increase Penetration in Digital TV Market.  Through our acquisition of Trident’s DTV business, we have obtained a position in the digital television market, specifically targeting the new generation of SmartTVs that will feature Ultra-high definition video.  Our chipsets incorporate both hardware and software elements that enable SmartTV features and content access, while at the same time, managing all of the routine television functions. We believe our product line is differentiated by the hardware technologies such as frame-rate-conversion as well as sophisticated software such as Internet connectivity and web portal access.

• Re-grow our Leadership Position in the IP Streaming Set-top Box Segment.  We have achieved a significant share in the IPTV set-top box market by providing our customers with highly integrated digital media processor chipsets.  In addition, our solutions work effectively across different platforms and standards in this market.  We intend to provide the most compelling integrated digital media processing solutions to our customers and support multiple standards in this end market in order to grow our market share through both carrier deployed set-top boxes and retail-based digital media adapters.

• Enhance our Software Advantage.  We believe our software provides a suite of capabilities that offer differentiated advantages from our competitors.  Our software is integrated and embedded into our customers' products during their product design stage.  As a result, once we are designed into our customers' product, we believe it is difficult for our competitors to displace us.  We intend to leverage our software development capabilities and continue to invest significant resources in developing additional expertise in the area of high-performance software development, over-the-top video delivery software, and customer support.

7

• Solidify our position in the G.hn Market. We have developed unified broadband home networking technology under the G.hn standard.  We plan to use this technology to further expand our position in the home networking market.  This market is fragmented into multiple standards, and we believe G.hn provides a way of unifying the demand in this market under a single standard encompassing all wired transmission media (coaxial cable, phone line and power line) in the home.

Expand our position in home monitoring and control.We have developed a strong position in the home monitoring and control market and intend to expand this position with our Z-Wave technology to encompass security, energy management, and other services. This expansion will be largely achieved through the addition of service offerings from existing service providers, such as AT&T, ADT, Vivint, and others. As the market develops, these providers expect to leverage additional value-added features from remote access capabilities.

•

Leverage Existing Relationships.  We have developed relationships within standards and platform defining entities like Google and Microsoft, which enable us to win new customers effectively.  We also have strong customer relationships with many set-top box and connected media player designers and consumer device manufacturers.  We also work closely with telecommunications carriers to understand their needs in advance of our customer’s product development cycle.  We intend to leverage our existing position with our partners and customers to identify and secure new market opportunities.

Our Products

We offer the following categories of chipset solutions:

Media processors

• Media processor chipsets. Our broad range of media processor chipsets and development platforms are designed to provide comprehensive solutions to our customers primarily for application in IPTV and hybrid set-top boxes and connected media players.  For set-top box applications, we offer platforms tailored for Mediaroom, as well as various other Linux and Android based middleware solutions.  For digital televisions, we provide an alternative set of input/output interfaces and software to tailor our chips for SmartTV use.  We offer platforms that are tailored for specific applications and that are optimized for performance, low-power, or features.  We are constantly evolving our software suite to increase our breadth of application support and over-the-top content delivery capabilities.  Within our media processor chipset products we have value-line and premium offerings to enable our customers to select between performance, features and price.

Home networking products

• HomePNA chipsets.  Our HomePNA chipsets provide in-home connectivity capabilities over existing telephone wires or coax cables for residential gateways, multiple dwelling unit gateways and IPTV set-top boxes. Our HomePNA chipsets comply with the ITU G.9954 standard to support distribution of multimedia content throughout the home.

• HomePlug AV chipsets.  Our HomePlug AV chipsets provide connectivity over existing powerline wiring, supporting AES encryption, high QoS and remote management and diagnostic capabilities.  In addition, we offer versions optimized for low power and low footprint implementations.  All our HomePlug AV chipsets employ MIMO technology that utilizes all three power wires to extend coverage. 

• G.hn chipsets.  Our G.hn chipset is compliant with ITU G.9960/61 which supports connectivity over any type of existing wires inside the home. We are designing the G.hn chipset to employ MIMO technology to deliver higher throughput with extended coverage even in presence of high noise conditions. Our G.hn chipset enables self-installation for home multimedia distribution networks.  To date, we have not generated significant revenue from our G.hn chipsets.

Video image processor and encoder products

• VXP brand chipsets.  Our VXP brand products are standalone high performance semiconductors that provide studio-quality video output or input for professional, prosumer and consumer applications. These products address applications including audio/video receivers, broadcast studios, digital cinema, digital signage, front-projection home theatre televisions, HDTV, medical imaging and video conferencing systems.

• Video encoder chipsets.  Our video encoders are designed to capture video for visual telephony between set-top boxes, connected media players, VoIP devices, video phones, video conferencing TVs and video surveillance devices. To date, we have not generated significant revenue from these products.

8

Home control and energy management products

• Z-Wave chipsets. Our Z-Wave chipsets and modules are designed to deliver reliable, cost-effective wireless networking for residential and light commercial control applications. We embed our Z-Wave protocol stack in our chipset and Flash memory is available to the customer for their product development.

Customers

We sell our products principally to designers and manufacturers (OEMs and ODMs) as well as to distributors who, in turn, sell to manufacturers. Typically, when we sell to distributors, they have already received an order for our products directly from a manufacturer. Sales to our customers are typically made on a purchase order basis.

No customer accounted for more than 10% of our net revenue in fiscal 2014. For fiscal 2013, TP Vision and Flextronics accounted for 14% and 12%, respectively, of our net revenue. For fiscal 2012, Motorola and Gemtek accounted for 17% and 22%, respectively, of our net revenue. 

Our business also depends on demand for our chipsets from companies, such as large telecommunication carriers, who are not our direct customers but deploy IPTV set-boxes that incorporate our chipsets. Large carriers often use multiple set-top box providers, who in turn sometimes use multiple contract manufacturers to purchase our chipsets and manufacture set-top boxes. Even though we do not sell our products directly to these companies that ultimately deploy set-top boxes to consumers, these companies have a significant impact on the demand for our chipsets.

A substantial portion of our product shipments are to customers outside of North America. In fiscal 2014, 2013 and 2012, net revenue from our customers outside of North America accounted for 86%, 92%, and 95% of our net revenue, respectively. Revenue from our customers in Asia accounted for 73%, 70% and 91% of our net revenue in fiscal 2014, 2013 and 2012, respectively. Revenue from our customers in Asia increased as a percentage of total net revenues primarily due to the decrease in net revenues in Europe from our DTV product line acquired during fiscal 2013.

Sales and Marketing

We sell our products worldwide through multiple channels, including our direct sales force, manufacturer representatives and independent distributors strategically located in many countries around the world. Members of our direct sales force are based in the United States, Denmark, Israel, Taiwan, South Korea and Japan. Our sales are also supported by representatives, resellers and distributors in other key countries such as Brazil, China, and India.

Our sales cycle typically ranges from nine to eighteen months, but may last longer, and depends on a number of factors including the technical capabilities of the customer, the customer's need for customization of our chipsets and the customer's evaluation and qualification process. In many cases, we must also qualify our products with our technology partners and in some cases with an end customer, such as a service provider. This qualification process can extend our sales cycle beyond its typical duration. We generally plan the fabrication of our products based on customer forecasts.

For our larger volume designer and manufacturer customers, purchase orders for our products are generally non-cancelable between four and twelve weeks before our scheduled delivery dates and not subject to rescheduling within four weeks of scheduled delivery dates.

Competition

The market for our chipsets is highly competitive and is characterized by rapid technological change, evolving standards and decreasing average selling prices per unit. We believe that the principal factors on which we compete include time-to-market for new product introductions, product performance, industry standards compatibility, software functionality, image quality, price, and product support.

We believe our primary competitors include Broadcom Corporation, Mediatek, MStar Semiconductor, RealTek and ST Microelectronics for our media processors; Broadcom (through their acquisition of Gigle), Marvell Technology Group, Ltd. (through their acquisition of DS2) and Qualcomm (through their acquisition of Atheros) for our HPNA, HPAV and G.hn products; Texas Instruments, Freescale and Silicon Lab through their Zigbee based chips for our Z-Wave products; and Pixelworks and Marvell for our VXP products. Many of these companies have higher profiles, larger financial resources and greater marketing resources than we do and may develop a competitive product that may inhibit the wide acceptance of our products. We believe that other manufacturers are developing products that will compete directly with our products in the near future.

9

Research and Development

We focus our research and development efforts primarily on three areas: video/audio decoder technologies, secure media processing and home connectivity. In building new solutions, our strategy is to build fully integrated chipset solutions. To achieve and maintain technology leadership, we intend to continue to make advancements in the areas of video and audio compression and decompression as well as wired and wireless connectivity. We expect these advancements will include maintaining compatibility with emerging standards and multiple platforms, and making improvements to the current architecture.

We have invested, and expect that we will continue to invest, substantial resources in research and development of performance enhancements, cost reductions and additional features for future generations of Motion Picture Expert Group, or MPEG, and other multimedia technologies. During fiscal 2014, 2013 and 2012 our research and development expenses were $73.2 million, $103.5 million and $86.5 million, respectively.

We have assembled a qualified team of experienced engineers and technologists. As of February 1, 2014, we had 497 research and development employees. These personnel conduct all of our product development along with the assistance of a number of independent contractors and consultants.

Intellectual Property

Our success and future revenue growth depend, in part, on our ability to protect our intellectual property. We rely primarily on patent, copyright, trademark and trade secret laws as well as agreements with customers, suppliers and employees to protect our proprietary technologies and processes.

As of February 1, 2014, we held 117 issued patents and we had 110 patent applications pending for our technology. The expiration dates of these patents are within the next one to twenty years.  We cannot assure you that more patents will be issued or that such patents, even if issued, or our existing patents, will provide adequate protection for our competitive position. Although we intend to protect our rights vigorously, we cannot assure you that these measures will be successful.

Manufacturing

We are a fabless semiconductor company and we do not own or operate a fabrication, packaging or testing facility. We depend on third-party vendors to manufacture, package and test our products. By outsourcing manufacturing, we are able to avoid the costs associated with owning and operating our own manufacturing facility. This allows us to focus our efforts on the design and marketing of our products.

Semiconductor fabrication

We rely on Taiwan Semiconductor Manufacturing Company, or TSMC, and, to a lesser extent, United Microelectronics Corporation, or UMC, Grace Semiconductors and NXP Semiconductors, or NXP, to fulfill the majority of our semiconductor fabrication needs, including chipset manufacturing. We only recently began working with NXP as a result of our acquisition of certain assets of the DTV business from Trident Microsystems in fiscal 2013.  We believe that our fabless manufacturing approach provides us with the benefits of superior manufacturing capability as well as flexibility to move the manufacturing, assembly and testing of our products to those vendors that offer the best capability at an attractive price. Nevertheless, because we do not have a formal, long-term pricing agreement with our third-party manufacturers, our costs and services are subject to sudden price fluctuations based on the cyclical demand for semiconductors.  In addition, we may be unable to secure sufficient capacity at our third-party manufacturers’ facilities, which could harm our ability to ship products to our customers in a timely manner and negatively impact our financial results in a particular period.

Assembly and test

Once our wafers have been manufactured, they are shipped from TSMC and our other third-party foundries to sort, assembly and test facilities where they are sorted, packaged and tested.  Generally, we store our sorted die in our die bank and only package the products for sale when we book an order.  We outsource all packaging and testing of our products to third-party assembly and test facilities, primarily to Advanced Semiconductor Engineering, Inc., or ASE, in Taiwan.  Our products are designed to use low-cost, standard packages and to be tested with widely available test equipment.

Quality assurance

We are committed to maintaining the highest level of quality in our products.  We have designed and implemented a quality management system that provides the framework for continual improvement of products, processes and customer service to ensure customer satisfaction.  We also rely on in-depth simulation studies, design review and verification during our design phase, bench testing to perform design validation, product reliability qualification to verify the product’s quality and manufacturing testing when the products are in production.  To ensure consistent product quality, reliability and yield, together with our manufacturing logistics partners, we closely monitor the production cycle by regularly reviewing manufacturing process data from each wafer foundry and assembly subcontractor.  We are ISO 9000 certified as are our key manufacturing partners, ASE, UMC and TSMC.

10

Environmental Laws

Our products and certain aspects of our operations are regulated under various environmental laws in the U.S., Europe and other parts of the world. These environmental laws are broad in scope and regulate numerous activities including the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, the content of our products and the recycling and treatment and disposal of our products. Certain of these laws also pertain to tracking and labeling potentially harmful substances that have been incorporated into our products. These product labeling laws require us to know whether certain substances are present in our products, and to what degree. Environmental laws may limit the use of certain substances in our products, or may require us to provide product safety information to our customers if certain substances are present in our products in sufficient quantities. Additionally, we may be required to recycle certain of our products when they become waste. Compliance with environmental laws and regulations across multiple jurisdictions is complex and we regularly review known and pending laws and regulations to ensure we are compliant. We did not incur any material expenditures in fiscal 2014, and none are planned for fiscal 2015 in relation to any environmental matters.

Backlog

Our backlog at February 1, 2014 was approximately $39.1 million, compared with backlog of approximately $55.1 million at February 2, 2013. The amount of backlog at any date depends upon various factors, including the timing of the receipt of orders, fluctuations in orders for existing product lines and the introduction of any new product lines.  Accordingly, we believe that the amount of our backlog at any date is not a useful measure of our future sales.

Employees

As of February 1, 2014, we had 716 full-time employees worldwide, including 497 in research and development, 112 in sales and marketing, 75 in general and administration and 32 in operations and quality assurance.

Over the past two fiscal years, we adopted restructuring plans which included targeted reductions in labor costs through headcount reduction and other related actions.  We reduced our workforce over several geographic regions by 67 employees and 114 employees in fiscal 2014 and 2013, respectively, resulting in restructuring charges of $1.7 million and $2.2 million in fiscal 2014 and 2013, respectively.

Our future success will depend, in part, on our ability to continue to attract, retain and motivate highly qualified technical, marketing, engineering and management personnel who are in great demand.  Our employees are not represented by any collective bargaining unit and we have never experienced a work stoppage.  We believe that our employee relations are satisfactory.

Corporate Information

We were incorporated in California in January 1982.  Our principal offices are located at 1778 McCarthy Boulevard, Milpitas, California 95035, and our telephone number at that location is (408) 262-9003.  Our website is located at www.sigmadesigns.com; however, the information in, or that can be accessed through, our website is not part of this report.  Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports are available, free of charge, through the “Investor Overview” section of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or SEC.  Additionally, copies of materials filed by us with the SEC may be accessed at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or at www.sec.gov.  For information about the SEC’s Public Reference Room, contact 1-800-SEC-0330 or send an electronic message to the SEC at publicinfo@sec.gov.

ITEM 1A.    RISK FACTORS

If any of the following risks actually occurs, our business, financial condition and results of operations could be harmed.  In that case, the trading price of our common stock could decline and you might lose all or part of your investment in our common stock.  The risks and uncertainties described below are not the only ones we face.  You should also refer to other information set forth in this Form 10-K, including our consolidated financial statements and the related notes.  Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

Risks Related to Our Business and Our Industry

If we do not successfully anticipate market needs and develop products and product enhancements in a timely manner that meet those needs, or if those products do not gain market acceptance, we may not be able to compete effectively and our ability to generate revenue will suffer.

We may not be able to accurately anticipate future market needs or be able to develop new products or product enhancements to meet such needs or to meet them in a timely manner.  Our ability to develop and deliver new products successfully will depend on various factors, including our ability to:

• accurately predict market requirements and evolving industry standards;

11

• accurately design new chipset products;

• timely complete and introduce new product designs;

• timely qualify and obtain industry interoperability certification of our products and the equipment into which our products will be incorporated;

• ensure that our subcontractors have sufficient foundry, assembly and test capacity and packaging materials and achieve acceptable manufacturing yields;

• shift our products to smaller geometry process technologies to achieve lower cost and higher levels of design integration; and

• gain market acceptance of our products and our customers' products.

If we fail to anticipate market requirements or to develop new products or product enhancements to meet those needs in a cost-effective and timely manner, it could substantially decrease market acceptance and sales of our present and future products and we may be unable to attract new customers or retain our existing customers, which would significantly harm our business and financial results.

Even if we are able to anticipate, develop and commercially introduce new products and enhancements, our new products or enhancements may not achieve widespread market acceptance.  Any failure of our products to achieve market acceptance could adversely affect our business and financial results.

If demand for our chipsets declines or does not grow, we will be unable to increase or sustain our net revenue.

We expect our chipsets to account for a substantial majority of our net revenue for the foreseeable future.  For fiscal 2014, sales of our chipsets represented a substantial amount of our net revenue.  Even if the consumer electronic markets that we target continue to expand, manufacturers of consumer products in these markets may not choose to utilize our chipsets in their products.  The markets for our products are characterized by frequent introduction of new technologies, short product life cycles and significant price competition.  If we or our customers are unable to manage product transitions in a timely and cost effective manner, our net revenue would suffer.  In addition, frequent technological changes and introduction of next generation products may result in inventory obsolescence which would increase our cost of revenue and adversely affect our operating performance.  If demand for our chipsets declines or fails to grow or we are unable to develop new products to meet our customers' demand, our net revenue could be harmed.

Our industry is highly competitive and we may not be able to compete effectively, which would harm our market share and cause our revenue to decline.

The markets in which we operate are extremely competitive and are characterized by rapid technological change, continuously evolving customer requirements and declining average selling prices. We may not be able to compete successfully against current or potential competitors. Most of our products compete with large semiconductor providers that have substantial experience and expertise in video, audio and multimedia technology and in selling to consumer equipment providers. Many of these companies have substantially greater engineering, marketing and financial resources than we have. As a result, our competitors may be able to respond better to new or emerging technologies or standards and to changes in customer requirements. Further, some of our competitors are in a better financial and marketing position from which to influence industry acceptance of a particular industry standard or competing technology than we are. Our competitors may also be able to devote greater resources to the development, promotion and sale of products, and may be able to deliver competitive products at a lower price. We also may face competition from newly established competitors, suppliers of products based on new or emerging technologies and customers who choose to develop their own chipsets. Additionally, some of our competitors operate their own fabrication facilities or may have stronger manufacturing partner relationships than we have. We expect our current customers, particularly in the set-top box market, to seek additional suppliers of chipsets for inclusion in their products, which will increase competition and could reduce our market share. If we do not compete successfully, our market share and net revenue could decline.

Our restructuring efforts may not be effective, might have unintended consequences, and could negatively impact our business.

In fiscal 2013 and fiscal 2014, we launched and implemented restructuring plans to significantly reduce our operating expenses. Despite our efforts to structure our business to operate in a cost-effective manner, some cost reduction measures could have unexpected negative consequences, such as attrition among employees and a slowdown of development projects. While our restructuring efforts are intended to reduce our costs, we cannot be certain that all restructuring efforts will be successful, or that we will not be required to implement additional restructuring activities in the future. If we are unable to recognize the anticipated benefit from our restructuring plan, our results of operations would be harmed.

12

If we fail to achieve initial design wins for our products, we may be unable to recoup our investments in our products and revenue could decline.

We expend considerable resources in order to achieve design wins for our products, especially our new products and product enhancements, without any assurance that a customer will select our product. Once a customer designs a semiconductor into a product, it is likely to continue to use the same semiconductor or enhanced versions of that semiconductor from the same supplier across a number of similar and successor products for a lengthy period of time due to the significant costs and risks associated with qualifying a new supplier and potentially redesigning the product to incorporate a different semiconductor. As a result, if we fail to achieve an initial design win in a customer's qualification process, we may lose the opportunity for significant sales to that customer for a number of its products and for a lengthy period of time, or we would only be able to sell our products to these customers as a second source, which usually means we would only be able to sell a limited amount of product to them. Also, even if we achieve new design wins with customers, these manufacturers may not purchase our products in sufficient volumes to recoup our development costs, and they can choose at any time to stop using our products, for example, if their own products are not commercially successful. This may cause us to be unable to recoup our investments in the development of our products and cause our revenue to decline.

We depend on a limited number of customers and any reduction, delay or cancellation of an order from these customers or the loss of any of these customers could cause our revenue to decline.

Our dependence on a limited number of customers means that the loss of a major customer or any reduction in orders by a major customer could materially reduce our net revenue and adversely affect our results of operations. We expect that sales to relatively few customers will continue to account for a significant percentage of our net revenue for the foreseeable future. We have no firm, long-term volume commitments from any of our major customers and we generally accept purchase commitments from our customers based upon their purchase orders. Customer purchase orders may be cancelled and order volume levels can be changed, cancelled or delayed with limited or no penalties. We have experienced fluctuations in order levels from period to period and expect that we will continue to experience such fluctuations and may experience cancellations in the future. We may not be able to replace the cancelled, delayed or reduced purchase orders with new orders. Any difficulty in the collection of receivables from key customers could also harm our business.

No customer accounted for more than 10% of our net revenue in fiscal 2014. For fiscal 2013, TP Vision and Flextronics accounted for 14% and 12%, respectively, of our net revenue. For fiscal 2012, Motorola and Gemtek accounted for 17% and 22%, respectively, of our net revenue. 

Our business also depends on demand for our chipsets from companies, such as large telecommunication carriers, who are not our direct customers but deploy IPTV set-top boxes that incorporate our chipsets. Large carriers often use multiple set-top box providers, who in turn sometimes use multiple contract manufacturers to purchase our chipsets and manufacture set-top boxes. Even though we do not sell our products directly to these companies that ultimately deploy set-top boxes to consumers, these companies have a significant impact on the demand for our chipsets. For example, a significant number of our chipsets are incorporated in set-top boxes and gateways deployed by AT&T. In the past, companies that deploy set-top boxes incorporating our chipsets have had significant fluctuations in demand, which has resulted in a decline in our business from our direct customers, such as original equipment manufacturers and contract manufacturers. We may experience increased competition as companies that deploy set-top boxes incorporating our chipsets seek additional or alternate sources of supply of chipsets for inclusion in their products. Any decrease in the demand from the companies that deploy IPTV set-top boxes incorporating our chipsets, and in particular AT&T, could have a material and adverse effect on our net revenue and results of operations.

We base orders for inventory on our forecasts of our customers' demand and if our forecasts are inaccurate, our financial condition and liquidity will suffer.

We place orders with our suppliers based on our forecasts of our customers' demand. Our forecasts are based on multiple assumptions, each of which may introduce errors into our estimates. When the demand for our customers' products increases significantly, we may not be able to meet demand on a timely basis and we may need to expend a significant amount of effort and time working with our customers to allocate a limited supply and maintain positive customer relations. If we underestimate customer demand, we may forego revenue opportunities, lose market share and damage our customer relationships. Conversely, if we overestimate customer demand, we may allocate resources to manufacturing products that we may not be able to sell when we expect to or at all. For example, during fiscal 2014 and 2013, we recorded a provision for excess inventory of $0.8 million and $7.1 million, respectively, which was primarily the result of the end of life of certain products and our end customer’s transition to a next generation product sold by one of our competitors. When we have excess or obsolete inventory, the value of our inventory declines, which increases our cost of revenue and reduces our liquidity.

13

We have engaged, and may in the future engage in acquisitions of other businesses and technologies which could divert our attention and prove difficult to integrate with our existing business and technology.

We continue to consider investments in and acquisitions of other businesses, technologies or products as part of our efforts to improve our market position, broaden our technological capabilities and expand our product offerings. For example, in May 2012, we completed the acquisition of certain assets used in the digital TV business of Trident Microsystems, where we hired approximately 320 new employees. In March 2011, we completed the acquisition of certain assets from a large computer manufacturer and in November 2009, we completed the acquisition of CopperGate Communications Ltd., an Israeli company, which added substantial operations, including 141 employees. We also completed the acquisition of Zensys Holdings Corporation in December 2008, the acquisition of certain assets of the VXP Group from Gennum Corporation in February 2008 and the acquisition of Blue7 Communications in February 2006. In the future, we may not be able to acquire or successfully identify companies, products or technologies that would enhance our business. Once we identify a strategic opportunity, the process to consummate a transaction could divert our attention from the operation of our business causing our financial results to decline.

Acquisitions may require large one-time charges and can result in increased debt or contingent liabilities, adverse tax consequences, additional stock-based compensation expense, and the recording and subsequent amortization of amounts related to certain purchased intangible assets, any of which items could negatively impact our results of operations. We may also record goodwill in connection with an acquisition and incur goodwill impairment charges in the future. For example, in fiscal 2012, we recorded a goodwill impairment charge of $45.1 million, which represented a full write-off of all goodwill associated with our acquisitions to date, which had a materially adverse impact on our results of operations. In addition, in order to complete acquisitions, we may issue equity securities and incur debt, which would result in dilution to our existing shareholders and could negatively impact profitability.

We may experience difficulties in integrating acquired businesses.  Integrating acquired businesses involves a number of risks, including:

• potential disruption of our ongoing business and the diversion of management resources from other business concerns;

• unexpected costs or incurring unknown liabilities;

• difficulties relating to integrating the operations and personnel of the acquired businesses;

• adverse effects on the existing customer relationships of acquired companies; and

• adverse effects associated with entering into markets and acquiring technologies in areas in which we have little experience.

 If we are unable to successfully integrate the businesses we acquire, our operating results could be harmed.

The timing of our customer orders and product shipments can adversely affect our operating results and stock price.

Our net revenue and operating results depend upon the volume and timing of customer orders received during a given period and the percentage of each order that we are able to ship and recognize as net revenue during each period. Customers may change their cycle of product orders from us, which would affect the timing of our product shipments. Any failure or delay in the closing of orders expected to occur within a quarterly period, particularly from significant customers, would adversely affect our operating results. Further, to the extent we receive orders late in any given quarter, we may not be able to ship products to fill those orders during the same period in which we received the corresponding order which could have an adverse impact on our operating results for that period.

We are facing and may face additional intellectual property claims that could be costly to defend and result in our loss of significant rights.

The semiconductor industry is characterized by frequent litigation regarding patent and intellectual property rights. We believe that it may be necessary, from time to time, to initiate litigation against one or more third parties to preserve our intellectual property rights. From time to time, we have received, and may receive in the future, notices that claim we have infringed upon, misappropriated or misused other parties' proprietary rights. We have also been subject to claims based on our alleged failure to comply with license terms. Any of the foregoing events or claims could result in litigation. In fiscal 2013, we were named in a lawsuit alleging certain of our products infringe the patents held by another party. In addition, we have filed a motion to intervene, which has been granted, in a patent infringement lawsuit based upon now expired patents that was previously brought by U.S. Ethernet Innovations, LLC, or USEI, against AT&T Mobility, Inc., or AT&T, after the court in early 2013 lifted a stay that had been in place regarding the allegedly infringing AT&T product that contains our chipset and after renewed requests for indemnification and defense concerning the lawsuit. USEI has asserted counter-claims against us in this action, and we have responded to these counter-claims. From time to time, we have been subject to audits of our compliance with license agreements. As a result of these audits, we have been required to make additional payments to our licensing partners. In February 2014, we were sued by a third-party licensor who claimed we breached our license agreement with them. Any litigation or additional audits of our licensing compliance, including the audits and proceedings we are currently undergoing, could result in significant expense to us and divert the efforts of our technical and management personnel. In the event of an adverse result in any such litigation or arbitration or additional payments from any licensing audits, we could be required to pay substantial damages, cease the manufacture, use and sale of certain products or expend significant resources to develop non-infringing technology or to obtain licenses to the technology that is the subject of the litigation or audit, and we may not be successful in such development or in obtaining such licenses on acceptable terms, if at all. In addition, patent disputes in the electronics industry have often been settled through cross-licensing arrangements. Although we have a portfolio of applicable issued patents, we may not be able to settle an alleged patent infringement claim through a cross-licensing arrangement.

14

To remain competitive, we need to continue to transition our chipsets to increasingly smaller sizes while maintaining or increasing functionality, and our failure to do so may harm our business.

We periodically evaluate the benefits, on a product-by-product basis, of migrating to more advanced technology to reduce the size of our chipsets. The smaller chipset size reduces our production and packaging costs, which enables us to be competitive in our pricing. We also continually strive to increase the functionality of our chipsets, which is essential to competing effectively in our target markets. The transition to smaller geometries while maintaining or increasing functionality requires us to work with our contractors to modify the manufacturing processes for our products and to redesign some products. This effort requires considerable development investment and a risk of reduced yields as a new process is brought to acceptable levels of operating and quality efficiency. In the past, we have experienced difficulties in shifting to smaller geometry process technologies or new manufacturing processes, which resulted in reduced manufacturing yields, delays in product deliveries and increased expenses. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes, all of which could harm our relationships with our customers, and our failure to do so would impact our ability to provide competitive prices to our customers, which would have a negative impact on our sales.

The average selling prices of semiconductor products have historically decreased rapidly and will likely do so in the future, which could harm our revenue and gross margins.

The semiconductor industry, in general, and the consumer electronics markets that we target, specifically, are characterized by intense price competition, frequent introductions of new products and short product life cycles, which can result in rapid price erosion in the average selling prices for semiconductor products. A decline in the average selling prices of our products could harm our revenue and gross margins. The willingness of customers to design our chipsets into their products depends to a significant extent upon our ability to sell our products at competitive prices. In the past, we have reduced our prices to meet customer requirements or to maintain a competitive advantage. Reductions in our average selling prices to one customer could impact our average selling prices to all customers. If we are unable to reduce our costs sufficiently to offset declines in product selling prices or are unable to introduce more advanced products with higher margins in a timely manner, we could experience declines in our net revenue and gross margins.

We added two new directors to our board of directors in fiscal 2014, which may lead to changes in the execution of our business strategies and objectives.

In connection with the resignation of two board members during fiscal 2014, two new directors were elected to our board of directors. Two of our other directors have served on our board of directors for less than 18 months.  Because of these additions, our board of directors has not worked together as a group for an extended period of time. This turnover in our board of directors may lead to changes in the execution of our business strategies and objectives as these new directors analyze our business and contribute to the formulation of our business strategies and objectives.

We rely upon patents, trademarks, copyrights and trade secrets to protect our proprietary rights and if these rights are not sufficiently protected, it could harm our ability to compete and to generate revenue.

Our ability to compete may be affected by our ability to protect our proprietary information.  As of February 1, 2014, we held 117 patents and these patents will expire within the next one to twenty years.  These patents cover the technology underlying our products.  We have filed certain patent applications and are in the process of preparing others.  We cannot assure you that any additional patents for which we have applied will be issued or that any issued patents will provide meaningful protection of our product innovations.  Like other semiconductor companies, we rely primarily on trade secrets and technological know-how in the conduct of our business.  We use measures such as confidentiality agreements to protect our intellectual property.  However, these methods of protecting our intellectual property may not be sufficient.

The complexity of our products could result in unforeseen delays or expenses and in undetected defects, which could damage our reputation with current or prospective customers, adversely affect the market acceptance of new products and result in warranty claims.

Highly complex products, such as those that we offer, frequently contain defects, particularly when they are first introduced or as new versions are released. Our chipsets contain highly sophisticated silicon technology and complex software. In the past we have experienced, and may in the future experience, defects in our products, both with our chipsets and the related software products we offer. If any of our products contain defects or have reliability, quality or compatibility problems, our reputation may be damaged and our customers may be reluctant to buy our products, which could harm our ability to retain existing customers and attract new customers. In addition, these defects could interrupt or delay sales or shipment of our products to our customers. Manufacturing defects may not be detected by the testing process performed by our subcontractors. If defects are discovered after we have shipped our products, it could result in unanticipated costs, order cancellations or deferrals and product returns or recalls, harm to our reputation and a decline in our net revenue, income from operations and gross margins.

15

In addition, our agreements with some customers contain warranty provisions which provide the customer with a right to damages if a defect is traced to our products or if we cannot correct errors in our product reported during the warranty period. However, any contractual limitations to our liability may be unenforceable in a particular jurisdiction. We do not have insurance coverage for any warranty or product liability claims and a successful claim could require us to pay substantial damages. A successful warranty or product liability claim against us, or a requirement that we participate in a product recall, could have adverse effects on our business results.

If our third-party manufacturers do not achieve satisfactory yields or quality, our relationships with our customers and our reputation will be harmed, which in turn would harm our operating results and financial performance.

The fabrication of semiconductors is a complex and technically demanding process. Minor deviations in the manufacturing process can cause substantial decreases in yields and, in some cases, cause production to be stopped or suspended. Although we work closely with our third-party manufacturers to minimize the likelihood of reduced manufacturing yields, their facilities have from time to time experienced lower than anticipated manufacturing yields that have resulted in our inability to meet our customer demand. It is not uncommon for yields in semiconductor fabrication facilities to decrease in times of high demand, in addition to reduced yields that may result from normal wafer lot loss due to workmanship or operational problems at these facilities. When these events occur, especially simultaneously, as happens from time to time, we may be unable to supply our customers' demand. Many of these problems are difficult to detect at an early stage of the manufacturing process and may be time consuming and expensive to correct. Poor yields from the wafer foundries or defects, integration issues or other performance problems in our products could cause us significant customer relations and business reputation problems or force us to sell our products at lower gross margins and therefore harm our financial results.

New regulations related to conflict-free minerals may force us to incur additional expenses which could harm our financial results and decrease our cash balance.

In August 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), the SEC adopted new requirements for companies that use certain minerals and derivative metals (referred to as “conflict minerals”, regardless of their actual country of origin) in their products. These new requirements will require companies to investigate, disclose and report whether or not such metals originated from the Democratic Republic of Congo or adjoining countries. We could be required to incur additional expenses in our efforts to comply with these new regulations, which could harm our financial results and decrease our cash balance. In July 2013, the U.S. Court of Appeals for the District of Columbia rejected a challenge to the conflict minerals rules that had been brought in October 2012 by the National Association of Manufacturers and the U.S. Chamber of Commerce. In January 2013, the SEC conflict minerals disclosure rules became effective, requiring companies to make their first conflict minerals disclosures on or before May 31, 2014 for the 2013 calendar year. We are currently evaluating disclosure requirements in order to comply with these disclosures, if any, within the prescribed time frame.

In the semiconductor industry, these minerals are most commonly found in gold and other metals. As there may be only a limited number of suppliers offering “conflict free” metals, we cannot be sure that our contract manufacturers and other suppliers will be able to obtain necessary metals in sufficient quantities or at competitive prices. Also, since our supply chain is complex and some suppliers will not share their confidential supplier information, we may face challenges with our customers and suppliers if we are unable to sufficiently verify that the metals used in our products are “conflict free”. Some customers may choose to disqualify us a supplier and we may have to write off inventory in the event that it becomes unsalable as a result of these regulations.

If the growth of demand in the consumer electronics market does not continue, our ability to increase our revenue could suffer.

Our business is highly dependent on developing sectors of the consumer electronics market, including DTV, home networking, set-top box, and home control market. The consumer electronics market is highly competitive and is characterized by, among other things, frequent introductions of new products and short product life cycles. The consumer electronics market may also be negatively impacted by a slowdown in overall consumer spending. The worldwide economy, generally, and consumer spending, specifically, has significantly declined, which has negatively impacted our target markets. If our target markets do not grow as rapidly or to the extent we anticipate, our business could suffer. We expect the majority of our revenue for the foreseeable future to come from the sale of our chipsets for use in emerging consumer applications. Our ability to sustain and increase revenue is in large part dependent on the continued growth of these rapidly evolving market sectors, whose future is largely uncertain. Many factors could impede or interfere with the expansion of these consumer market sectors, including consumer demand in these sectors, general economic conditions, and other competing consumer electronic products, delays in the deployment of telecommunications video services and insufficient interest in new technology innovations. In addition, if market acceptance of the consumer products that utilize our products does not occur as expected, our business could be harmed.

Due to the cyclical nature of the semiconductor industry, our operating results may fluctuate significantly, which could adversely affect the market price of our common stock.

The semiconductor industry is highly cyclical and subject to rapid change and evolving industry standards and, from time to time, has experienced significant downturns. These downturns are characterized by decreases in product demand, excess customer inventory and accelerated erosion of prices. These factors have caused, and could cause, substantial fluctuations in our net revenue and in our operating results. Any downturns in the semiconductor industry may be severe and prolonged, and any failure of this industry to fully recover from downturns could harm our business. The semiconductor industry also periodically experiences increased demand and production capacity constraints, which may affect our ability to ship products. Accordingly, our operating results have varied and may vary significantly as a result of the general conditions in the semiconductor industry, which could cause our stock price to decline.

16

Our ability to raise capital in the future may be limited and our failure to raise capital when needed could prevent us from executing our growth strategy.

We believe that our existing cash and cash equivalents, and short-term and long-term marketable securities will be sufficient to meet our anticipated cash needs for at least the next 12 months.  The timing and amount of our working capital and capital expenditure requirements may vary significantly depending on numerous factors, including:

● market acceptance of our products;

● the need to adapt to changing technologies and technical requirements;

● the existence of opportunities for expansion; and

● access to and availability of sufficient management, technical, marketing and financial personnel.

If our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or debt securities or obtain debt financing. In fiscal 2014, we generated $21.4 million in cash from our operating activities. During the fourth quarter of fiscal 2014, we repurchased approximately 0.5 million shares of our common stock at a weighted average price of $4.83 for a total value of $2.3 million. The stock repurchase was pursuant to our Board of Directors authorization in fiscal 2014 for the repurchase of up to $20.0 million of our common stock in the open market or in privately negotiated transactions through December 31, 2014. In fiscal 2013, we used $14.6 million of our cash in our operating activities. During the second quarter of fiscal 2013, we made cash payments aggregating $38.2 million related to the acquisition of certain assets of the DTV business of Trident Microsystems. During fiscal 2009, we used an aggregate of $85.9 million to purchase 4.2 million shares of our common stock. In November 2009, we used approximately $116.0 million in cash (which included approximately $28.0 million of acquired CopperGate cash) for the acquisition of CopperGate. The amount of cash we used for these acquisitions and common stock repurchases could limit our ability to execute our business plans and require us to raise additional capital in the future in order to fund any further repurchases or for other purposes. The sale of additional equity securities or convertible debt securities would result in additional dilution to our shareholders. Additional debt would result in increased expenses and could result in covenants that would restrict our operations. We have not made arrangements to obtain additional financing and there is no assurance that financing, if required, will be available in amounts or on terms acceptable to us, if at all.

Changes in our effective tax rate or tax liability may have an adverse effect on our results of operations.

As a global company, we are subject to taxation in Hong Kong, Israel, Singapore, the United States and various other countries and states.  Significant judgment is required to determine and estimate worldwide tax liabilities.  Any significant change in our future effective tax rates could adversely impact our consolidated financial position, results of operations and cash flows.  Our future effective tax rates may be adversely affected by a number of factors including:

● changes in tax laws in the countries in which we operate or the interpretation of such tax laws;

● changes in the valuation of our deferred tax assets and liabilities, including the effect of foreign exchange rate fluctuations relative to the US Dollar;

● increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairment of goodwill in connection with acquisitions;

● changes in stock-based compensation expense;

● changes in generally accepted accounting principles; and

● our ability to use our tax attributes such as research and development tax credits and net operating losses of acquired companies to the fullest extent.

In an effort to increase commercial activities in Singapore, an agency of the government of Singapore had previously negotiated with us a reduction in its customary income tax rates in return for our commitment to fulfill a defined set of milestones that were comprised of business activities in Singapore including the establishment of an operations center. During fiscal 2009, we established a foreign operating subsidiary in Singapore. However, due to changes in our business conditions, product development cycles and other factors, we have only been able to fulfill a portion of these milestones. We therefore initiated renewed negotiations with the Singapore tax agency and have reached an agreement in the year ended February 1, 2014 that we will be allowed to retain the tax benefits through February 29, 2012.We have accrued income taxes at the full 17.0% income tax rate on all income earned in subsequent periods.  

17

We anticipate that a portion of our consolidated pre-tax income will continue to be subject to foreign tax at relatively lower tax rates when compared to the United States’ federal statutory tax rate and, as a consequence, our effective income tax rate has been and is expected to continue to be lower than the United States’ federal statutory rate. Our future effective income tax rates could be adversely affected if tax authorities challenge our international tax structure, if the relative mix of United States and international income or losses changes for any reason, or if we lose the benefit of our reduced tax rate in Singapore. Accordingly, there can be no assurance that our income tax rate will be less than the United States’ federal statutory rate.

We have a history of fluctuating operating results, including net losses in fiscal 2012, 2013 and 2014 and we may not be able to return to profitability in the future, which may cause the market price of our common stock to decline.

We have a history of fluctuating operating results. We reported net income of $2.5 million in fiscal 2010, net income of $9.1 million in fiscal 2011, a net loss of $168.0 million in fiscal 2012, a net loss of $101.8 million in fiscal 2013, and a net loss of $11.0 million in fiscal 2014. To return to profitability, we will need to successfully develop new products and product enhancements and sustain higher revenue while controlling our cost and expense levels. In recent years, we made significant investments in our product development efforts and have expended substantial funds to enhance our sales and marketing efforts and otherwise operate our business. However, we may not realize the benefits of these investments. We may incur operating losses in future quarterly periods or fiscal years, which in turn could cause the price of our common stock to decline.

Our sales cycle can be lengthy, which could result in uncertainty and delays in generating net revenue.

Because our products are based on constantly evolving technologies, we have experienced a lengthy sales cycle for some of our chipsets, particularly those designed for set-top box applications in the IPTV media processor market.  After we have qualified a product with a customer, the customer will usually test and evaluate our product with its service provider prior to the customer completing the design of its own equipment that will incorporate our product.  Our customers and the telecommunications carriers our customers serve may need from three months to more than a year to test evaluate and adopt our product and an additional three to more than nine months to begin volume production of equipment that incorporates our product.  Our complete sales cycle typically ranges from nine to eighteen months, but could be longer.  As a result, we may experience a significant delay between the time we increase expenditures for research and development, sales and marketing efforts and inventory and the time we generate net revenue, if any, from these expenditures.  In addition, because we do not have long-term commitments from our customers, we must repeat our sales process on a continual basis even for current customers looking to purchase a new product.  As a result, our business could be harmed if a customer reduces or delays its orders, chooses not to release products incorporating our chipsets or elects not to purchase a new product or product enhancements from us.

The complexity of our international operations may increase our operating expenses and disrupt our business.

We transact business and have operations worldwide.  For example, we derive a substantial portion of our net revenue from our customers outside of North America and we plan to continue expanding our business in international markets in the future.  For fiscal 2014, we derived 86% of our revenue from customers outside of North America.  We also have significant international operations, including research and development facilities in Shanghai, Vietnam, Singapore, Germany, France and The Netherlands; sales and research and development facilities in Taiwan, Israel and Denmark; sales and sales support facilities in South Korea, Japan, Shenzhen and Hong Kong, and a distribution facility in Singapore.

As a result of our international business, we are affected by economic, regulatory and political conditions in foreign countries, including the imposition of government controls, changes or limitations in trade protection laws, unfavorable changes in tax treaties or laws, varying statutory equity requirements, difficulties in collecting receivables and enforcing contracts, natural disasters, labor unrest, earnings expatriation restrictions, misappropriation of intellectual property, changes in import/export regulations, tariffs and freight rates, economic instability, public health crises, acts of terrorism and continued unrest in many regions and other factors, which could have a material impact on our international revenue and operations. In particular, in some countries we may experience reduced intellectual property protection.  

Our results of operations could also be adversely affected by exchange rate fluctuations, which could increase the sales price in local currencies of our products in international markets.  Overseas sales and purchases to date have been denominated in U.S. dollars.  Although we engage in some hedging of our foreign currency exposures, we do not hedge all such exposures and our hedging arrangements may not always be effective.  See “Foreign currency exchange rate sensitivity” under Part II Item 7A “Quantitative and Qualitative Disclosures about Market Risk” in this Form 10-K.  Moreover, local laws and customs in many countries differ significantly from those in the United States.  We also face challenges in staffing and managing our global operations.  If we are unable to manage the complexity of our global operations successfully, our financial performance and operating results could suffer.

18

The volatile global economy could negatively affect our business, results of operations and financial condition.

Current uncertainty in global economic conditions poses a risk to the overall economy as consumers and businesses may defer purchases in response to tighter credit and negative financial news, which could negatively affect demand for our products and other related matters.  Consequently, demand for our products could be different from our expectations due to factors including:

● changes in business and economic conditions, including conditions in the credit market that could negatively affect consumer confidence;

● customer acceptance of our products and those of our competitors;

● changes in customer order patterns including order cancellations; and

● reductions in the level of inventory our customers are willing to hold.

Because many of our products are incorporated into customer devices, a general slowdown in the economy or in consumer confidence could have a significant negative impact on the demand for the products that incorporate our products, which in turn would have a negative impact on our results of operations. There could also be a number of secondary effects from the current uncertainty in global economic conditions, such as insolvency of suppliers resulting in product delays, an inability of our customers to obtain credit to finance purchases of our products or a desire of our customers to delay payment to us for the purchase of our products.  The effects, including those mentioned above, of the current global economic environment could negatively impact our business, results of operations and financial condition.

We rely on a limited number of independent third-party manufacturers for the fabrication, assembly and testing of our chipsets and the failure of any of these third-party manufacturers to deliver products or otherwise perform as requested could damage our relationships with our customers, decrease our sales and limit our growth.

We are a fabless semiconductor company and thus we do not own or operate a fabrication or manufacturing facility. We depend on independent manufacturers, each of whom is a third-party manufacturer for numerous companies, to manufacture, assemble and test our products. We currently rely on Taiwan Semiconductor Manufacturing Corporation, or TSMC, and, to a lesser extent, United Microelectronics Corporation, or UMC, Grace Semiconductors, or Grace, and NXP Semiconductors, or NXP, to produce substantially all of our chipsets. We only recently began working with NXP as a result of our acquisition of certain assets of the DTV business from Trident Microsystems. As we continue to establish a relationship with NXP, we may experience delays, disruptions and technical or quality control problems as we integrate them into our manufacturing processes. In June 2013, we filed a lawsuit against NXP, as well as Trident, to attempt to recover $1.8 million in damages we suffered resulting from the period of time during which Trident was acting on our behalf in operating our DTV business and placing orders with NXP for inventory. This lawsuit could adversely affect our relationship with NXP. In February 2014, we entered into a settlement agreement with Trident and NXP. In February 2014, pursuant to the settlement agreement, Trident paid us $1.4 million for the recovery of our assets. We rely on Advanced Semiconductor Engineering, Inc., or ASE, to assemble, package and test substantially all of our products. These third-party manufacturers may allocate capacity to the production of other companies' products while reducing product deliveries or the provision of services to us on short notice or they may increase the prices of the products and services they provide to us with little or no notice. In particular, other clients that are larger and better financed than we are or that have long-term agreements with ASE, TSMC, UMC, Grace or NXP may cause any or all of them to reallocate capacity to those clients, decreasing the capacity available to us.

If we fail to effectively manage our relationships with the third-party manufacturers, if we are unable to secure sufficient capacity at our third-party manufacturers' facilities or if any of them should experience delays, disruptions or technical or quality control problems in our manufacturing operations or if we had to change or add additional third-party manufacturers or contract manufacturing sites, our ability to ship products to our customers could be delayed, our relationships with our customers would suffer and our market share and operating results would suffer. If our third-party manufacturers' pricing for the products and services they provide increases and we are unable to pass along such increases to our customers, our operating results would be adversely affected. Also, the addition of manufacturing locations or additional third-party subcontractors would increase the complexity of our supply chain management. Moreover, all of our product manufacturing, assembly and packaging is performed in Asian countries and is therefore subject to risks associated with doing business in these countries such as quarantines or closures of manufacturing facilities due to the outbreak of viruses such as swine flu, SARS, avian flu or any similar outbreaks. Each of these factors could harm our business and financial results.

We may not be able to effectively manage our growth or develop our financial and managerial control and reporting systems, and we may need to incur significant expenditures to address the additional operational and control requirements of our growth, either of which could harm our business and operating results.

To continue to grow, we must continue to expand and improve our operational, engineering, accounting and financial systems, procedures, controls and other internal management systems. This may require substantial managerial and financial resources and our efforts in this regard may not be successful. Our current systems, procedures and controls may not be adequate to support our future operations. For example, we implemented a new enterprise resource management system in fiscal 2009. We integrated the operations of CopperGate into our enterprise resource management system in fiscal 2011. We integrated DTV business operations, having completed the acquisition of certain assets of the DTV business of Trident Microsystems in the second quarter of fiscal 2013. Any integration efforts could be costly and time consuming. If we fail to adequately manage our growth or to improve and develop our operational, financial and management information systems or fail to effectively motivate or manage our current and future employees, the quality of our products and the management of our operations could suffer, which could adversely affect our operating results.

19

In the event we seek or are required to use a new manufacturer to fabricate or to assemble and test all or a portion of our chipset products, we may not be able to bring new manufacturers on-line rapidly enough, which could damage our relationships with our customers, decrease our sales and limit our growth.

We use a single wafer foundry to manufacture a substantial majority of our products and to a lesser extent two other foundries including NXP. We only recently began working with NXP as a result of our acquisition of certain assets of the DTV business from Trident Microsystems. We use a single source to assemble and test substantially all of our products. This exposes us to a substantial risk of delay, increased costs and customer dissatisfaction in the event our third-party manufacturers are unable to provide us with our chipset requirements. Particularly during times when semiconductor capacity is limited, we may seek to, and in the event that our current foundry were to stop producing wafers for us altogether, we would be required to, qualify one or more additional wafer foundries to meet our requirements, which would be time consuming and costly. In order to bring any new foundries on-line, our customers and we would need to qualify their facilities, which process could take as long as several months. Once qualified, each new foundry would then require an additional number of months to actually begin producing chipsets to meet our needs, by which time our perceived need for additional capacity may have passed, or the opportunities we previously identified may have been lost to our competitors. Similarly, qualifying a new provider of assembly, packaging and testing services would be a lengthy and costly process and, in both cases, they could prove to be less reliable than our existing manufacturers, which could result in increased costs and expenses as well as delays in deliveries of our products to our customers.

Our ability to develop, market and sell products could be harmed if we are unable to retain or hire key personnel.

Our future success depends upon our ability to recruit and retain the services of key executive, engineering, finance and accounting, sales, marketing and support personnel.  Our Chief Executive Officer has served in that role for us for over thirty years and the loss of his services could have a negative impact on our operations.  The supply of highly qualified individuals, in particular engineers in very specialized technical areas, or sales people specializing in the semiconductor industry, is limited and competition for such individuals is intense. As part of our restructuring efforts in fiscal 2013 and 2014, we terminated a significant number of employees and also imposed work furloughs. Our remaining employees, many of whom are highly qualified engineers, may be discomforted by these actions and seek alternative employment opportunities. None of our officers or key employees is bound by an employment agreement for any specific term.  The loss of the services of any of our key employees, the inability to attract or retain key personnel in the future or delays in hiring required personnel, particularly engineers and sales people, and the complexity and time involved in hiring and training new employees, could delay the development and introduction of new products, and negatively impact our ability to market, sell or support our products.

Litigation due to stock price volatility or other factors could cause us to incur substantial costs and divert our attention and resources.

In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. Companies such as ours in the semiconductor industry and other technology industries are particularly vulnerable to this kind of litigation due to the high volatility of their stock prices. While we are not aware of any such contemplated class action litigation against us, we may in the future be the target of securities litigation. Any future lawsuits to which we may become a party will likely be expensive and time consuming to investigate, defend and resolve. Such costs, which include investigation and defense, the diversion of our attention and resources and any losses resulting from these claims, could significantly increase our expenses and adversely affect our profitability and cash flow.

Our business is subject to seasonality, which may cause our revenue to fluctuate.

Our business is subject to seasonality as a result of our target markets, particularly the DTV business, which historically has peaked in the third quarter. We sell a number of our semiconductor products to our customers who manufacture products for the consumer electronics market. Our customers who manufacture products for the consumer electronics market typically experience seasonality in the sales of their products which in turn may affect the timing and volume of orders for our chipsets. We expect to experience lower sales in our first and/or fourth fiscal quarters and higher sales in our second and/or third fiscal quarters as a result of the seasonality of demand associated with the consumer electronics markets. For example, we expect that our DTV business may experience some seasonality typical of the consumer electronics markets, resulting in slower DTV sales in the first and fourth quarter of each calendar year and strongest DTV sales in the third calendar quarter. As a result of the potential seasonality in our business, our operating results may vary significantly from quarter to quarter.

If credit market conditions deteriorate further, it could have a material adverse impact on our investment portfolio.

U.S. sub-prime mortgage defaults have had a significant impact across various sectors of the financial markets, causing global credit and liquidity related difficulties.  Beginning mid-2007, global short-term funding markets have experienced credit issues, leading to liquidity issues and failed auctions in the auction rate securities market.  If the global credit market continues to be weak or deteriorates further, the liquidity of our investment portfolio may be impacted and we could determine that some of our investments are impaired.  This could materially adversely impact our results of operations and financial condition.

20

Regional instability in Israel may adversely affect business conditions and may disrupt our operations and negatively affect our revenues and profitability.

As a result of our acquisition of CopperGate in November 2009, we have engineering facilities, administrative and sales support operations and, as of February 1, 2014, we had 101 employees located in Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, as well as incidents of civil unrest. In addition, in the past, Israel and companies doing business with Israel has been the subject of economic boycotts. Although Israel has entered into various agreements with Egypt, Jordan and the Palestinian Authority, Israel has been and is subject to civil unrest and terrorist activity, with varying levels of severity since September 2000. Recently, there has been an increase in civil unrest and political instability in the Middle East, including the recent escalation of conflict in Syria. Any future armed conflicts, civil unrest or political instability in the region may negatively affect business conditions and adversely affect our results of operations.

In addition, our business insurance does not cover losses that may occur as a result of events associated with the security situation in the Middle East. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained. Any losses or damages incurred by us could have a material adverse effect on our business and financial results.

The income tax benefits in Israel to which we are currently entitled from our approved enterprise program may be reduced or eliminated by the Israeli government in the future and also require us to satisfy specified conditions.  If they are reduced or if we fail to satisfy these conditions, we may be required to pay increased taxes and would likely be denied these benefits in the future.

The Investment Center of the Ministry of Industry, Trade and Labor has granted “approved and/or beneficiary enterprise” status to certain product development programs at our facility in Tel Aviv. Sigma Designs Israel’s taxable income from the approved and beneficiary enterprise program is exempt from tax for a period of two years commencing calendar year 2008 and 2009, respectively, and will be subject to a reduced tax rate for an additional eight years thereafter, depending on the percentage of Sigma Designs Israel’s share capital held by non-Israelis. The Israeli government may reduce, or eliminate in the future, tax benefits available to approved enterprise programs. Our approved and beneficiary programs and the resulting tax benefits may not continue in the future at their current levels or at any level. The termination or reduction of these tax benefits would likely increase our tax liability. Additionally, the benefits available to an approved and beneficiary enterprise program are dependent upon the fulfillment of conditions stipulated under applicable law and in the certificate of approval. If we fail to comply with these conditions, in whole or in part, we may be required to pay additional taxes for the period in which we benefited from the tax exemption or reduced tax rates and would likely be denied these benefits in the future. In either case, the amount by which our taxes would increase will depend on the difference between the then applicable tax rate for non-approved enterprises and the rate of tax, if any, that we would otherwise pay as an approved enterprise, and the amount of any taxable income that we may earn in the future. The current maximum enterprise tax rate in Israel is 26.5%.

Failure to maintain effective internal control over financial reporting may cause us to delay filing our periodic reports with the SEC, affect our NASDAQ listing and adversely affect our stock price.  

The SEC, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include a report of management on internal control over financial reporting in their annual reports on Form 10-K.  Our management is responsible for maintaining internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP.  Our management assessed the effectiveness of our internal control over financial reporting as of February 1, 2014 and concluded that our internal control over financial reporting was effective.  However, during the second quarter of fiscal 2013, we acquired certain assets used in the DTV business of Trident Microsystems.  As a result of completing the accounting procedures related to this acquisition, we were unable to timely file our quarterly report on Form 10-Q for the quarterly period in which we completed this acquisition.  In fiscal 2014 and 2013, we also experienced significant turnover in our finance and accounting personnel, including the resignation of our former chief financial officer on March 4, 2013.  All of these changes placed a strain on our internal control over financial reporting, and we must continue to apply significant resources in order to maintain effective internal controls.  Although we review our internal control over financial reporting in order to ensure compliance with the Section 404 requirements, our failure to maintain adequate internal controls over financial reporting could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which ultimately could negatively impact our stock price.

21

Our headquarters, certain of our other facilities, and some of our suppliers and third-party manufacturers are located in active earthquake zones.  Earthquakes, tsunamis, floods or other types of natural disasters affecting our suppliers, our manufacturers or us could cause resource shortages and production delays, which would disrupt and harm our business, results of operations and financial condition.

We are headquartered in the San Francisco Bay Area, have research and development and sales offices in Japan and outsource most of our manufacturing to Taiwan.  Each of these areas is an active earthquake zone, and certain of our suppliers and third-party manufacturers conduct operations in the same regions or in other locations that are susceptible to natural disasters.  The occurrence of a natural disaster, such as an earthquake, tsunami or flood, or localized extended outages of critical utilities or transportation systems, or any critical resource shortages, affecting us, our suppliers or our third-party manufacturers could cause a significant interruption in our production, business, damage or destroy our facilities or those of our suppliers and cause us to incur significant costs or result in limitations on the availability of our raw materials, any of which could harm our business, financial condition and results of operations.

Risks Related to Our Common Stock

Our operating results are subject to significant fluctuations due to many factors and any of these factors could adversely affect our stock price.

Our operating results have fluctuated in the past and may continue to fluctuate in the future due to a number of factors, including:

• failure to reduce our expenses sufficiently to achieve profitability at current revenue levels;

• the loss of one or more significant customers;

• changes in our pricing models and product sales mix;

• unexpected reductions in unit sales and average selling prices, particularly if they occur precipitously;

• new product introductions by us and our competitors;

• the level of acceptance of our products by our customers and acceptance of our customers' products by their end user customers;

• an interrupted or inadequate supply of semiconductor chips or other materials included in our products;

• availability of third-party manufacturing capacity for production of certain products;

• shifts in demand for the technology embodied in our products and those of our competitors;

• the timing of, and potential unexpected delays in, our customer orders and product shipments;

• the impairment and associated write-down of strategic investments that we may make from time-to-time;

• write-downs of accounts receivable;

• inventory obsolescence;

• a significant increase in our effective tax rate in any particular period as a result of the exhaustion, disallowance or accelerated recognition of our net operating loss carry-forwards or otherwise;

• technical problems in the development, production ramp up and manufacturing of products, which could cause shipping delays;

• the impact of potential economic instability in the United States and Asia-Pacific region, including the continued effects of the recent worldwide economic slowdown;

• expenses related to implementing and maintaining a new enterprise resource management system and other information technologies; and

• expenses related to our compliance efforts with Section 404 of the Sarbanes-Oxley Act of 2002.

In addition, the market prices of securities of semiconductor and other technology companies have been volatile.  This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies.

Accordingly, you may not be able to resell your shares of common stock at or above the price you paid.  

22

Our stock price has demonstrated volatility and continued volatility in the stock market or our operating performance may cause further fluctuations or decline in our stock price.

The market for our common stock has been subject to significant volatility which is expected to continue.  For example, during the fiscal year ended February 1, 2014, the closing sale price per share of our common stock on the NASDAQ Global Market ranged from a high of $6.49 on September 13, 2013 to a low of $4.06 on December 18, 2013.  This volatility may or may not be related or proportionate to our operating performance.  Our operating performance as well as general economic and market conditions, could cause the market price of our common stock to decline.

If securities or industry analysts do not publish research or reports about our business or if they issue an adverse opinion regarding our stock, our stock price and trading volume could decline.

The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about our business or us.  If one or more of the analysts who cover us issue an adverse opinion regarding our stock, our stock price would likely decline.  If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets which in turn could cause our stock price or trading volume to decline.

Provisions in our organizational documents and California law could delay or prevent a change in control of Sigma that our shareholders may consider favorable.

Our articles of incorporation and bylaws contain provisions that could limit the price that investors might be willing to pay in the future for shares of our common stock.  Our Board of Directors can authorize the issuance of preferred stock that can be created and issued by our Board of Directors without prior shareholder approval, commonly referred to as "blank check" preferred stock, with rights senior to those of our common stock.  The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that we may issue in the future.  The issuance of preferred stock could have the effect of delaying, deterring or preventing a change in control and could adversely affect the voting power of your shares.  In addition, provisions of California law could make it more difficult for a third party to acquire a majority of our outstanding voting stock by discouraging a hostile bid or delaying or deterring a merger, acquisition or tender offer in which our shareholders could receive a premium for their shares or a proxy contest for control of Sigma or other changes in our management.

ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

ITEM 2.      PROPERTIES

We currently lease an approximately 66,000 square foot facility in Milpitas, California that is used as our headquarters.  The lease on this facility commenced on June 30, 2007 and will expire in September 2015.  We also lease an approximately 9,075 square foot facility in Tel-Aviv, Israel that is used for our Israel operations.  We have the right to renew the lease for the Israel facility until December 31, 2014 for 7,523 square feet and until June 15, 2014 for the remaining 1,552 square feet.  We also lease facilities for sales and sales support in South Korea, Japan, Shenzhen, Hong Kong and a distribution facility in Singapore.  Additionally, we lease facilities for research and development in Shanghai, Vietnam, Singapore, Germany, France and The Netherlands, and facilities for sales and research and development in Taiwan and Denmark.

ITEM 3.      LEGAL PROCEEDINGS

In March 2013, we filed a motion to intervene in (and become a party to) U.S. Ethernet Innovations, LLC (USEI) v. AT&T Mobility, LLC (“AT&T”) and others, Case No. 5-10-cv-05254 CW, currently pending in the U.S. District Court for the Northern District of California, or the Litigation. In this Litigation, USEI filed a patent infringement complaint alleging that various AT&T products infringe USEI patents that have now expired, including alleging that set-top boxes deployed by AT&T that contain our SoCs infringe a USEI patent. USEI has made similar allegations that other defendants infringe this and other now expired USEI patents in this Litigation and other related cases. Further, other interveners have already been added to this Litigation and other related cases. USEI seeks monetary damages, attorney’s fees, and an injunction against AT&T, other defendants and other interveners. AT&T, other defendants and other interveners have denied the allegations of infringement made by USEI and asserted that USEI’s patents are invalid, unenforceable, and not infringed. The Court granted our motion to intervene. As a result, we filed a declaratory judgment complaint. USEI answered this complaint and asserted counter-claims against us, for which we have responded. The parties have now completed fact discovery and have moved on to expert discovery. USEI attempted to expand the scope of claims to cover all of our semiconductors; however, the court approved our motion to limit the case to only those devices initially claimed in the original USEI filing. Case management hearings for this multi-party suit have resulted in the court entertaining separate sequential trials for the various interveners remaining in the case. Intel Corporation, as one intervener, has requested that it proceed first, which would set a precedent for all subsequent trials. The trial date currently set by the court for the first trial is January 5, 2015.

23

In April 2013, we initiated a lawsuit against Trident and NXP Semiconductors Netherlands B.V. (“NXP”) Adv. Aoc. No. 13-50940 (CSS) in the United States Bankruptcy Court for the District of Delaware. Trident filed for voluntarily petition under Chapter 11 bankruptcy on January 4, 2012. In May 2012, we entered into an Asset Purchase Agreement (“APA”) with Trident to acquire certain assets of its digital television and PC television businesses, as further discussed in Note 10. In connection with the APA, we entered into a Transition Services Agreement (“TSA”) under which Trident agreed to provide certain transition services to us following the closing, including management of billings and collections with their former customers and payment to former vendors, among others. We were seeking recovery of $1.8 million that we paid to Trident to specifically pay to NXP, on our behalf pursuant to the TSA, for purchases of inventory that Trident, on our behalf, made from NXP during the month of June 2012. NXP claimed they had not received payment of $1.8 million from Trident and reduced such amount from our inventory prepayment balance with NXP. Both Trident and NXP filed motions to dismiss our claims and we answered their motions. During the third quarter of fiscal 2014, we could reasonably estimate our potential range of loss on this matter, and we recognized an impairment of approximately $0.4 million on this receivable which is included in “General and administrative” in the accompanying consolidated statements of operations. On February 3, 2014, we entered into a settlement agreement with the parties and pursuant to the settlement agreement, Trident agreed to pay us $1.4 million. The net receivable of $1.4 million is included in “Prepaid expenses and other current assets” in the accompanying consolidated balance sheet at February 1, 2014. We received the settlement payment towards the end of February 2014.

In February 2014, Mentor Graphics Corporation (“Mentor”) filed a complaint against us, Case No. 3-14-cv00742, in the U.S. District Court for the Northern District of California, for unspecified damages alleging copyright infringement, breach of contract, unjust enrichment and a request for audit and accounting relating to that certain Reference Platform License Agreement for Embedded Software, dated March 28, 2008 (the “Mentor Agreement”) by and between Trident Microsystems, Inc. (“Trident”) and Mentor. The Mentor Agreement was assigned to us in connection with our acquisition of assets related to the DTV business of Trident. We have filed our answer to this complaint, denying the substantive allegations. We believe this complaint is without merit and intend to defend ourselves vigorously.

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 our time, result in the diversion of significant operational resources, or require us to enter into royalty or licensing agreements which, if required, may not be available on terms favorable to us or at all.  Were an unfavorable outcome to occur against us, there exists the possibility of a material adverse impact on our financial position and results of operations for the period in which the unfavorable outcome occurs, and potentially in future periods. 

ITEM 4.      MINE SAFETY DISCLOSURES

None.

PART II

ITEM 5.      MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on The NASDAQ Global Select under the trading symbol “SIGM.”  The following table sets forth the high and low sales prices per share of our common stock for each quarter in the last two fiscal years.

	Fiscal 2014				Fiscal 2013
	High		Low		High		Low
First fiscal quarter	$	5.41	$	4.30	$	6.11	$	4.68
Second fiscal quarter		5.79		4.35		6.74		5.43
Third fiscal quarter		6.70		4.68		7.13		5.62
Fourth fiscal quarter		5.75		4.04		6.00		5.04

As of April 11, 2014, we had approximately 128 shareholders of record of our common stock.

We have never paid cash dividends on our common stock and we currently do not plan to pay cash dividends to our common shareholders in the foreseeable future.

For information about securities authorized for issuance under our equity compensation plans, please refer to Item 12 of Part III of this Form 10-K and Note 18 to our consolidated financial statements.

Purchases of Equity Securities by Issuer

The following table sets forth a summary of our stock repurchases under our share repurchase program for fiscal 2014:

24

	Number of shares purchased		Average price per share		Number of shares purchased under publicly announced programs		Approximatedollar valuethat may yet be purchased under the programs(in thousands)
Beginning balance available under the share repurchase program as of December 11, 2013 (1)		—	$	—		—	$	20,000
Shares repurchased:
January 2014		466,831	$	4.83		466,831		2,257
Ending balance available under the share repurchase program as of February 1, 2014							$	17,743

(1) On December 11, 2013, we announced a share repurchase program to repurchase up to $20.0 million in value of our outstanding shares of common stock through December 31, 2014.

Stock Performance Graph

The following graph shows the value of a $100 cash investment on the last business day of fiscal year 2009 in (i) our common stock, (ii) the NASDAQ Composite Index, and (iii) the NASDAQ Electronic Components Index.  All values assume reinvestments of all dividends, if any and are calculated as of the last day of each of our fiscal years.  Note that historic stock price performance shown on the graph below is not necessarily indicative of future stock price performance.

25 

ITEM 6.     SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data (presented in thousands, except per share amounts) should be read in conjunction with our consolidated financial statements, the notes related thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations.  The consolidated statements of operations data for the years ended February 1, 2014, February 2, 2013, and January 28, 2012, and the consolidated balance sheets data as of February 1, 2014, and February 2, 2013 have been derived from and should be read in conjunction with our audited consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K.  The consolidated statements of operations data for the years ended January 29, 2011 and January 30, 2010 and the consolidated balance sheets data as of January 28, 2012, January 29, 2011, and January 30, 2010 are derived from audited consolidated financial statements which are not included herein.

	Fiscal Years Ended
	February 1, 2014			February 2, 2013			January 28, 2012			January 29, 2011		January 30, 2010
Consolidated Statements of Operations Data:
Net revenue	$	199,193		$	216,613		$	182,617		$	286,915	$	206,083
Income (loss) from operations		(9,572	)		(83,346	)		(175,715	)		12,917		3,201
Net income (loss)		(11,049	)		(101,768	)		(168,045	)		9,147		2,455
Basic net income (loss) per share		(0.32	)		(3.06	)		(5.25	)		0.29		0.09
Diluted net income (loss) per share	$	(0.32	)	$	(3.06	)	$	(5.25	)	$	0.29	$	0.09

	February 1, 2014		February 2, 2013		January 28, 2012		January 29, 2011		January 30, 2010
Consolidated Balance Sheets Data:
Working capital	$	91,870	$	96,628	$	110,950	$	163,196	$	165,990
Total assets	$	215,775	$	220,831	$	297,224	$	459,239	$	423,897
Total shareholders' equity	$	158,391	$	162,018	$	248,475	$	398,041	$	368,822

The following table presents details of the total stock-based compensation expense, excluding tender offer payments associated with the adjustments to measurement dates for option grants, that is included in the consolidated statements of operations data above:

	Fiscal Years Ended
	February 1, 2014		February 2, 2013		January 28, 2012		January 29, 2011		January 30, 2010
Stock-based Compensation Expense:
Cost of revenue	$	267	$	487	$	478	$	560	$	358
Research and development		3,381		5,740		6,277		6,745		5,334
Selling and marketing		1,275		1,811		2,137		2,094		1,861
General and administrative		1,891		2,557		3,133		3,178		1,240
	$	6,814	$	10,595	$	12,025	$	12,577	$	8,793

ITEM 7.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with our consolidated financial statements and related notes.  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 I, Item 1A “Risk Factors” in this Form 10-K 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-K.  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 intelligent media platforms for use in home entertainment and control. We focus on integrated system-on-chip, or SoC, solutions that serve as the foundation for some of the world’s leading consumer products, including televisions, set-top boxes and video networking products. All of our primary products are semiconductors that are targeted toward end-product manufacturers, Original Equipment Manufacturers, or OEMs, and Original Design Manufacturers, or ODMs. We sell our products into four primary markets which are the Digital Television, or DTV market, the home networking market, the set-top box market, and the home control market. We derive a portion of our revenue from other products and services, including technology licenses, software development kits, engineering support services for hardware and software, engineering development for customization of chipsets and other accessories.

26 

Our chipset products and target markets

We consider all of our semiconductor products to be chipsets because each of our products is comprised of multiple semiconductors.  We believe our chipsets enable our customers to efficiently bring consumer multimedia devices to market.  We design our highly integrated products to significantly improve performance, lower power consumption and reduce cost.

We derive nearly all of our operating net revenue from sales of chipset products and we sell our chipsets into four primary target markets plus licensing and other markets, for which we separately report revenues that we derive from sales into each of these target markets.

Our primary target markets are the DTV market, set-top box market, home networking market, home control market and license and other markets. Because of our focus on these target markets, we separately report revenues that we derive from sales into each of these target markets.  Starting with the first quarter of fiscal 2014, we have defined the DTV market to include all products that are sold into digital televisions or “SmartTVs” as well as other adjacent markets using chipset products that are designed for video post-processing. We believe DTV products complement our existing set-top box products, which will provide substantial research and development leverage and improved operating scale to augment our ability to develop innovative solutions for the anticipated convergence of IP-video delivery across any device within the connected home. We serve this market with our media processor SoCs and dedicated post-processing products. Also starting with the first quarter of fiscal 2014, we have defined the set-top box market to include all set-top box products delivering IP streaming video, including hybrid versions of these products. We have also eliminated the connected media player market as a separate revenue market as the majority of demand accruing from these sales will be represented in the set-top box market. We serve this market primarily with our media processor products. 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 or wireless connectivity. We serve the home networking market with our wired home networking controllers that are designed to provide connectivity solutions between various home entertainment products and incoming video streams. We define the home control market to include all the gateways and interconnected appliances that provide home monitoring and control for the management of security, safety, energy, health, and convenience. Our home control product line consists of our wireless Z-Wave chipsets, which consist of wireless transceiver devices along with a mesh networking protocol. We also sell into license and other markets which include technology licenses, software development kits, engineering support services for hardware and software, engineering development for customization of chipsets and other accessories.

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 fiscal 2014, 2013 and 2012, we recorded provisions for excess inventory of $0.8 million, $7.1 million and $9.0 million, respectively, primarily due to the end of life of certain products and an end customer’s transition to a next generation product sold by our competitors

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.   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, discounts, mix of product sales, amount of license revenue and provisions for inventory excess and obsolescence.

Critical accounting policies and estimates

Management’s discussion and analysis of financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or GAAP.  The preparation of consolidated financial statements and related disclosures requires us to make judgments that affect the reported amounts and disclosures of the assets and liabilities at the date of the 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.  The primary areas that require significant estimates and judgments by management include, but are not limited to, revenue recognition, allowances for doubtful accounts, sales returns, warranty obligations, inventory valuation, stock-based compensation expense, goodwill and purchased intangible asset valuations, strategic investments, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, restructuring costs, litigation and other loss contingencies. 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.  We believe the critical accounting policies as disclosed in Note 1 to the consolidated financial statements for the year ended February 1, 2014, reflect the more significant judgments and estimates used in preparation of our consolidated financial statements.

27

Restructuring charges:  Our restructuring charges include primarily payments to employees for severance, asset impairment charges, termination fees associated with leases, other contracts and other costs related to the closure of facilities. Accruals are recorded when management has approved a plan to restructure operations and a liability has been incurred. The restructuring accruals are based upon management estimates at the time they are recorded. These estimates can change depending upon changes in facts and circumstances subsequent to the date the original liability was recorded. During fiscal 2014 and 2013, we recorded restructuring charges of $2.3 million and $3.3 million, respectively.

Derivative financial instruments: We account for our financial derivatives as either assets or liabilities and carry them at fair value.  We do not use derivative financial instruments for speculative or trading purposes, nor do we hold or issue leveraged derivative financial instruments. We use foreign exchange contracts to hedge certain existing and anticipated foreign currency denominated transactions.  Unrealized gains and losses arising from the effective portion of foreign exchange contracts that are designated as cash flow hedging instruments are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the same period or periods during which the underlying transactions affect earnings.  Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.  Gains and losses arising from changes in the fair values of foreign exchange contracts that are not designated as hedging instruments are recognized in current earnings.

Short and long-term marketable securities:  Short-term marketable securities represent highly liquid instruments with a remaining maturity date at the end of each reporting period of greater than 90 days but less than one year and are stated at fair value. Long-term marketable securities represent securities with contractual maturities greater than one year from the date of acquisition. We classify our marketable securities as available-for-sale because the sale of such securities may be required prior to maturity. The difference between amortized cost (cost adjusted for amortization of premiums and accretion of discounts, which is recognized as an adjustment to interest income) and fair value, representing unrealized holding gains or losses, are recorded separately as a component of accumulated other comprehensive income within shareholders’ equity. Any gains and losses on the sale of marketable securities are determined on a specific identification basis. We monitor all of our marketable securities for impairment and if these securities are reported to have a decline in fair value, we use significant judgment to identify events or circumstances that would likely have a significant adverse effect on the future value of each investment including: (i) the nature of the investment; (ii) the cause and duration of any impairment; (iii) the financial condition and future prospects of the issuer; (iv) for securities with a reported decline in fair value, our ability to hold the security for a period of time sufficient to allow for any anticipated recovery of fair value; (v) the extent to which fair value may differ from cost; and  (vi) a comparison of the income generated by the securities compared to alternative investments. We recognize an impairment charge if a decline in the fair value of our marketable securities is judged to be other-than-temporary. No such impairment charges were recorded in fiscal 2014, 2013 and 2012.

Accounts receivable and allowances:  We defer recognition of revenue and the related receivable when we cannot estimate whether collectability is reasonably assured at the time products and services are delivered to our customer.  We also provide allowances for bad debt and sales returns.  In establishing the allowance for bad debt, we review the customer’s payment history and information regarding their credit worthiness.  In establishing the allowance for sales returns, we make estimates of potential future returns of products for which revenue has been recognized in the current period, including analyzing historical returns, current economic trends and changes in customer demand and acceptance of our products.  At February 1, 2014 and February 2, 2013, the allowance for sales returns, discounts and bad debt was approximately $0.3 million and $0.3 million, respectively. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, or future product returns increased, additional allowances may be required.

Inventory: Our inventory is 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 inventory 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 month and quarter 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 inventory in excess of estimated future demand.  In addition, we write-off inventory that is 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 recorded provisions for excess and obsolete inventory of approximately $0.8 million, $7.1 million and $9.0 million to cost of revenue for fiscal 2014, 2013 and 2012, respectively. We have sold through $1.0 million, $3.3 million and $0.6 million of inventory that we had previously recorded as excess and obsolete in fiscal 2014, 2013 and 2012, 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.

28

Warranty: Our products typically carry a one-year limited warranty that 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. Although we engage in extensive product quality programs and processes, our warranty obligation has been and may in the future be affected by product failure rates, product recalls, repair or replacement costs and additional development costs incurred in correcting any product failure. Should actual product failure rates differ from our estimates, additional warranty reserves could be required. In that event, our product gross margins would be reduced.

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.

Intangible assets:  The amounts and useful lives assigned to intangible assets acquired, other than goodwill, impact the amount and timing of future amortization.  Intangible assets include those acquired through business combinations and 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, generally two to three years.

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired.  Other intangible assets primarily represent purchased developed technology, customer relationships, trademarks, non-compete agreements, purchased IP and IP R&D.  We currently amortize our intangible assets with definitive lives over periods ranging from two to ten years using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used or, if that pattern cannot be reliably determined, using a straight-line amortization method.  We capitalize IP R&D projects acquired as part of a business combination and upon completion of each project, IP R&D assets are reclassified to developed technology and amortized over their estimated useful lives

Impairment of goodwill and other long-lived assets: We evaluate goodwill on an annual basis as of the last day of our fiscal year or whenever events or changes in circumstances indicate the carrying value may not be recoverable.  We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we conduct a two-step quantitative goodwill impairment test.  The first step requires identifying the reporting units and comparing the fair value of each reporting unit to its net book value, including goodwill.  We have identified that we operate one reporting unit and the fair value of our operating unit is determined to be equal to our market capitalization as determined through quoted market prices, adjusted for a reasonable control premium.  We estimate the control premium based on a review of acquisitions of comparable semiconductor companies that were completed during the last four years.  If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. The amount, by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss.

During development, IP R&D is not subject to amortization and is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. We first assess qualitative factors to determine whether it is more likely than not that the fair value of IP R&D is less than its carrying amount, and if so, we conduct a quantitative impairment test. The impairment test consists of a comparison of the fair value to its carrying amount. If the carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Once an IP R&D project is complete, it becomes a definite lived intangible asset and is evaluated for impairment in accordance with our policy for long-lived assets.

We test long-lived assets, including purchased intangible assets (other than goodwill and IP R&D) for impairment whenever events or changes in circumstances, such as a change in technology, indicate that the carrying value of these assets may not be recoverable.  If indicators of impairment exist, we determine whether the carrying value of an asset or asset group is recoverable, based on comparisons to undiscounted expected future cash flows that the assets are expected to generate. If an asset is not recoverable, we record an impairment loss equal to the amount by which the carrying value of the asset exceeds its fair value. We primarily use the income valuation approach to determine the fair value of our long-lived assets and purchased intangible assets.

Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions.  These estimates and assumptions include forecasts of revenue and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and a determination of appropriate market comparables.  We base our fair value estimates on assumptions we believe to be reasonable at that time, however, actual future results may differ from those estimates.  Future competitive, market and economic conditions could negatively impact key assumptions including our market capitalization, actual control premiums or the carrying value of our net assets, which could require us to realize an additional impairment.

29

Long-term investments:  Investments in private equity securities of less than 20% owned companies are accounted for using the cost method unless we can exercise significant influence or the investee is economically dependent upon us, in which case the equity method is used.  We evaluate our long-term investments for impairment annually or whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable.

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. These criteria are usually met at the time of product shipment. We record reductions of revenue for estimated product returns in the same period that the related revenue is recorded. The amount of these reductions is based on historical sales returns, analysis of credit memo data, specific criteria included in the agreements, and other factors known at the time. We accrue 100% of potential returns at the time of sale when there is not sufficient historical sales data and recognize revenue when the right of return expires. During the third quarter of fiscal 2014, we adopted prospectively, the authoritative guidance, ASU No. 2010-17, “Revenue Recognition – Milestone Method”, (ASU 2010-17) that provides an alternative method of revenue recognition for milestone payments. Under the milestone method guidance, we recognize revenue that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. To be considered substantive, the consideration earned by achieving the milestone should be (a) commensurate with (1) either the vendor’s performance to achieve the milestone or (2) to the enhancement of the value of the item delivered as a result of a specific outcome resulting from the vendor’s performance to achieve the milestone (b) the consideration should relate solely to past performance, and (c) the consideration should be reasonable relative to all deliverables and payment terms in the arrangement. Other milestones that do not fall under the definition of a milestone under the milestone method are recognized under the authoritative guidance concerning revenue recognition. We also derive a portion of our net revenue from licensing the right to use our intellectual property. We recognize licensing revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectability is reasonably assured. These criteria are usually met at the time our technology is made available to the customer.

On occasion, we derive revenue from the license of our internally developed intellectual property ("IP"). IP licensing agreements that we enter into generally provide licensees the right to incorporate our IP components in their products with terms and conditions that vary by licensee. Our license fee arrangements generally include multiple deliverables and we are required to determine whether there is more than one unit of accounting. To the extent that the deliverables are separable into multiple units of accounting, we allocate the total fee on such arrangements to the individual units of accounting using management’s best estimate of selling price ("ESP"), if third party evidence ("TPE") or vendor specific objective evidence ("VSOE") does not exist. We defer revenue recognition for consideration that is contingent upon future performance or other contractual terms.

The Company’s process for determining its ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. The key factors considered by the Company in developing the ESPs include the nature and complexity of the licensed technologies, our cost to provide the deliverables, the availability of substitute technologies in the marketplace and the Company’s historical pricing practices. We then recognize revenue for each unit of accounting depending on the nature of the deliverable(s) comprising the unit of accounting in accordance with the revenue recognition criteria mentioned above. Fees under these agreements generally include (a) license fees relating to our IP, (b) engineering services, and (c) support services. Historically, each of these elements has standalone value and therefore each are treated as separate units of accounting. Any future licensing arrangements will be analyzed based on the specific facts and circumstances which may be different than our historical licensing arrangements.

For deliverables related to licenses of our technology that involve significant engineering services, we recognize revenue in accordance with the provisions of the proportional performance method. We determine costs associated with engineering services using actual labor dollars incurred and estimated other direct or incremental costs allocated based on the percentage of time the engineer(s) spent on the project. These costs are deferred until revenue recognition criteria have been met, at which time they are reclassified as cost of revenue.

We defer revenue when payments are received from customers in advance of revenue recognition.  Deferred revenue, consisting principally of license fees collected in advance, at February 1, 2014 and February 2, 2013 was $3.0 million and $3.1 million, respectively, and is included in accrued liabilities in the accompanying consolidated balance sheets.

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 the income tax return must be recognized as the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority.  An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

Stock-based compensation:  We measure and recognize compensation expense for all stock-based payment awards made to employees and directors based on their estimated fair values measured on the date of grant.  Stock option awards are measured using an option-pricing model.  The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in our consolidated statements of operations.  We estimate forfeitures, based on historical experience, at the time of grant and revise our estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

30

Results of operations

The following table is derived from our consolidated statements of operations and sets forth our historical operating results as a percentage of net revenue for each of the fiscal years indicated (in thousands, except percentages):

	Fiscal Years Ended
	February 1, 2014			% of Net Revenue			February 2, 2013			% of Net Revenue			January 28, 2012			% of Net Revenue
Net revenue	$	199,193			100%		$	216,613			100%		$	182,617			100%
Cost of revenue		91,052			46%			125,588			58%			105,241			58%
Gross profit		108,141			54%			91,025			42%			77,376			42%
Operating expenses
Research and development		73,162			37%			103,478			47%			86,517			47%
Sales and marketing		21,637			11%			34,550			16%			34,467			19%
General and administrative		19,640			10%			27,899			13%			20,829			11%
Restructuring costs		2,261			1%			3,264			2%			-			-
Impairment of goodwill		-			-			-			-			45,108			25%
Impairment of acquired intangible assets		-			-			-			-			66,170			36%
Impairment of IP, mask sets and design tools		1,013			-			6,569			3%			-			-
Gain on acquisition		-			-			(1,389	)		(1%	)		-			-
Total operating expenses		117,713			59%			174,371			80%			253,091			138%
Loss from operations		(9,572	)		(5%	)		(83,346	)		(38%	)		(175,715	)		(96%	)
Gain on sale of development project		1,079			1%
Impairment, net of gain on sale, of privately-held investments, net		(433	)		-			-			-			-			-
Interest and other income, net		827			-			2,325			1%			2,704			1%
Loss before income taxes		(8,099	)		(4%	)		(81,021	)		(37%	)		(173,011	)		(95%	)
Provision for (benefit from) income taxes		2,950			2%			20,747			(10%	)		(4,966	)		(3%	)
Net loss	$	(11,049	)		(6%	)	$	(101,768	)		(47%	)	$	(168,045	)		(92%	)

Net revenue

Our net revenue for fiscal 2014 decreased $17.4 million, or 8%, compared to fiscal 2013. The decrease was primarily due to a decline in our chipset revenue of $29.3 million, or 14%, partially offset by an increase in our license and other revenue of $11.9 million, or 184%. The decline in our chipset revenue resulted primarily from reduced demand, a weaker pricing environment, the end of life for several products and new product transitions. Sales of our chipsets accounted for approximately 91%, 97% and 99% of our net revenue for fiscal 2014, 2013 and 2012, respectively. The increase in license and other revenue was primarily the result of two outbound license agreements.

Our net revenue for fiscal 2013 increased $34.0 million, or 19%, compared to fiscal 2012.  Net revenue benefited $66.6 million from the addition of the DTV product line, resulting from our acquisition of certain assets from Trident Microsystems Inc., or Trident, in the second quarter of fiscal 2013. Excluding DTV, our net revenue for fiscal 2013 decreased $32.6 million, or 18%, compared to fiscal 2012. This net revenue decrease was primarily due to a change in product mix to our lower average selling price, or ASP, products resulting in a 26% decline in ASP per chipset, partially offset by an 11% increase in units shipped. ASPs continued to decline in all of our target markets year over year, due to competitive pressures.

Net revenue by target market

We sell our products into four primary target markets, which are the DTV market, home networking market, set-top box market, and home control market. We also have license revenue, included in the license and other market, which we receive from the license of our technology to third parties. Starting with the first quarter of fiscal 2014, we have defined the DTV market to include all products that are sold into digital televisions as well as other adjacent markets using chipset products that are designed for video post-processing and have eliminated the prosumer and industrial audio/video market as a separate revenue segment as the majority of demand accruing from these sales will be represented in the DTV market segment. Also starting with the first quarter of fiscal 2014, we have defined the set-top box market to include all set-top box products delivering IP streaming video, including hybrid versions of these products, and we have eliminated the connected media player market as a separate revenue market as the majority of demand accruing from these sales will be represented in the set-top box market segment.

31

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):

	Fiscal Years Ended
	February 1, 2014		% of Net Revenue			February 2, 2013		% of Net Revenue			January 28, 2012		% of Net Revenue
DTV	$	49,600		25	%	$	76,614		35	%	$	12,351		7	%
Home networking		72,927		37	%		79,492		37	%		68,266		37	%
Set-top Box		38,483		19	%		42,205		19	%		90,780		50	%
Home Control		20,704		10	%		12,342		6	%		11,092		6	%
License and other		17,479		9	%		5,960		3	%		128		0	%
Net revenue	$	199,193		100	%	$	216,613		100	%	$	182,617		100	%

DTV market:  Our acquisition of the DTV assets from Trident Microsystems in the second quarter of fiscal 2013 allowed us to expand our participation in the DTV market, which previously had not been significant and had been included in the license and other category. We believe DTV products complement our IPTV media processor and connected media player products, which will provide substantial research and development leverage and improved operating scale to augment our ability to develop innovative solutions for the anticipated convergence of IP-video delivery across any device within the home networking market.  DTV net revenue decreased $27.0 million, or 35%, in fiscal 2014 compared to fiscal 2013, primarily due to declines of 20% in average selling price and 19% in units shipped. The decline in our DTV market resulted primarily from reduced demand and new product transitions. Net revenue from sales of our products into the DTV market was $76.6 million in fiscal 2013, of which $66.6 million was attributable to the DTV product lines resulting from our acquisition of the DTV assets from Trident Microsystems in the second quarter of fiscal 2013. Excluding the net revenue generated from the acquisition of the DTV assets, our net revenue from sales of our products into the DTV market decreased to approximately $10.0 million in fiscal 2013 from net revenue of $12.4 million in fiscal 2012. As a percentage of net revenue, DTV revenue accounted for 35% and 7% of our total net revenue in fiscal 2013 and 2012, respectively. We expect that our DTV business may experience some seasonality common to consumer electronics markets. We expect our net revenue from the DTV market to continue to be a significant percentage of net revenue but will fluctuate in future periods as we develop and introduce new products for this market.

Home networking market:  For fiscal 2014, net revenue from sales of our products into the home networking market decreased $6.6 million, or 8%, compared to fiscal 2013. The decrease was primarily attributable to a decline of 12% in average selling price, compared to fiscal 2014, partially offset by a 4% increase in units shipped. For fiscal 2013, net revenue from sales of our products into the home networking market increased $11.2 million, or 16%, compared to fiscal 2012. The increase in net revenue was primarily the result of a higher volume of units shipped due to our expansion into South America and continued growth in Asia.

Set-top box market: For fiscal 2014, net revenue from sales of our products into the set-top box market decreased $3.7 million, or 9%, compared to fiscal 2013. The decrease was primarily attributable to a decline of 16% in average selling price, partially offset by a 9% increase in units shipped. The decline in the average selling price was primarily due to the shift in market demand from our MIPS based products to a new generation of ARM based products.  For fiscal 2013, net revenue from sales of our products into the set-top box market decreased $48.6 million, or 54%, compared to fiscal 2012. The decrease in our net revenue from the set-top box market was primarily due to declines of 50% in units shipped and 7% in average selling price. The decrease in net revenue was primarily attributable to our operators’ pending transitions to newer generations of set-top box products and the resultant draw-down of inventory levels.

Home control market:   For fiscal 2014, net revenue from sales of our products into the home control market increased $8.4 million, or 68%, compared to fiscal 2013. The increase was due to an increase of 63% in units shipped with almost no change in the average selling price. The increase was primarily the result of the adoption of our home control automation services by the customers in security and protection services, telecommunication services and E-retailers. We expect our revenue from the home control market to continue to increase in the foreseeable future. For fiscal 2013, net revenue from sales of our products into the home control market increased $1.3 million, or 11%, compared to fiscal 2012.  The increase in net revenue was primarily due to our continued growth in Asia and North America. 

License and other market:  Our license and other market consists primarily of technology license revenue and revenue from other ancillary markets. For fiscal 2014, net revenue from sales of our products into the license and other market increased $11.5 million, or 193%. The increase in revenue is attributable to two license agreements pursuant to which we license our technology to third parties. For fiscal 2013, net revenue from sales of our products into the license and other market increased $5.8 million from net revenue of $0.1 million in fiscal 2012. The increase in revenue is attributable to one license agreement pursuant to which we license our technology to a third party.

32

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):

	Fiscal Years Ended
	February 1, 2014		% of Net Revenue			February 2, 2013		% of Net Revenue			January 28, 2012		% of Net Revenue
Asia	$	144,483		73	%	$	150,658		70	%	$	166,583		91	%
North America		28,795		14	%		17,006		8	%		8,982		5	%
Europe		22,262		11	%		41,283		19	%		5,718		3	%
Other Regions		3,653		2	%		7,666		3	%		1,334		1	%
Net revenue	$	199,193		100	%	$	216,613		100	%	$	182,617		100	%

Asia:  Our net revenue from Asia decreased $6.2 million, or 4%, for fiscal 2014 compared to fiscal 2013. The decrease in net revenue was primarily attributable to lower demand in our DTV, home networking and set-top box markets, partially offset by increases in our home control and license and other markets. As a percentage of total net revenue by country, China, including Hong Kong, Taiwan and Thailand represented 66%, 9% and 17%, respectively, of the total net revenue generated from Asia in fiscal 2014. Our net revenue from Asia decreased $15.9 million, or 10%, for fiscal 2013 compared to fiscal 2012.  Our net revenue from Asia decreased 21 percentage points as a percentage of our total net revenue for fiscal 2013 compared to fiscal 2012.  The decrease in net revenue from Asia was primarily attributable to lower demand in our set-top box market, partially offset by the addition of DTV net revenue and higher demand for our home networking products. As a percentage of total net revenue by country, China, including Hong Kong, Taiwan and Thailand represented 75%, 9% and 4%, respectively, of the total net revenue generated from Asia in fiscal 2013.

North America:  Our net revenue from North America increased $11.8 million, or 69%, for fiscal 2014 compared to fiscal 2013.  The increase in net revenue was primarily from two customers in our license and other market. Our net revenue from North America increased 6 percentage points as a percentage of our total net revenue for fiscal 2014 compared to fiscal 2013.  This increase in revenue was primarily due to an increase of sales in our license and other market, and to a lesser extent in our set-top box market. This increase was partially offset by lower sales in the DTV and home control markets. For fiscal 2014 and 2013, our net revenue generated outside North America was 86% and 92% of our net revenue, respectively.  Our net revenue from North America increased $8.0 million, or 89%, for fiscal 2013 compared to fiscal 2012.  This increase in revenue was primarily due to the increase of sales in home control, license and other, and the addition of DTV net revenue. 

Europe:  Our net revenue from Europe decreased $19.0 million, or 46%, for fiscal 2014 compared to fiscal 2013. This decrease was primarily due to the reduction of DTV net revenue by $20.8 million, partially offset by an increase of sales in our set-top box market. Our net revenue from Europe decreased 8 percentage points as a percentage of our total net revenue for fiscal 2014 compared to fiscal 2013. Our net revenue from Europe increased $35.6 million, or 622%, for fiscal 2013 compared to fiscal 2012.  This increase was primarily due to the addition of DTV net revenue of $38.8 million, partially offset by decreases in the home networking and set-top box markets due to changes in location of the contract manufacturers used by our customers. Our net revenue from Europe increased 16 percentage points as a percentage of our total net revenue for fiscal 2013 compared to fiscal 2012. 

Major customers

The following table sets forth the major direct customers that accounted for 10% or more of our net revenue:

	Fiscal Years Ended
	February 1, 2014		February 2, 2013			January 28, 2012
TP Vision		*		14	%		*
Flextronics		*		12	%		*
Motorola		*		*			17	%
Gemtek		*		*			22	%

*Accounted for less than 10% of our net revenue.

Although we continue to generate revenue from the four customers mentioned in the table above, they no longer represent more than 10% of our net revenue.

33

Gross profit and gross margin

The following table sets forth gross profit and gross margin (in thousands, except percentages):

	For Fiscal Years Ended
	February 1, 2014			% Change			February 2, 2013			% Change			January 28, 2012
Gross profit	$	108,141			19	%	$	91,025			18	%	$	77,376
Gross margin %		54.3	%					42.0	%					42.4	%

Gross profit increased $17.1 million, or 19%, for fiscal 2014 compared to fiscal 2013. Gross profit in fiscal 2014 was positively impacted by higher sales in license technology and home control products, a shift in the mix of products sold in other target markets, and our continued operational efficiency in manufacturing operations. The productivity improvements were in large part due to increased benefits from cost savings. In addition, during fiscal 2013 we incurred a $4.6 million charge related to the impairment of certain long-lived assets as part of cost of sales, with no recurrence of such charge in 2014. The combined effect of these items was a positive impact to our gross margin of 12.3 percentage points for fiscal 2014. Our future gross margin could be impacted by our product mix and could be adversely affected by further growth in sales of products that have lower gross margins. Our gross margin may also be impacted by the geographic mix of our revenue and may be adversely affected by increased sales discounts, rebates, royalties, and product pricing attributable to competitive factors. Additionally, our manufacturing-related costs may be negatively impacted by constraints in our supply chain, which in turn could negatively affect gross margin. If any of the preceding factors that in the past have negatively impacted our gross margin arises in the future, our gross margin could decline. During fiscal 2014, we benefitted from the sale of $1.0 million of inventory that had been previously written-down.

Our gross margin declined 0.4 percentage points in fiscal 2013 compared to fiscal 2012, primarily due to the addition of the lower margin DTV product line which reduced overall gross margin by 7.9 percentage points. Excluding DTV, our gross margin was 49.9%, an increase of 7.5 percentage points compared to fiscal 2012. This increase was primarily a result of an increase in the volume of our home networking products with reduced average cost per unit, or ACU, the license revenue we recognized in fiscal 2013 with no corresponding license revenue in fiscal 2012 and lower fixed costs absorbed in fiscal 2013 compared to fiscal 2012. The decrease in ACU was primarily due to cost reduction efforts to offset declines in ASP and product mix, and was partially offset by a decreased percentage of fixed costs per unit due to an 83% increase in units shipped. Excluding DTV shipments, units shipped increased 11% in fiscal 2013 compared to fiscal 2012. Our fixed costs include items such as depreciation and amortization and compensation costs for operations. The decrease in gross margin primarily due to the DTV product mix was partially offset by a reduction of $1.9 million in the amount of inventory write-downs we had in fiscal 2013 compared to fiscal 2012. In fiscal 2013, we recorded a $7.1 million provision for excess inventory primarily in connection with the end of life of certain products. During fiscal 2013 and 2012, we benefited from the sale of $3.3 million and $0.6 million, respectively, of inventory that had been previously written-down.

Operating expenses

The following table sets forth operating expenses and operating expenses as a percent of net revenue (in thousands, except percentages):

	Fiscal Years Ended
	February 1, 2014		% of Net Revenue			February 2, 2013			% of Net Revenue			January 28, 2012		% of Net Revenue
Research and development	$	73,162		37	%	$	103,478			47	%	$	86,517		47	%
Sales and marketing		21,637		11	%		34,550			16	%		34,467		19	%
General and administrative		19,640		10	%		27,899			13	%		20,829		11	%
Restructuring costs		2,261		1	%		3,264			2	%		-		-
Impairment of goodwill		-		-			-			-			45,108		25	%
Impairment of acquired intangible assets		-		-			-			-			66,170		36	%
Impairment of IP, mask sets and design tools		1,013		0	%		6,569			3	%		-		-
Gain on acquisition		-		-			(1,389	)		(1	%)		-		-
Total operating expenses	$	117,713		59	%	$	174,371			80	%	$	253,091		138	%

Research and development expense

Research and development expense consists of compensation and benefits including variable compensation expense such as profit sharing; development and design costs (for example, mask, prototyping, testing and subcontracting costs); depreciation and amortization (for example, engineering design tools and equipment costs); stock-based compensation expense; and other expenses which include costs for facilities and travel.

34

Our research and development expense is summarized as follows (in thousands except for percentages):

	For Fiscal Years Ended						Fiscal 2014 vs 2013						Fiscal 2013 vs 2012
	February 1, 2014		February 2, 2013		January 28, 2012		$ Change			% Change			$ Change		% Change
Research and development expense	$	73,162	$	103,478	$	86,517	$	(30,316	)		(29	%)	$	16,961		20	%

Research and development expense decreased $30.3 million, or 29%, in fiscal 2014. The decrease was primarily due to reductions of $18.4 million in compensation and benefits, $2.4 million in stock-based compensation expense, $2.1 million in amortization and depreciation expense, $6.8 million in projects and material costs, and $0.6 million in support and other variable expenses. The reduction in our research and development expense resulted from our restructuring efforts principally through reduction in force. We had 497 employees in research and development at the end of fiscal 2014 compared to 672 employees at the end of fiscal 2013.

Research and development expense increased $17.0 million, or 20%, in fiscal 2013 compared to fiscal 2012.  Fiscal 2013 includes $18.2 million of DTV research and development activities subsequent to our acquisition of certain assets used in the digital TV business from Trident in the second quarter of fiscal 2013. The increase was primarily due to a 45% increase in headcount as a result of the acquisition and other related operating activities.

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.

Our sales and marketing expense is summarized as follows (in thousands except for percentages):

	For Fiscal Years Ended						Fiscal 2014 vs 2013						Fiscal 2013 vs 2012
	February 1, 2014		February 2, 2013		January 28, 2012		$ Change			% Change			$ Change		% Change
Sales and marketing expense	$	21,637	$	34,550	$	34,467	$	(12,913	)		(37	%)	$	83		0	%

Sales and marketing expense for fiscal 2014 and fiscal 2013 includes $0.1 million and $5.7 million, respectively, of settlement charges in connection with claims that we failed to comply with third party technology licensors’ custodial and reporting requirements. For further discussion, refer to Note 16, “Commitments and contingencies” of the Notes to consolidated financial statements of this Form 10-K included in Item 8 of this report.  Excluding settlement charges, our sales and marketing expense decreased $7.3 million, or 25%, in fiscal 2014. The decrease was primarily due to reductions of $4.1 million in compensation and benefits, $0.5 million in stock-based compensation and $2.7 million in marketing, travel and other variable costs. The overall decrease in our sales and marketing expense was a result of our reduction in force and our restructuring efforts. We had 112 employees in sales and marketing at the end of fiscal 2014 compared to 135 employees at the end of fiscal 2013.

Sales and marketing expense for fiscal 2013 and fiscal 2012 includes $5.7 million and $2.0 million, respectively, of settlement charges in connection with claims that we failed to comply with third party technology licensors’ custodial and reporting requirements. Fiscal 2013 also includes $1.9 million of DTV post-acquisition selling and marketing expense. Excluding these costs, our sales and marketing expense decreased $5.5 million, or 17%, in fiscal 2013. The decrease was primarily due to a $5.0 million reduction in amortization expense resulting from the impairment and write-down of the related intangibles in fiscal 2012.

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.

Our general and administrative expense is summarized as follows (in thousands except for percentages):

	For Fiscal Years Ended						Fiscal 2014 vs 2013						Fiscal 2013 vs 2012
	February 1, 2014		February 2, 2013		January 28, 2012		$ Change			% Change			$ Change		% Change
General and administrative expense	$	19,640	$	27,899	$	20,829	$	(8,259	)		(30	%)	$	7,070		34	%

General and administrative expense decreased $8.3 million, or 30%, in fiscal 2014 compared to fiscal 2013. General and administrative expense for fiscal 2013 includes approximately $3.0 million of expenses directly related to the acquisition of certain assets used in the DTV business from Trident in the second quarter of 2013. Excluding the acquisition costs, our general and administrative expense decreased $5.3 million, or 21%, in fiscal 2014. The decrease was primarily due to reductions of $1.9 million in compensation and benefits, $0.7 million in stock-based compensation expense, $1.1 million in shareholders related activities, and $1.6 million in overall corporate-level spending and allocations. The decrease in our general and administrative expense was a result of our reduction in force and our restructuring efforts. We had 75 employees in general and administrative at the end of fiscal 2014 compared to 100 employees at the end of fiscal 2013.

35

General and administrative expense increased $7.1 million, or 34%, in fiscal 2013 compared to fiscal 2012.  Fiscal 2013 includes $3.0 million of expenses directly related to the acquisition of certain assets used in the DTV business from Trident in the second quarter of fiscal 2013, and includes $1.4 million of DTV general and administrative activities subsequent to our acquisition. Excluding these costs, our general and administrative expense increased $2.7 million, or 13%, in fiscal 2013 compared to fiscal 2012 primarily due to costs associated with expansion of facilities and IT infrastructure, and shareholder related activities.

Restructuring costs

In fiscal 2013, as a result of significant expansion in our infrastructure and operational activities in connection with purchases and acquisitions that took place between fiscal years 2008 and 2013, and in response to certain redundancies, underperforming operations and delays in programs and product releases, we implemented a restructuring program to realign our global operating expenses with our new business conditions, and to improve efficiency, competitiveness and profitability. In fiscal 2013, we reduced our workforce by 114 employees, implemented plans to scale down our reliance on contractors and consultants, impaired the unamortized value of certain software intellectual property licenses, which we no longer intend to use, initiated the closure of our facilities in Canada, Hong Kong and Japan and reduced our discretionary spending across all operational areas. We recorded $3.3 million in restructuring charges in fiscal 2013. Of the total restructuring charges recorded in fiscal 2013, less than $0.1 million was reflected in cost of revenue and $3.2 million was reflected in operating expenses ($2.4 million in research and development, $0.4 million in sales and marketing and $0.4 million in general and administrative). Costs relating to facilities closure or lease commitment are recognized when the facility has been exited. Terminations costs are recognized when the costs are deemed both probable and estimable.

In fiscal 2014, as part of our continuing efforts to reduce expenses, we incurred restructuring charges of approximately $2.3 million, of which $1.7 million was related to workforce reductions of 67 employees across several geographic regions and $0.6 million was related to early termination of lease agreements for locations in Canada and southern California. Of the total restructuring charges recorded in fiscal 2014, less than $0.1 million was reflected in cost of revenue and $2.3 million was reflected in operating expenses ($1.3 million in research and development, $0.3 million in sales and marketing and $0.7 million in general and administrative).

Expenses recognized for restructuring activities impacting our operating expenses are included in “Restructuring costs” in the accompanying consolidated statements of operations. We anticipate that these restructuring measures will reduce ongoing headcount expenses in research and development, sales and marketing and general and administrative by approximately $21.0 million to $22.5 million annually and other additional operational expenses by $0.8 million to $1.0 million annually. Our restructuring measures could negatively impact our revenue and results of operations in the future as a result of less employees developing future products and working to sell our products.

A combined summary of the recent activity of the restructuring plans initiated by us is as follows (in thousands):

	Workforce Reduction			Asset Impairment			Facility Exit Costs			Total			Cumulative Restructuring Costs
Charges in fiscal 2013	$	2,167		$	1,089		$	8		$	3,264		$	3,264
Cash payments		(1,153	)		-			-			(1,153	)
Non-cash items		-			(1,089	)		-			(1,089	)
Liability, February 2, 2013		1,014			-			8			1,022			3,264
Charges in fiscal 2014		1,696			-			610			2,306			2,306
Cash payments		(2,347	)		-			(616	)		(2,963	)
Liability, February 1, 2014	$	363		$	-		$	2		$	365		$	5,570

Impairment of intangible assets

We test long-lived assets, including our intangible assets, for impairment whenever events or changes in circumstances, such as a change in technology, indicate that the carrying value of these assets may not be recoverable. We review goodwill for impairment annually, as of the last day of our fiscal year, and whenever events or changes in circumstances indicate the carrying value may not be recoverable.  IP R&D is not subject to amortization and is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. 

During fiscal 2014, we continued to restructure our operations to further align our operating expenses with our business, industry and revenue outlooks. In connection with our continued restructuring plan, we performed an impairment review of our intangible assets by comparing undiscounted expected future cash flows with the carrying values of the underlying assets. The results of this review indicated certain purchased IP licenses incorporated into discontinued products were impaired; as a result, we recorded an impairment charge for purchased IP of $0.3 million.  In addition, we recorded an impairment charge for certain software, equipment and leasehold improvements associated with such discontinued products of $0.7 million.  We recorded the impairment of $1.0 million related to products in development in operating expenses in the accompanying consolidated statements of operations in fiscal 2014.

36

Our business also requires investment in purchased intellectual properties, mask sets and design tools that are technologically advanced but can quickly become significantly underutilized or rendered obsolete by rapid changes in demand in the semiconductor industry. We periodically review our purchased intellectual properties, mask sets and design tools for possible impairment or whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. We recorded impairment charges of $1.0 million as a result of our quarterly reviews during fiscal 2014 for our purchased intellectual properties, mask sets and design tools.

During fiscal 2013, due to continued reductions in our profitability, negative cash flows from operations and our restructuring measures adopted in fiscal 2013, we performed an impairment review of our intangible assets.  In performing this review, we developed a forecast of the undiscounted cash flow expected to be generated by each intangible asset group and compared the result to the carrying value. The results of this review indicated certain purchased IP licenses incorporated into discontinued products and products in development were impaired; as a result, we recorded an impairment charge for purchased IP of $8.2 million.  In addition, we recorded an impairment charge for certain software, equipment and leasehold improvements and prepaid licenses associated with such discontinued products of $2.6 million and $0.4 million, respectively.  We recorded the impairment of $4.6 million related to developed products in cost of revenue and the impairment of $6.6 million related to products in development in operating expenses in the accompanying consolidated statements of operations in fiscal 2013.

During the third quarter of fiscal 2012, we performed an impairment review and concluded that the carrying value of our goodwill and acquired IP R&D was fully impaired, which resulted in an impairment charge of $45.1 million and $11.1 million, respectively, in fiscal 2012.  Subsequent to January 28, 2012, we have not capitalized any goodwill or IP R&D.  Additionally, we performed an impairment review of our intangible assets, other than goodwill and IP R&D, and concluded that two of our intangible asset groups, consisting primarily of certain developed technology and customer relationship intangibles related to our CopperGate acquisition, were not fully recoverable, resulting in an impairment charge of $55.1 million in fiscal 2012.

The following table presents the amortization of intangible assets in the accompanying consolidated statements of operations (in thousands):

	Fiscal Years Ended
	February 1, 2014		February 2, 2013		January 28, 2012
Cost of revenue	$	9,105	$	9,473	$	9,562
Operating expenses		1,542		2,124		9,206
Total intangible amortization expense	$	10,647	$	11,597	$	18,768

Intangible assets subject to amortization were as follows as of February 1, 2014 (in thousands, except for years):

	February 1, 2014
	Gross Value		Impairment			Accumulated Amortization and Effect of Currency Translation			Net Value		Weighted Average Remaining Amortization Period (Years)
Acquired intangible assets:
Developed technology	$	76,639	$	(24,614	)	$	(40,334	)	$	11,691		2.9
Customer relationships		50,704		(30,486	)		(17,048	)		3,170		2.7
Trademarks		2,678		-			(2,102	)		576		4.9
Non-compete agreements		1,400		-			(1,400	)		-
Purchased IP - amortizing		21,569		(5,516	)		(11,464	)		4,589		1.5
Total amortizing		152,990		(60,616	)		(72,348	)		20,026		2.6
Purchased IP - not yet deployed		12,770		(3,016	)		-			9,754
Total intangibles	$	165,760	$	(63,632	)	$	(72,348	)	$	29,780

37

Stock-based compensation expense

The following table sets forth stock-based compensation expense that is included in each functional line item in the consolidated statements of operations (in thousands):

	Fiscal Years Ended
	February 1, 2014		February 2, 2013		January 28, 2012
Cost of revenue	$	267	$	487	$	478
Research and development		3,381		5,740		6,277
Sales and marketing		1,275		1,811		2,137
General and administrative		1,891		2,557		3,133
Total stock-based compensation	$	6,814	$	10,595	$	12,025

The expensing of employee stock-based payment awards will continue to have an adverse impact on our results of operations. As of February 1, 2014, the unrecorded stock-based compensation balance related to stock options, restricted stock awards, and restricted stock units outstanding excluding estimated forfeitures was $3.2 million, $0.7 million, and $2.3 million, respectively, which will be recognized over an estimated weighted average amortization period of 1.7 years, 1.8 years, and 2.0 years, respectively. The amortization period is based on the expected vesting term of the awards. The decrease in stock-based compensation expense for fiscal 2014 compared to fiscal 2013 was primarily due to stock options that became fully vested or forfeited during the year, partially offset by an increase in awards for newly hired and existing employees compared to the prior fiscal year. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards to employees or assume unvested equity awards in connection with any acquisitions.

Gain on acquisition

On May 4, 2012, we completed our acquisition of certain assets used in or related to Trident’s DTV business for a purchase price of $38.2 million, subject to 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”). Trident filed for voluntarily petition under Chapter 11 bankruptcy on January 4, 2012. In April 2012, we were selected as the successful bidder to acquire Trident’s DTV business. The purchase price of the Trident acquisition was paid in cash.

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 May 4, 2012. The fair value of the tangible assets and identifiable intangible assets acquired, net of liabilities assumed, exceeded the purchase price by $1.4 million, which was recognized in the consolidated statements of operations as a gain on acquisition in fiscal 2013. For further discussion, refer to Note 10, “Business combinations” of the Notes to consolidated financial statements of this Form 10-K included in Item 8 of this report.

Interest and other income, net

The following table sets forth our net interest and other income and related percentage change (in thousands, except percentages):

	For Fiscal Years Ended						Fiscal 2014 vs 2013						Fiscal 2013 vs 2012
	February 1, 2014		February 2, 2013		January 28, 2012		$ Change			% Change			$ Change			% Change
Interest and other income, net	$	827	$	2,325	$	2,704	$	(1,498	)		(64	%)	$	(379	)		(14	%)

Interest and other income primarily consist 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, gains or losses on currency hedging activities and gains or losses on disposals of software, equipment and leasehold improvements. The decrease of $1.5 million, or 64%, in fiscal 2014 compared to fiscal 2013 was primarily due to foreign currency fluctuations and lower interest income from a lower average cash balance. The decrease of $0.4 million, or 14%, in fiscal 2013 compared to fiscal 2012 was primarily due to foreign currency fluctuations and lower interest income from a lower average cash balance.  

Impairment of investment

In fiscal 2014, we recorded approximately $0.6 million in other-than temporary impairment charges of our privately-held investments. There was no impairment of investments in fiscal 2013 or fiscal 2012.

38

Provision for (benefit from) income taxes

We recorded an income tax provision of $3.0 million and $20.7 million in fiscal 2014 and 2013, respectively, and a benefit from income taxes of $5.0 million in fiscal 2012.  The fiscal 2014, 2013 and 2012 effective tax rates were approximately 36%, 26%, and (3)%, respectively.  Our fiscal 2014 effective tax rate differs from the federal statutory rate of 35% primarily because most of our net losses were in a foreign tax jurisdiction with a zero tax rate where no tax benefit could be realized.  Our fiscal 2013 effective tax rate differs from the federal statutory rate of 35% primarily because we set up a partial valuation allowance against our federal deferred tax assets due to our assessment that they are not more likely than not to be realized in the future, as well as most of our net losses were in a foreign tax jurisdiction with a zero tax rate where no tax benefit could be realized. Our fiscal 2012 effective tax rate differs from the federal statutory rate of 35% primarily because our net loss for fiscal 2012 was either in a foreign tax jurisdiction with a zero tax rate where no tax benefit could be realized or in jurisdictions where the losses were not deductible for tax purposes. 

We benefit from tax incentives granted by local tax authorities in certain foreign jurisdictions.  The Economic Development Board of Singapore granted development and expansion incentives to our wholly-owned subsidiary in Singapore in 2008 for a period of four years ended February 29, 2012 contingent on meeting specified requirements.  Absent such tax incentives, the corporate income tax rate in Singapore would have been 17% from fiscal 2009 to fiscal 2012.  The impact of this tax holiday was to increase net income by approximately $2.0 million or $0.06 per diluted share in fiscal 2012, $6.7 million or $0.21 per diluted share in fiscal 2011 and $7.0 million or $0.25 per diluted share in fiscal 2010.  As we were unable to comply with all of the operating conditions required by the tax incentives, we have reached an agreement with the Singapore authorities that our incentives would not extend beyond February 29, 2012, but that we will be able to retain the benefits previously realized.

Liquidity and capital resources

The following table sets forth the cash and cash equivalents and short-term marketable securities as of February 1, 2014 and February 2, 2013 (in thousands):

	February 1, 2014		February 2, 2013
Cash and cash equivalents	$	64,326	$	51,218
Short-term marketable securities		7,791		17,455
	$	72,117	$	68,673

As of February 1, 2014, our principal sources of liquidity consisted of cash and cash equivalents and short-term marketable securities of $72.1 million, which represents approximately $2.09 per share of outstanding common stock as compared to $2.02 per share at February 2, 2013. Working capital as of February 1, 2014 was $91.9 million. Total cash and cash equivalents and short-term marketable securities increased by $3.4 million during fiscal 2014, primarily due to cash generated by operations of $21.4 million, net proceeds from the sale of a development project of $2.0 million, net proceeds from the sale of a privately-held investment of $2.1 million, repayment of $0.5 million in note receivable, proceeds of $2.6 million from issuance of common stock, and $0.7 million in excess tax benefit from stock-based compensation, partially offset by $17.0 million of purchases of software, equipment and leasehold improvements, $4.9 million of purchases of IP, $1.7 million net purchase of long-term securities, and $2.3 million of repurchase of our common stock.

As of February 1, 2014, we held $15.5 million of long-term marketable securities.  Although these marketable securities have maturities of greater than one year, we hold them as available-for-sale and may access these funds prior to their contractual maturities.

The following table sets forth the primary net cash inflows and outflows for fiscal 2014, 2013 and 2012 (in thousands):

	Fiscal Years Ended
	February 1, 2014			February 2, 2013			January 28, 2012
Net cash provided by (used in):
Operating activities	$	21,434		$	(14,645	)	$	(12,146	)
Investing activities		(9,140	)		17,100			(23,441	)
Financing activities		1,047			4,229			7,315
Effect of foreign exchange rate changes on cash and cash equivalents		(233	)		251			(177	)
Net increase (decrease) in cash and cash equivalents	$	13,108		$	6,935		$	(28,449	)

39

Cash flows from operating activities

For fiscal 2014, we generated $21.4 million cash from our operations compared to using $14.6 million of cash in operations for fiscal 2013. Our net loss of $11.0 million in fiscal 2014 included $32.6 million of non-cash charges consisting of $20.2 million of depreciation and amortization expense, $6.8 million of stock-based compensation, $4.1 million of deferred income taxes, $1.4 million of impairment of intangible and other assets, $0.6 million of impairment on privately-held investments and $0.8 million of provision for excess and obsolete inventory, partially offset by $1.1 million gain on sale of development project and $0.1 million gain on sale of a privately-held investment. The remaining change in operating cash flows relating to changes in working capital for fiscal 2014 primarily reflected an increase in accounts receivable as a result of timing of shipments and collections, an increase in accounts payable generally due to timing of our payments, a decrease in inventory due to lower purchases of wafers used by our media processor products, a decrease in prepaid expenses and other current assets related to our acquisition of the DTV business from Trident, a decrease in accrued compensation and other benefits due to lower labor and labor related liabilities, a decrease in long-term income tax payable and an increase in accrued liabilities and other long-term liabilities. Our net loss of $101.8 million in fiscal 2013 included $65.0 million of non-cash charges consisting of $23.9 million of depreciation and amortization expense, $10.6 million of stock-based compensation, $12.4 million of deferred income taxes, $11.2 million of impairment of intangible and other assets, $7.1 million of provision for excess and obsolete inventory and $2.1 million of restructuring charges, partially offset by $1.4 million gain on acquisition, $0.4 million gain on disposal of software, equipment and leasehold improvements and $0.2 million recovery of sales returns, discounts, and doubtful accounts. The remaining change in operating cash flows relating to changes in working capital for fiscal 2013 primarily reflected decreases in accounts receivable, inventory, prepaid expenses and other current assets, and increases in other non-current assets, accounts payable, accrued liabilities, compensation and other benefits and income tax payable and other long-term liabilities. The changes in operating assets and liabilities generally reflect the increase in revenue and related expenses resulting from the expansion of our DTV business subsequent to the Trident asset acquisition. Our overall quarterly days of sales outstanding was 65 days and 48 days for the fourth fiscal quarter ended at February 1, 2014 and February 2, 2013, respectively, primarily due to timing of shipments and customer mix.

Cash flows from our operating activities will continue to fluctuate based upon our ability to grow net revenues while reducing our costs through our restructuring efforts and managing the timing of payments to us from customers and to vendors from us, the timing of inventory purchases and subsequent manufacture and sale of our products.

Cash flows from investing activities

We used $9.1 million in cash for our investing activities during fiscal 2014, compared to providing $17.1 million during fiscal 2013. We used $17.0 million for the purchase of software, equipment and leasehold improvements and $4.9 million for purchases of IP, partially offset by net proceeds of $8.2 million from net sale of investment activities, $2.0 million from sale of development project, $2.1 million from a sale of privately-held investment and $0.5 million from repayment of note receivable. During fiscal 2013, we provided $72.7 million from net sale of long-term marketable securities and $0.3 million from repayment of note receivable and used $38.2 million for the acquisition of certain assets used in the DTV business from Trident, $5.8 million for purchases of software, equipment and leasehold improvements and $11.8 million for purchases of IP.

Cash flows from financing activities

We provided $1.0 million and $4.2 million in cash from our financing activities during fiscal 2014 and 2013, respectively. The major financing use of cash during fiscal 2014 was the $2.3 million for the repurchase of common stock offset by proceeds from exercises of employee stock options and employee stock purchases of $2.6 million and an excess tax benefit from stock-based compensation of $0.7 million. Net cash provided by financing activities of $4.2 million in fiscal 2013 was due to $4.6 million of proceeds from exercises of employee stock options and employee stock purchases, partially offset by $0.3 million of excess tax expense from stock-based compensation.

As of February 1, 2014, $49.7 million of the $87.6 million of our cash, cash equivalents and marketable securities was held by our foreign subsidiaries. If these funds are needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.  We are not aware of any trends, demands or uncertainties as a result of this policy that are reasonably likely to have a material effect on our business, as a whole or that may be relevant to our financial flexibility.

Our marketable securities primarily include corporate bonds, money market funds, municipal bonds and notes, and fixed income mutual funds. We monitor all of our marketable securities for impairment and if these securities are reported to have had a decline in fair value, we may need to use significant judgment to identify events or circumstances that would likely have a significant adverse effect on the future value of each investment including: (i) the nature of the investment; (ii) the cause and duration of any impairment; (iii) the financial condition and near term prospects of the issuer; (iv) for securities with a reported decline in fair value, our ability to hold the security for a period of time sufficient to allow for any anticipated recovery of fair value; (v) the extent to which fair value may differ from cost; and (vi) a comparison of the income generated by the securities compared to alternative investments. We would recognize an impairment charge if a decline in the fair value of our marketable securities is judged to be other-than-temporary.

40

Contractual obligations and commitments

We generally do not have guaranteed price or quantity commitments from any of our suppliers.  Additionally, we generally acquire products for sale to our customers based on purchase orders received as well as forecasts from such customers.  Purchase orders with delivery dates greater than twelve weeks are typically cancelable without penalty to our customers.  We currently place non-cancelable orders to purchase semiconductor wafers, other materials and finished goods from our suppliers on an eight to sixteen week lead-time basis. For further discussion, refer to Note 16, “Commitment and contingencies”.

The following table sets forth the amounts of payments due under specified contractual obligations as of February 1, 2014 (in thousands):

	Payments Due by Period
	Fiscal 2015		Fiscal 2016 - 2017		Fiscal 2018 - 2019		Total
Operating leases	$	4,661	$	4,636	$	144	$	9,441
Design tools		4,569		6,781		-		11,350
Non-cancelable purchase obligations		17,388		-		-		17,388
Total contractual obligations	$	26,618	$	11,417	$	144	$	38,179

Privately held investments

In the ordinary course of business, we have investments in privately held companies, which we review annually to determine if they should be accounted for as variable interest entities.  For the year ended February 1, 2014, we evaluated our investments in these privately held companies and concluded that we are not the primary beneficiary of any variable interest from investment entities.  As a result, we account for these investments on a cost basis and do not consolidate the activity of these investee entities.  Certain events can require a reassessment of our investments in privately held companies to determine if they meet the criteria for variable interest entities and to determine which stakeholders in such entities will be the primary beneficiary.  In the event of a reassessment, we may be required to make additional disclosures or consolidate these entities in future periods.  

Recent accounting pronouncements

See “Recent accounting pronouncements,” under Note 1, “Organization and summary of significant accounting policies” of the Notes to consolidated financial statements of this Form 10-K included in Item 8 of this report.

Subsequent events

See Note 22, “Subsequent events,” of the Notes to consolidated financial statements of this Form 10-K included in Item 8 of this report.

41

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussion about our market risk disclosures involves forward-looking statements.  Actual results could differ materially from those projected in the forward-looking statements.  We face exposure to market risk from adverse movements in interest rates and foreign currency exchange rates, which could impact our operations and financial condition.  To mitigate some of the foreign currency exchange rate risk, we utilize derivative financial instruments to hedge certain foreign currency exposures.  We do not use derivative financial instruments for speculative or trading purposes.

Interest rate sensitivity:  As of February 1, 2014 and February 2, 2013, we held approximately $87.6 million and $82.9 million, respectively, of cash, cash equivalents and short-term and long-term marketable securities.  If short-term interest rates were to decrease 10%, the decreased interest income associated with these cash, cash equivalents and marketable securities would not have a significant impact on our net income (loss) and cash flows.

Foreign currency exchange rate sensitivity: We transact our revenue in U.S. dollars.  The U.S. dollar is our reporting currency.  The U.S. dollar is our functional currency except for our subsidiaries in China, Denmark, France, Japan, Taiwan, Korea and Vietnam where the Chinese Yuan, Danish krone, Euro, Japanese yen, Taiwanese dollar, Korean won and Vietnamese dong are the functional currencies, respectively.  Additionally, significant portions of our Israel subsidiary’s expenses are payroll related and are denominated in Israeli shekels.  This foreign currency exposure gives rise to market risk associated with exchange rate movements of the U.S. dollar against the Israeli shekel.  To the extent the U.S. dollar weakens against the Israeli shekel, our Israeli subsidiary will experience a negative impact on its results of operations.

As of February 1, 2014, with the exception of our Israel operation, we had not entered into foreign exchange forward contracts to hedge certain balance sheet exposures and inter-company balances against future movements in foreign exchange rates.  For our Israel operation, we do hedge portions of our forecasted expenses that are denominated in the Israeli shekel with foreign exchange forward contracts. As of February 1, 2014, we had foreign exchange contracts with notional values of approximately $0.9 million that mature on or before April 28, 2014.  These hedges of cash flow exposures will only mitigate a portion of our foreign exchange exposure.  If foreign exchange rates were to weaken against the U.S. dollar immediately and uniformly by 10% from the exchange rates at February 1, 2014, the notional value of our derivative instruments would decline and we would record a foreign exchange loss of approximately $0.1 million. 

We maintain certain cash balances denominated in the Chinese Yuan, Danish krone, Euro, Japanese yen, Hong Kong dollar, Israeli shekel, Singapore dollar, Taiwanese dollar, Korean won and Vietnamese dong.  If foreign exchange rates were to weaken against the U.S. dollar immediately and uniformly by 10% from the exchange rates at February 1, 2014, the fair value of these foreign currency amounts would decline and we would record a charge of approximately $0.1 million, a portion of which should be offset by our foreign exchange hedging activities.

ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	43
Consolidated Balance Sheets	44
Consolidated Statements of Operations	45
Consolidated Statements of Comprehensive Loss	45
Consolidated Statements of Shareholders’ Equity	46
Consolidated Statements of Cash Flows	47
Notes to Consolidated Financial Statements	48

42

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

Sigma Designs, Inc.

Milpitas, CA

We have audited the accompanying consolidated balance sheets of Sigma Designs, Inc. and subsidiaries ("the Company") as of February 1, 2014 and February 2, 2013, and the related consolidated statements of operations, comprehensive loss, shareholders' equity, and cash flows for each of the fiscal years in the three-year period ended February 1, 2014.  We also have audited the Company's internal control over financial reporting as of February 1, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Our audits also included the financial statement schedule listed in the Index at Part IV, Item 15.  The Company's management is responsible for these consolidated financial statements and schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting, appearing under Item 9A.  Our responsibility is to express an opinion on these consolidated financial statements and schedule and an opinion on the Company's internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of February 1, 2014 and February 2, 2013, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended February 1, 2014 in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, the related financial statement schedule for each of the fiscal years in the three-year period ended February 1, 2014, when considered in relation to the consolidated financial statements as a whole, presents fairly in all material respects the information set forth therein.  Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 1, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

ARMANINO LLP

San Jose, California

April 17, 2014

43

SIGMA DESIGNS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

	February 1, 2014			February 2, 2013
ASSETS
Current assets
Cash and cash equivalents	$	64,326		$	51,218
Short-term marketable securities		7,791			17,455
Restricted cash		1,775			1,769
Accounts receivable, net of allowances of $300 as of February 1, 2014 and $295 as of February 2, 2013		27,647			21,648
Inventory		20,403			24,929
Deferred tax assets		4,144			5,868
Prepaid expenses and other current assets		8,069			13,578
Total current assets		134,155			136,465
Long-term marketable securities		15,505			14,253
Software, equipment and leasehold improvements, net		27,089			17,106
Intangible assets, net		29,780			36,573
Deferred tax assets, net of current portion		439			2,681
Long-term investments and notes receivable, net of current portion		3,873			8,943
Other non-current assets		4,934			4,810
Total assets	$	215,775		$	220,831
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable	$	16,184		$	11,046
Accrued compensation and related benefits		6,288			10,070
Accrued liabilities		19,813			18,721
Total current liabilities		42,285			39,837
Income taxes payable		7,065			17,723
Long-term deferred tax liabilities		976			804
Other long-term liabilities		7,058			449
Total liabilities		57,384			58,813
Commitments and contingencies (Note 16)
Shareholders' equity
Preferred stock; no par value, 2,000,000 shares authorized; no shares issued and outstanding		-			-
Common stock and additional paid-in capital; no par value; 100,000,000 shares authorized; 39,083,961 issued and 34,424,818 outstanding as of February 1, 2014 and 38,234,357 issued and 34,042,045 outstanding as of February 2, 2013		485,188			475,070
Treasury stock, at cost, 4,659,143 shares as of February 1, 2014 and 4,192,312 as of February 2, 2013		(88,198	)		(85,941	)
Accumulated other comprehensive income		651			1,090
Accumulated deficit		(239,250	)		(228,201	)
Total shareholders' equity		158,391			162,018
Total liabilities and shareholders' equity	$	215,775		$	220,831

See the accompanying Notes to Consolidated Financial Statements

44

SIGMA DESIGNS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

	Fiscal Years Ended
	February 1, 2014			February 2, 2013			January 28, 2012
Net revenue	$	199,193		$	216,613		$	182,617
Cost of revenue		91,052			125,588			105,241
Gross profit		108,141			91,025			77,376
Operating expenses
Research and development		73,162			103,478			86,517
Sales and marketing		21,637			34,550			34,467
General and administrative		19,640			27,899			20,829
Restructuring costs		2,261			3,264			-
Impairment of goodwill		-			-			45,108
Impairment of acquired intangible assets		-			-			66,170
Impairment of IP, mask sets and design tools		1,013			6,569			-
Gain on acquisition		-			(1,389	)		-
Total operating expenses		117,713			174,371			253,091
Loss from operations		(9,572	)		(83,346	)		(175,715	)
Gain on sale of development project		1,079			-			-
Impairment, net of gain on sale, of privately-held investments, net		(433	)		-			-
Interest and other income, net		827			2,325			2,704
Loss before income taxes		(8,099	)		(81,021	)		(173,011	)
Provision for (benefit from) income taxes		2,950			20,747			(4,966	)
Net loss	$	(11,049	)	$	(101,768	)	$	(168,045	)
Net loss per common share:
Basic	$	(0.32	)	$	(3.06	)	$	(5.25	)
Diluted	$	(0.32	)	$	(3.06	)	$	(5.25	)
Shares used in computing net loss per share:
Basic		34,206			33,205			32,036
Diluted		34,206			33,205			32,036

SIGMA DESIGNS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

	Fiscal Years Ended
	February 1, 2014			February 2, 2013			January 28, 2012
Net loss	$	(11,049	)	$	(101,768	)	$	(168,045	)
Other comprehensive income (loss):
Currency translation adjustments		(187	)		247			(327	)
Unrealized gains (losses) on marketable securities, net of tax		(252	)		240			(191	)
Other comprehensive income (loss)		(439	)		487			(518	)
Comprehensive loss	$	(11,488	)	$	(101,281	)	$	(168,563	)

See the accompanying Notes to Consolidated Financial Statements

45

SIGMA DESIGNS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands, except shares)

	Common Stock					Treasury Stock						Accumulated Other Comprehensive Income
	Shares		Amount			Shares			Amount			Unrealized Gain (Loss)			Accumulated Translation Adjustment			Retained Earnings (Accumulated Deficit)			Total Shareholders' Equity
Balance, January 29, 2011		35,933,278	$	441,249			(4,192,312	)	$	(85,941	)	$	352		$	769		$	41,612		$	398,041
Unrealized loss on marketable securities		-		-			-			-			(191	)		-			-			(191	)
Currency translation adjustments		-		-			-			-			-			(327	)		-			(327	)
Stock-based compensation expense		-		12,025			-			-			-			-			-			12,025
Grants of restricted stock awards		163,070		-			-			-			-			-			-			-
Tax effect related to stock options		-		1,595			-			-			-			-			-			1,595
Net proceeds from common stock issued under share plans		974,230		5,377			-			-			-			-			-			5,377
Net loss		-		-			-			-			-			-			(168,045	)		(168,045	)
Balance, January 28, 2012		37,070,578		460,246			(4,192,312	)		(85,941	)		161			442			(126,433	)		248,475
Unrealized gain on marketable securities		-		-			-			-			240			-			-			240
Currency translation adjustments		-		-			-			-			-			247			-			247
Stock-based compensation expense		-		10,595			-			-			-			-			-			10,595
Grants of restricted stock awards		10,980		-			-			-			-			-			-			-
Tax effect related to stock options		-		(345	)		-			-			-			-			-			(345	)
Net proceeds from common stock issued under share plans		1,152,799		4,574			-			-			-			-			-			4,574
Net loss		-		-			-			-			-			-			(101,768	)		(101,768	)
Balance, February 2, 2013		38,234,357		475,070			(4,192,312	)		(85,941	)		401			689			(228,201	)		162,018
Unrealized loss on marketable securities		-		-			-			-			(252	)		-			-			(252	)
Currency translation adjustments		-		-			-			-			-			(187	)		-			(187	)
Stock-based compensation expense		-		6,814			-			-			-			-			-			6,814
Tax effect related to stock options		-		682			-			-			-			-			-			682
Net proceeds from common stock issued under share plans		849,604		2,622			-			-			-			-			-			2,622
Repurchase of common stock		-		-			(466,831	)		(2,257	)		-			-			-			(2,257	)
Net loss		-		-			-			-			-			-			(11,049	)		(11,049	)
Balance, February 1, 2014		39,083,961	$	485,188			(4,659,143	)	$	(88,198	)	$	149		$	502		$	(239,250	)	$	158,391

See the accompanying Notes to Consolidated Financial Statements

46

SIGMA DESIGNS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Fiscal Years Ended
	February 1, 2014			February 2, 2013			January 28, 2012
Cash flows from operating activities
Net loss	$	(11,049	)	$	(101,768	)	$	(168,045	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		20,154			23,870			28,952
Stock-based compensation		6,814			10,595			12,025
Provision for excess and obsolete inventory		758			7,053			8,955
Provision for (recovery of) sales returns, discounts, and doubtful accounts		6			(158	)		54
Deferred income taxes		4,129			12,398			(10,221	)
Loss (gain) on disposal of software, equipment and leasehold improvements		21			(437	)		173
Gain on acquisition		-			(1,389	)		-
Gain on sale of development project		(1,079	)		-			-
Gain on sale of privately-held investment		(137	)		-			-
Non-cash restructuring costs		-			2,111			-
Tax effect related to stock options		(682	)		(345	)		1,595
Excess tax (benefit) expense from stock-based compensation		682			345			(1,938	)
Accretion of contributed leasehold improvements		(30	)		(206	)		(260	)
Impairment of goodwill, intangibles, IP, mask sets, design tools and other assets		1,425			11,174			111,278
Impairment loss on privately-held investment		570			-			-
Changes in operating assets and liabilities:
Accounts receivable		(6,006	)		13,100			10,114
Inventory		3,767			3,699			6,964
Prepaid expenses and other current assets		3,932			1,268			(443	)
Other non-current assets		(133	)		(3,954	)		156
Accounts payable		6,698			4,473			(7,968	)
Accrued liabilities, compensation and related benefits		(7,739	)		1,391			(4,114	)
Income taxes payable and other long-term liabilities		(667	)		2,135			577
Net cash provided by (used in) operating activities		21,434			(14,645	)		(12,146	)
Cash flows from investing activities
Restricted cash		-			-			(153	)
Purchases of marketable securities		(17,771	)		(21,354	)		(88,072	)
Sales and maturities of marketable securities		25,930			94,043			88,515
Purchases of software, equipment and leasehold improvements		(16,989	)		(5,804	)		(6,865	)
Purchases of IP		(4,868	)		(11,825	)		(7,374	)
Proceeds from sale of development project, net of transaction fees		1,971			-			-
Proceeds from sale of privately-held investment		2,137			-			-
Net cash paid in connection with acquisitions		-			(38,210	)		(5,000	)
Purchases of long-term investments		-			-			(2,142	)
Repayment of note receivable		450			250			150
Purchase of notes receivable		-			-			(2,500	)
Net cash provided by (used in) investing activities		(9,140	)		17,100			(23,441	)
Cash flows from financing activities
Net proceeds from exercise of employee stock options and stock purchase rights		2,622			4,574			5,377
Excess tax benefit (expense) from stock-based compensation		682			(345	)		1,938
Repurchase of common stock		(2,257	)		-			-
Net cash provided by financing activities		1,047			4,229			7,315
Effect of foreign exchange rate changes on cash and cash equivalents		(233	)		251			(177	)
Net increase (decrease) in cash and cash equivalents		13,108			6,935			(28,449	)
Cash and cash equivalents, beginning of period		51,218			44,283			72,732
Cash and cash equivalents, end of period	$	64,326		$	51,218		$	44,283
Supplemental disclosure of cash flow information
Cash paid for interest	$	-		$	-		$	-
Cash paid for income taxes	$	6,093		$	2,673		$	1,330

See the accompanying Notes to Consolidated Financial Statements

47

SIGMA DESIGNS, INC.

NOTES TO 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”, “the Company” and “us”) is a leader in intelligent media platforms in home entertainment and control.  We focus on integrated system-on-chip, or SoC, solutions that serve as the foundation for some of the world’s leading consumer products, including televisions, set-top boxes and video networking products. All of our primary products are semiconductors that are targeted toward end-product manufacturers, Original Equipment Manufacturers, or OEMs, and Original Design Manufacturers, or ODMs. We sell our products into four primary markets which are the Digital Television, or DTV market, the home networking market, the set-top box market, and the home control market. We derive a portion of our revenue from licensing and other markets, including licenses, software development kits, engineering support services for hardware and software, engineering development for customization of chipsets and other accessories.

Basis of presentation:  The consolidated financial statements include the accounts of Sigma Designs, Inc. and its wholly-owned subsidiaries.  All significant intercompany balances and transactions have been eliminated. We changed our presentation of other comprehensive income due to the adoption of Financial Accounting Standards Board, or FASB, Accounting Standards Codification (ASC) Topic 220, Presentation of Comprehensive Income. The adoption of this accounting standard did not have a material impact on our consolidated financial statements. In May 2012, we completed our acquisition of certain assets from Trident Microsystems, Inc. and certain of its subsidiaries (collectively referred to as “Trident”). The consolidated financial statements include the results of operations of Trident commencing as of the acquisition date. See Note 10 for further discussion.

Accounting period:  We follow a 52 or 53-week fiscal reporting calendar ending on the Saturday closest to January 31 each year. Our most recent fiscal year, fiscal 2014, ended on February 1, 2014, included 52 weeks. The fiscal years 2013 and 2012, ended February 2, 2013 and January 28, 2012 included 53 and 52 weeks, respectively. Our next fiscal year, ending on January 31, 2015, will include 52 weeks.

Restructuring charges: During fiscal 2014 and 2013, we implemented restructuring plans to reorganize our operations and reduce our workforce and related operating expenses. Our restructuring charges include primarily payments to employees for severance, asset impairment charges, termination fees associated with leases and other contracts and other costs related to the closure of facilities. Accruals are recorded when management has approved a plan to restructure operations and a liability has been incurred. The restructuring accruals are based upon management estimates at the time they are recorded. These estimates can change depending upon changes in facts and circumstances subsequent to the date the original liability was recorded. During fiscal 2014 and 2013, we recorded restructuring charges of $2.3 million and $3.3 million, respectively.

Use of estimates:  The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or 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 revenue and expenses during the reporting period.  The primary areas that require significant estimates and judgments by management include, but are not limited to, revenue recognition, allowances for doubtful accounts, sales returns, warranty obligations, inventory valuation, stock-based compensation expense, goodwill and purchased intangible asset valuations, strategic investments, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, restructuring costs, litigation and other loss contingencies.  These estimates and assumptions are based on historical experience and various other factors that we believe to be reasonable under the circumstances.  Actual results could differ from those estimates, and such differences may be material to our consolidated financial statements.

Fair value of financial instruments:  For certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate their fair value due to the relatively short maturity of these items.  Marketable securities consist of available-for-sale securities that are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of shareholders’ equity.  The fair value of cash equivalents and certain marketable securities is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets.  

48

Derivative financial instruments: We account for our financial derivatives as either assets or liabilities and carry them at fair value.  We do not use derivative financial instruments for speculative or trading purposes, nor do we hold or issue leveraged derivative financial instruments. We use foreign exchange contracts to hedge certain existing and anticipated foreign currency denominated transactions.  Unrealized gains and losses arising from the effective portion of foreign exchange contracts that are designated as cash flow hedging instruments are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the same period or periods during which the underlying transactions affect earnings.  Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.  Gains and losses arising from changes in the fair values of foreign exchange contracts that are not designated as hedging instruments are recognized in current earnings.

Cash and cash equivalents:  We consider all highly liquid debt instruments with a remaining maturity of 90 days or less at the date of purchase to be cash equivalents.

Short and long-term marketable securities:  Short-term marketable securities represent highly liquid instruments with a remaining maturity date at the end of each reporting period of greater than 90 days but less than one year and are stated at fair value. Long-term marketable securities represent securities with contractual maturities greater than one year from the date of acquisition. We classify our marketable securities as available-for-sale because the sale of such securities may be required prior to maturity. The difference between amortized cost (cost adjusted for amortization of premiums and accretion of discounts, which is recognized as an adjustment to interest income) and fair value, representing unrealized holding gains or losses, are recorded separately as a component of accumulated other comprehensive income within shareholders’ equity. Any gains and losses on the sale of marketable securities are determined on a specific identification basis. We monitor all of our marketable securities for impairment and if these securities are reported to have a decline in fair value, we use significant judgment to identify events or circumstances that would likely have a significant adverse effect on the future value of each investment including: (i) the nature of the investment; (ii) the cause and duration of any impairment; (iii) the financial condition and future prospects of the issuer; (iv) for securities with a reported decline in fair value, our ability to hold the security for a period of time sufficient to allow for any anticipated recovery of fair value; (v) the extent to which fair value may differ from cost; and  (vi) a comparison of the income generated by the securities compared to alternative investments. We recognize an impairment charge if a decline in the fair value of our marketable securities is judged to be other-than-temporary. No such impairment charges were recorded in fiscal 2014, 2013 and 2012.

Accounts receivable and allowances:  We defer recognition of revenue and the related receivable when we cannot estimate whether collectability is reasonably assured at the time products and services are delivered to our customer.  We also provide allowances for bad debt and sales returns.  In establishing the allowance for bad debt, we review the customer’s payment history and information regarding their credit worthiness.  In establishing the allowance for sales returns, we make estimates of potential future returns of products for which revenue has been recognized in the current period, including analyzing historical returns, current economic trends and changes in customer demand and acceptance of our products. Our allowance for sales return, discounts and bad debt was $0.3 million and $0.3 million at February 1, 2014 and February 2, 2013, respectively.  If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, or future product returns increased, additional allowances may be required.

Inventory:  Inventory is 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 inventory 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 generally only provide us with firm purchase commitments for the month and quarter 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 inventory in excess of estimated future demand.  In addition, we write-off inventory that is 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 provisions for excess and obsolete inventory of approximately $0.8 million, $7.1 million and $9.0 million to cost of revenue for fiscal 2014, 2013 and 2012, respectively. We have sold through $1.0 million, $3.3 million and $0.6 million of inventory that we had previously recorded as excess and obsolete in fiscal 2014, 2013 and 2012, 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.

Warranty: Our products typically carry a one-year limited warranty that 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. Although we engage in extensive product quality programs and processes, our warranty obligation has been and may in the future be affected by product failure rates, product recalls, repair or replacement costs and additional development costs incurred in correcting any product failure. Should actual product failure rates differ from our estimates, additional warranty reserves could be required. In that event, our product gross margins would be reduced.

49

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.

Business combinations: The purchase accounting method applied to business combinations requires us to allocate the purchase price of acquired companies to the identifiable tangible and intangible assets acquired and liabilities assumed, as well as in-process research and development, or IP R&D, based on their estimated fair values. Such valuations require us to make significant estimates and assumptions, especially with respect to intangible assets. The significant purchased intangible assets recorded by us include customer relationships, developed technology, IP R&D and trademarks.  Critical estimates and assumptions used in valuing these assets include but are not limited to: future expected cash flows from acquired products, customer relationships and acquired developed technologies and patents; expected costs to develop IP R&D into commercially viable products, calculation of the weighted average cost of capital and expected cash flows from completed projects; assumptions regarding brand awareness and market position, and assumptions about the period of time the brand will continue to be used in our product portfolio; and assumptions about discount rates. The estimated fair values are based upon assumptions that we believe to be reasonable but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

Intangible assets:  The amounts and useful lives assigned to intangible assets acquired, other than goodwill, impact the amount and timing of future amortization.  Intangible assets include those acquired through business combinations and 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, generally two to three years.

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired.  Other intangible assets primarily represent purchased developed technology, customer relationships, trademarks, non-compete agreements, purchased IP and IP R&D.  We currently amortize our intangible assets with definitive lives over periods ranging from two to ten years using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used or, if that pattern cannot be reliably determined, using a straight-line amortization method.  We capitalize IP R&D projects acquired as part of a business combination and upon completion of each project, IP R&D assets are reclassified to developed technology and amortized over their estimated useful lives.  

Impairment of goodwill and other long-lived assets:  We evaluate goodwill on an annual basis as of the last day of our fiscal year or whenever events or changes in circumstances indicate the carrying value may not be recoverable.  We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting units is less than its carrying amount, we conduct a two-step quantitative goodwill impairment test.  The first step requires identifying the reporting units and comparing the fair value of each reporting unit to its net book value, including goodwill.  We have identified that we operate one reporting unit and the fair value of our operating unit is determined to be equal to our market capitalization as determined through quoted market prices, adjusted for a reasonable control premium.  We estimate the control premium based on a review of acquisitions of comparable semiconductor companies that were completed during the last four years.  If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. The amount, by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss.

During development, IP R&D is not subject to amortization and is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. We first assess qualitative factors to determine whether it is more likely than not that the fair value of IP R&D is less than its carrying amount, and if so, we conduct a quantitative impairment test. The impairment test consists of a comparison of the fair value to its carrying amount. If the carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Once an IP R&D project is complete, it becomes a definite lived intangible asset and is evaluated for impairment in accordance with our policy for long-lived assets.

We test long-lived assets, including purchased intangible assets (other than goodwill and IP R&D) for impairment whenever events or changes in circumstances, such as a change in technology, indicate that the carrying value of these assets may not be recoverable.  If indicators of impairment exist, we determine whether the carrying value of an asset or asset group is recoverable, based on comparisons to undiscounted expected future cash flows that the assets are expected to generate. If an asset is not recoverable, we record an impairment loss equal to the amount by which the carrying value of the asset exceeds its fair value. We primarily use the income valuation approach to determine the fair value of our long-lived assets and purchased intangible assets.

50

Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions.  These estimates and assumptions include forecasts of revenue and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and a determination of appropriate market comparables.  We base our fair value estimates on assumptions we believe to be reasonable at that time, however, actual future results may differ from those estimates.  Future competitive, market and economic conditions could negatively impact key assumptions including our market capitalization, actual control premiums or the carrying value of our net assets, which could require us to realize an additional impairment.

Long-term investments:  Investments in private equity securities of less than 20% owned companies are accounted for using the cost method unless we can exercise significant influence or the investee is economically dependent upon us, in which case the equity method is used.  We evaluate our long-term investments for impairment annually or whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable.

Assets held for sale: Assets are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction rather than through continuing use. The assets are classified as assets to be disposed of by sale when the following conditions have been met: management has approved the plan to sell; assets are available for immediate sale; assets are actively being marketed; sale is probable within one year; price is reasonable in the market and it is unlikely that there will be significant changes in the assets to be sold or a withdrawal to the plan to sell. Assets classified as held for sale are reported as current assets at the lower of their carrying amount or fair value less costs to sell and depreciation is not charged on long-lived assets classified as held for sale. The assets held for sale at February 1, 2014 and February 2, 2013 were zero and $0.6 million, respectively, and is included in prepaid expenses and other current assets in the accompanying consolidated balance sheets.

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. These criteria are usually met at the time of product shipment. We record reductions of revenue for estimated product returns in the same period that the related revenue is recorded. The amount of these reductions is based on historical sales returns, analysis of credit memo data, specific criteria included in the agreements, and other factors known at the time. We accrue 100% of potential returns at the time of sale when there is not sufficient historical sales data and recognize revenue when the right of return expires. During the third quarter of fiscal 2014, we adopted prospectively, the authoritative guidance, ASU No. 2010-17, “Revenue Recognition – Milestone Method”, (ASU 2010-17) that provides an alternative method of revenue recognition for milestone payments. Under the milestone method guidance, we recognize revenue that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. To be considered substantive, the consideration earned by achieving the milestone should be (a) commensurate with (1) either the vendor’s performance to achieve the milestone or (2) to the enhancement of the value of the item delivered as a result of a specific outcome resulting from the vendor’s performance to achieve the milestone (b) the consideration should relate solely to past performance, and (c) the consideration should be reasonable relative to all deliverables and payment terms in the arrangement. Other milestones that do not fall under the definition of a milestone under the milestone method are recognized under the authoritative guidance concerning revenue recognition. We also derive a portion of our net revenue from licensing the right to use our intellectual property. We recognize licensing revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectability is reasonably assured. These criteria are usually met at the time our technology is made available to the customer.

On occasion, we derive revenue from the license of our internally developed intellectual property ("IP"). IP licensing agreements that we enter into generally provide licensees the right to incorporate our IP components in their products with terms and conditions that vary by licensee. Our license fee arrangements generally include multiple deliverables and we are required to determine whether there is more than one unit of accounting. To the extent that the deliverables are separable into multiple units of accounting, we allocate the total fee on such arrangements to the individual units of accounting using management’s best estimate of selling price ("ESP"), if third party evidence ("TPE") or vendor specific objective evidence ("VSOE") does not exist. We defer revenue recognition for consideration that is contingent upon future performance or other contractual terms.

The Company’s process for determining its ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. The key factors considered by the Company in developing the ESPs include the nature and complexity of the licensed technologies, our cost to provide the deliverables, the availability of substitute technologies in the marketplace and the Company’s historical pricing practices. We then recognize revenue for each unit of accounting depending on the nature of the deliverable(s) comprising the unit of accounting in accordance with the revenue recognition criteria mentioned above. Fees under these agreements generally include (a) license fees relating to our IP, (b) engineering services, and (c) support services. Historically, each of these elements has standalone value and therefore each are treated as separate units of accounting. Any future licensing arrangements will be analyzed based on the specific facts and circumstances which may be different than our historical licensing arrangements.

For deliverables related to licenses of our technology that involve significant engineering services, we recognize revenue in accordance with the provisions of the proportional performance method. We determine costs associated with engineering services using actual labor dollars incurred and estimated other direct or incremental costs allocated based on the percentage of time the engineer(s) spent on the project. These costs are deferred until revenue recognition criteria have been met, at which time they are reclassified as cost of revenue. 

We defer revenue when payments are received from customers in advance of revenue recognition.  Deferred revenue, consisting principally of license fees collected in advance, at February 1, 2014 and February 2, 2013 was $3.0 million and $3.1 million, respectively, and is included in accrued liabilities in the accompanying consolidated balance sheets.

On September 27, 2013, we entered into an agreement to license specified IP block and other related technology to a customer to be used in chip designs for a fee of approximately $8.8 million. In addition, we agreed to provide technical support services to resolve difficulties and to answer inquiries in using the licensed technology. Pursuant to this agreement, the customer is obligated to make payments upon the attainment and acceptance of significant milestones, as set forth in the agreement. During fiscal 2014, the first four milestones were met, delivered and accepted by the customer resulting in $7.0 million of revenue recognition. Total additional milestone payments under the agreement are approximately $2.0 million.

51 

Cost of revenue: Cost of revenue is comprised of the cost of our media processors and chipset solutions, which consists of the cost of purchasing finished silicon wafers manufactured by independent foundries, costs associated with our purchase of assembly, test and quality assurance services and packaging materials, as well as royalties paid to vendors for use of their technology. Also included in cost of revenue is the amortization of purchased IP, manufacturing overhead, including costs of personnel and equipment associated with manufacturing support, product warranty costs, provisions for excess and obsolete inventory, and stock-based compensation expense for personnel engaged in manufacturing support.

Foreign currency:  The functional currency of our foreign subsidiaries is either the U.S. dollar or the local currency of each country.  Where the local currency is the functional currency, currency translation adjustments from the translation of the financial statements of the foreign subsidiaries are included in shareholders’ equity.  Foreign currency transaction gains and losses, which are included in interest and other income, net, in the accompanying consolidated statements of operations were a net loss of approximately $0.2 million in fiscal 2014, a net gain of approximately $0.8 million in fiscal 2013 and a net loss of approximately $0.6 million in fiscal 2012.

Concentration of credit risk:  Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, short-term and long-term marketable securities, restricted cash, long-term investments and accounts receivable.  Our cash, cash equivalents, short-term and long-term marketable securities and restricted cash are on deposit with major financial institutions.  Such deposits may be in excess of insured limits.  We believe that the financial institutions that hold our cash, cash equivalents, short-term and long-term marketable securities and restricted cash are financially sound and, accordingly, minimal credit risk exists with respect to these balances.  We have not experienced any investment losses due to institutional failure or bankruptcy.  We perform ongoing credit evaluations of our customers and generally do not require collateral for sales on credit.  We review our accounts receivable balances to determine if any receivables will potentially be uncollectible and include any amounts that are determined to be uncollectible in our allowance for doubtful accounts.

Provisions: In determining loss contingencies, we consider the likelihood of a loss of an asset or the incurrence of a liability as well as the ability to reasonably estimate the amount of such loss or liability. An estimated loss from a loss contingency is accrued and charged to expense when the information available indicates that it is probable that an asset has been impaired or a liability has been incurred, and when the amount of the loss can be reasonably estimated. 

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 the income tax return must be recognized as the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority.  An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

Stock-based compensation:  We measure and recognize compensation expense for all stock-based payment awards made to employees and directors based on their estimated fair values measured on the date of grant.  Stock option awards are measured using the Black-Scholes option pricing model.  The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in our consolidated statements of operations.  We estimate forfeitures, based on historical experience, at the time of grant and revise our estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Research and development costs: Costs incurred in the research and development of our products are expensed as incurred.

Advertising costs: Advertising costs are expensed as incurred and are included as an element of sales and marketing expense in the accompanying consolidated statements of operations. Advertising expenses incurred were less than $0.1 million in fiscal 2014, 2013 and 2012, respectively.

Comprehensive income (loss): Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss).  Other comprehensive income (loss) includes certain changes in equity that are excluded from results of operations.  Specifically, foreign currency translation adjustments and unrealized gains or losses on marketable securities.

Recent accounting pronouncements:  Recent accounting pronouncements expected to impact our operations that are not yet effective are summarized as follows:

In July 2013, the FASB issued Accounting Standard Update 2013-11 amending Income Taxes: Presentation of an Unrecognized Tax benefit When Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exist that will require the presentation of certain unrecognized tax benefits as reductions to deferred tax assets rather than as liabilities in the balance sheets when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendment will be effective for interim and annual periods beginning after December 15, 2013; however, early adoption and retrospective application are permitted. We do not expect the adoption of these amendments to have a significant impact on our consolidated financial statements.

52

2.            Cash, cash equivalents and marketable securities

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

	February 1, 2014						February 2, 2013
	Book Value		Net Unrealized Gains (Losses)		Fair Value		Book Value		Net Unrealized Gains (Losses)		Fair Value
Corporate bonds	$	21,186	$	308	$	21,494	$	30,642	$	537	$	31,179
Money market funds		13,521		-		13,521		21,032		-		21,032
Municipal bonds and notes		505		3		508		515		14		529
Fixed income mutual funds		1,286		8		1,294		1,259		20		1,279
Total cash equivalents and marketable securities	$	36,498	$	319	$	36,817	$	53,448	$	571	$	54,019
Cash on hand held in the United States						1,104						1,441
Cash on hand held overseas						49,701						27,466
Total cash on hand						50,805						28,907
Total cash, cash equivalents and marketable securities					$	87,622					$	82,926
Reported as:
Cash and cash equivalents						64,326						51,218
Short-term marketable securities						7,791						17,455
Long-term marketable securities						15,505						14,253
					$	87,622					$	82,926

The amortized cost and estimated fair value of cash equivalents and marketable securities, by contractual maturity, are as follows (in thousands):  

	February 1, 2014				February 2, 2013
	Book Value		Fair Value		Book Value		Fair Value
Due in one year or less	$	21,284	$	21,312	$	39,595	$	39,767
Due in greater than one year		15,214		15,505		13,853		14,252
Total	$	36,498	$	36,817	$	53,448	$	54,019

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 (exit price).”  The accounting standards establish a consistent framework for measuring fair value and disclosure requirements about fair value measurements and among other things, require 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 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency.  The types of marketable securities valued based on quoted market prices in active markets include most U.S. government and agency securities, sovereign government obligations, money market securities and certain corporate obligations with high credit ratings and an ongoing trading market.

53

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.

The tables below present the balances of our assets and liabilities measured at fair value on a recurring basis (in thousands):

	February 1, 2014
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Corporate bonds	$	21,494	$	21,494	$	-	$	-
Money market funds		13,521		13,521		-		-
Municipal bonds and notes		508		508		-		-
Fixed income mutual funds		1,294		1,294		-		-
Total cash equivalents and marketable securities	$	36,817	$	36,817	$	-	$	-
Restricted cash		1,775		1,775		-		-
Derivative instruments asset		35		-		35		-
Total assets measured at fair value	$	38,627	$	38,592	$	35	$	-

	February 2, 2013
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Corporate bonds	$	31,179	$	31,179	$	-	$	-
Money market funds		21,032		21,032		-		-
Municipal bonds and notes		529		529		-		-
Fixed income mutual funds		1,279		1,279		-		-
Total cash equivalents and marketable securities	$	54,019	$	54,019	$	-	$	-
Restricted cash		1,769		1,769		-		-
Derivative instruments asset		438		-		438		-
Total assets measured at fair value	$	56,226	$	55,788	$	438	$	-

Assets measured and recorded at fair value on a non-recurring basis

Our non-marketable promissory notes receivable and preferred stock investments in privately-held venture capital funded technology companies are recorded at cost and are adjusted to fair value only in the event that they become other-than-temporarily impaired.  As of February 1, 2014, we held equity investments in three, and promissory notes receivable in one, privately-held venture capital funded technology companies and an equity investment in one joint venture, with an aggregate face value equal to $4.1 million.  Each of these equity investments in privately held companies 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. During fiscal 2014, 2013 and 2012, we recorded other-than-temporary impairment charges of $0.6 million, zero and zero, respectively, in connection with our privately-held investments.

4.            Derivative financial instruments

Foreign exchange contracts are recognized either as assets or as 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.

54

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. Beginning in the first quarter of fiscal 2012, we elected to discontinue assessing new derivative contracts that are used in managing NIS denominated transactions for hedge effectiveness and thus such contracts do not qualify for hedge accounting.  As a result of this change, we recognize all gains and losses from changes in the fair value of these derivate contracts immediately into earnings rather than deferring any such amounts in OCI. For hedge transactions entered into prior to January 31, 2011, which continued to be effective, the gains and losses incurred prior to January 30, 2011 continued to be recorded in OCI and were reclassified into earnings when those hedge transactions matured in fiscal 2012.

All existing foreign exchange transactions were entered into subsequent to January 29, 2011, and are treated as foreign exchange contracts not designated as cash flow hedges.  

In fiscal 2014, 2013 and 2012, we recognized a loss of $0.4 million and gains of $0.4 million and $0.2 million, respectively, as a result of foreign exchange contracts.  As of February 1, 2014, we had foreign exchange contracts to sell up to approximately $0.9 million for a total amount of approximately NIS 3.3 million, that mature on or before April 28, 2014.  As of February 2, 2013, we had foreign exchange contracts to sell up to approximately $10.4 million for a total amount of approximately NIS 42.3 million, that matured on or before December 23, 2013.

The following table presents the fair value of our outstanding derivative instruments (in thousands):

Derivative Assets	Balance Sheet Location	February 1, 2014		February 2, 2013
Foreign exchange contracts not designated as cash flow hedges	Prepaid expenses and other current assets	$	35	$	438
Total fair value of derivative instruments		$	35	$	438

The effects of derivative instruments on income and accumulated other comprehensive income for fiscal 2014, 2013 and 2012 are summarized below (in thousands):

	Gains (Losses) 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)
Derivatives instruments	Amount		Amount		Location	Amount			Location
Fiscal 2014 foreign exchange contracts	$	-	$	-	Operating expenses and cost of revenue	$	(403	)	Interest and other income, net
Fiscal 2013 foreign exchange contracts	$	-	$	-	Operating expenses and cost of revenue	$	447		Interest and other income, net
Fiscal 2012 foreign exchange contracts	$	-	$	85	Operating expenses and cost of revenue	$	153		Interest and other income, net

5.            Restricted cash

As of February 1, 2014 and February 2, 2013, we had $1.8 million of restricted cash related to deposits pledged to a financial institution with regard to our foreign exchange hedging transactions and an office operating lease.

55

6.            Investments in and notes receivable from privately held companies  

The following table sets forth the value of investments in and notes receivable from privately-held companies (in thousands):

	February 1, 2014		February 2, 2013
Equity investments
Issuer A	$	2,000	$	2,000
Issuer B		1,000		1,000
Issuer C		730		1,000
Issuer D		-		300
Issuer E		-		2,000
Issuer F		143		143
Total equity investments		3,873		6,443
Notes receivable
Issuer A		230		750
Issuer G		-		2,500
Total notes receivable		230		3,250
Total equity investments and notes receivable	$	4,103	$	9,693

Equity investments

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 $1.0 million. In the fourth quarter of fiscal 2010, we purchased additional shares of preferred stock in Issuer A 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 B”) 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 C”) at a total investment cost of $1.0 million. In the fourth quarter of fiscal 2014, we recorded an impairment charge of $0.3 million on this investment as we concluded the impairment to be other-than-temporary.

In the fourth quarter of fiscal 2011, we purchased a convertible note, which has been converted to equity, from another privately-held technology company (“Issuer D”) with a face value equal to the cost of $0.3 million. In the third quarter of fiscal 2014, we recorded an impairment charge of $0.3 million on this investment as we concluded the impairment to be other-than temporary.

In the second quarter of fiscal 2012, we purchased shares of preferred stock in another privately-held technology company (“Issuer E”) at a total investment cost of $2.0 million. During the third quarter of fiscal 2014, we sold this investment for total consideration of $2.6 million of which we received $2.1 million in cash and recognized a gain of approximately $0.1 million on the sale of the investment, accordingly. The remaining $0.5 million is held in escrow related to an indemnity agreement for an 18-month period. We will recognize a gain to the extent any of the remaining consideration is released to us from escrow.

In the third quarter of fiscal 2012, we made an equity investment of $0.1 million in a privately-held joint venture (“Issuer F”).

Notes receivable from privately-held companies

In November 2010, we loaned $1.0 million to Issuer A and received a secured promissory note. This promissory note is secured by the assets of Issuer A, bears interest at a rate of 5% per annum and is scheduled to be fully repaid during the second quarter of fiscal 2015.

In January 2012, we loaned $2.5 million to a privately-held venture capital funded technology company (“Issuer G”), pursuant to a strategic agreement dated January 25, 2012. We made this loan in exchange for a secured promissory note, which was secured by the assets of Issuer G and bore interest at a rate of 3% per annum. The principal amount and accrued interest were due 36 months from the agreement date. On May 16, 2013, we entered into a Non-Exclusive License Agreement with Issuer G under which we agreed to apply Issuer G’s loan balance of $2.5 million plus accrued interest to offset the initial license fees under this license agreement for certain technologies.

As of February 1, 2014 and February 2, 2013, our notes receivable from privately-held companies were valued at $0.2 million and $3.3 million, respectively, 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. We analyze each investment quarterly for evidence of impairment.

Our President and Chief Executive Officer is a member of the Board of Directors of two of the companies we have invested in. Each of the aforementioned investment transactions was negotiated without the personal involvement of the executive officer who had a personal interest in the transaction.

56

7.            Inventory

Inventory consists of the following (in thousands):

	February 1, 2014		February 2, 2013
Wafers and other purchased materials	$	10,079	$	12,553
Work-in-process		1,527		1,071
Finished goods		8,797		11,305
Total inventory	$	20,403	$	24,929

8.            Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following (in thousands):

	February 1, 2014		February 2, 2013
Prepayments for inventory	$	1,670	$	2,542
Amounts due from seller related to DTV acquisition		1,439		4,519
Note receivable		230		750
Assets held for sale		-		623
Other current assets		4,730		5,144
Total prepaid expenses and other current assets	$	8,069	$	13,578

9.            Software, equipment and leasehold improvements

Software, equipment and leasehold improvements consist of the following (in thousands):

	Estimated Useful Lives (years)			February 1, 2014			February 2, 2013
Software		2		$	38,563		$	24,216
Equipment	1	to	5		21,147			17,688
Office equipment and furniture		2			8,806			8,338
Leasehold improvements	1	to	6		3,149			3,097
Total					71,665			53,339
Less: Accumulated depreciation and amortization					(44,576	)		(36,233	)
Total software, equipment and leasehold improvements, net				$	27,089		$	17,106

Software, equipment and leasehold improvement depreciation and amortization expense for fiscal 2014, 2013 and 2012 was $9.6 million, $12.3 million and $10.2 million, respectively.

10.            Business combinations

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 $38.2 million, subject to 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”). Trident filed for voluntarily petition under Chapter 11 bankruptcy on January 4, 2012. In April 2012, we were selected as the successful bidder to acquire Trident’s DTV business. The purchase price of the Trident acquisition was paid in cash.

In connection with the Trident acquisition, we acquired all of Trident’s DTV business products, certain licensed intellectual property rights, specified tangible assets and other assets specified in the Purchase Agreement. We also acquired the right to use certain facilities of Trident under short-term facilities use agreements for facilities located in Shanghai and Beijing, China, Germany, The Netherlands, Taiwan and California. We hired approximately 320 employees whose services are used in the DTV business. We also entered into a transition services agreement with Trident under which Trident agreed to provide certain services to us following the closing. The purchaser of Trident's set-top box business also agreed to provide transition support services to us.

The addition of Trident's industry-leading DTV media processor System-on-a-Chip, or SoC, products for next-generation Internet-enabled digital televisions has significantly expanded our served available market. DTV products complement our existing IPTV set-top box and connected media player SoC solutions and augment our ability to develop innovative solutions for the anticipated convergence of IP-video delivery across any device within the home.

57

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 May 4, 2012. The fair value of the tangible assets and identifiable intangible assets acquired, net of liabilities assumed, exceeded the purchase price by $1.4 million, which was recognized in the consolidated statements of operations as a gain on acquisition in fiscal 2013.

The purchase price in the transaction was allocated as follows (in thousands, except years):

	Purchase price (in thousands)			Estimated useful Life (in years)
Purchased tangible assets and liabilities
Accounts receivable	$	13,410
Inventory		13,643
Prepaid inventory		2,895
Prepaid third party support		2,466
Deposit with contract manufacturer		3,543
Property and equipment		2,553			1.5
Mask sets		1,438			3
Net liabilities		(1,489	)
Purchased identifiable intangible assets:
Developed technology		1,168			3
Gain on acquisition		(1,417	)
Cash consideration	$	38,210
Other consideration		-
Total consideration issued in the acquisition	$	38,210

The results of operations of the DTV business have been included in the consolidated results of operations from May 4, 2012.  For fiscal 2014 and 2013, net sales of approximately $39.1 million and $66.6 million, respectively, and an operating loss of approximately $9.5 million and $5.2 million, respectively, attributable to the DTV business, were included in the consolidated results of operations.

The following unaudited pro forma consolidated results of operations give effect to the acquisition of the DTV business as if it had occurred as of the beginning of the fiscal periods presented. The unaudited pro forma consolidated results of operations are provided for informational purposes only and do not purport to represent actual consolidated results of operations had the acquisition occurred on the date assumed, nor are these financial statements necessarily indicative of future consolidated results of operations.  We expect to incur costs and realize benefits associated with integrating the operations of the DTV business.  The unaudited pro forma consolidated results of operations do not reflect the cost of any integration activities or any benefits that may result from operating efficiencies or revenue synergies.  The pro forma consolidated results of operations for fiscal 2013 include non-recurring adjustments of $4.0 million of direct acquisition costs (in thousands, except per share data).

	Fiscal Years Ended
	February 1, 2014			February 2, 2013			January 28, 2012
Net revenue	$	199,193		$	239,557		$	356,778
Net loss		(11,049	)		(120,313	)		(221,297	)
Basic and diluted net loss per share	$	(0.32	)	$	(3.62	)	$	(6.91	)

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 was paid on May 3, 2011.

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.

58

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		Estimated Useful Lives (years)
Purchase consideration:
Cash	$	5,000
Tangible assets acquired and liabilities assumed	$	752
Identifiable intangible assets:
Developed technology
Technology		1,250		5
Technology leveraged		1,680		8
Customer relationships		750		5
In-process research and development		370		—
Goodwill		198		—
Total consideration	$	5,000

11.          Intangible assets

The table below presents the balances of our intangible assets (in thousands):

	February 1, 2014			February 2, 2013
Acquired intangible assets	$	76,321		$	76,321
Purchased IP		25,807			23,450
Total		102,128			99,771
Accumulated amortization		(72,348	)		(63,198	)
Intangible assets, net	$	29,780		$	36,573

Impairment of intangible assets

Acquired intangible assets represent intangible assets acquired through business combinations. Purchased intellectual property (“Purchased IP”) represents intangible assets acquired through direct purchases of licensed technology from vendors which is incorporated into our products.

Purchased IP – not yet deployed relates to Purchased IP from third parties for our products that are currently in development. We begin amortizing such intellectual property upon the earlier of the beginning of the term of the license agreement, as appropriate, or at the time we begin shipment of the associated products into which such intellectual property is incorporated.

We test long-lived assets, including purchased intangible assets (other than goodwill and in-process research and development) for impairment whenever events or changes in circumstances, such as a change in technology, indicate that the carrying value of these assets may not be recoverable.

During fiscal 2014, we continued to restructure our operations to further align our operating expenses with our business, industry and revenue outlooks. In connection with our continued restructuring plan, we performed an impairment review of our intangible assets by comparing undiscounted expected future cash flows with the carrying values of the underlying assets. The results of this review indicated certain purchased IP licenses incorporated into discontinued products were impaired; as a result, we recorded an impairment charge for purchased IP of $0.3 million.  In addition, we recorded an impairment charge for certain software, equipment and leasehold improvements associated with such discontinued products of $0.6 million.  We recorded the impairment of $1.0 million related to products in development in operating expenses in the accompanying consolidated statements of operations in fiscal 2014.

59

During fiscal 2013, due to continued reductions in our profitability, negative cash flows from operations and our restructuring measures adopted in fiscal 2013, we performed an impairment review of our intangible assets.  In performing this review, we developed a forecast of the undiscounted cash flow expected to be generated by each intangible asset group and compared the result to the carrying value. The results of this review indicated certain purchased IP licenses incorporated into discontinued products and products in development were impaired; as a result, we recorded an impairment charge for purchased IP of $8.2 million.  In addition, we recorded an impairment charge for certain software, equipment and leasehold improvements and prepaid licenses associated with such discontinued products of $2.6 million and $0.4 million, respectively.  We recorded the impairment of $4.6 million related to developed products in cost of revenue and the impairment of $6.6 million related to products in development in operating expenses in the accompanying consolidated statements of operations in fiscal 2013.

During the third quarter of fiscal 2012, we performed an impairment review and concluded that the carrying value of our goodwill and acquired IP R&D was fully impaired, which resulted in an impairment charge of $45.1 million and $11.1 million, respectively, in fiscal 2012.  Subsequent to January 28, 2012, we have not capitalized any goodwill or IP R&D.  Additionally, we performed an impairment review of our intangible assets, other than goodwill and IP R&D, and concluded that two of our intangible asset groups, consisting primarily of certain developed technology and customer relationship intangibles related to our CopperGate acquisition, were not fully recoverable, resulting in an impairment charge of $55.1 million in fiscal 2012.

Intangible assets, subject to amortization, were as follows (in thousands, except for years): 

	February 1, 2014
	Gross Value		Impairment			Accumulated Amortization and Effect of Currency Translation			Net Value		Weighted Average Remaining Amortization Period (Years)
Acquired intangible assets:
Developed technology	$	76,639	$	(24,614	)	$	(40,334	)	$	11,691		2.9
Customer relationships		50,704		(30,486	)		(17,048	)		3,170		2.7
Trademarks		2,678		-			(2,102	)		576		4.9
Non-compete agreements		1,400		-			(1,400	)		-
Purchased IP - amortizing		21,569		(5,516	)		(11,464	)		4,589		1.5
Total amortizing		152,990		(60,616	)		(72,348	)		20,026		2.6
Purchased IP - not yet deployed		12,770		(3,016	)		-			9,754
Total intangibles	$	165,760	$	(63,632	)	$	(72,348	)	$	29,780

	February 2, 2013
	Gross Value		Impairment			Accumulated Amortization and Effect of Currency Translation			Net Value		Weighted Average Remaining Amortization Period (Years)
Acquired intangible assets:
Developed technology	$	76,639	$	(24,614	)	$	(34,567	)	$	17,458		3.6
Customer relationships		50,704		(30,486	)		(15,782	)		4,436		3.6
Trademarks		2,678		-			(1,983	)		695		5.9
Non-compete agreements		1,400		-			(1,400	)		-
Purchased IP - amortizing		21,370		(5,516	)		(7,970	)		7,884		2.4
Total amortizing		152,791		(60,616	)		(61,702	)		30,473		3.4
Purchased IP - not yet deployed		8,778		(2,678	)		-			6,100
Total intangibles	$	161,569	$	(63,294	)	$	(61,702	)	$	36,573

Purchased IP – not yet deployed relates to Purchased IP from third parties for our products that are currently in development. We begin amortizing such intellectual property upon the earlier of the beginning of the term of the license agreement, as appropriate, or at the time we begin shipment of the associated products into which such intellectual property is incorporated. As of February 1, 2014, we had $9.8 million of Purchased IP, which we have not yet begun to amortize.

60

Amortization expense related to intangible assets was $10.6 million, $11.6 million and $18.8 million for fiscal 2014, 2013 and 2012, respectively.  The following table presents the amortization of intangible assets in the accompanying consolidated statements of operations (in thousands):

	Fiscal Years Ended
	February 1, 2014		February 2, 2013		January 28, 2012
Cost of revenue	$	9,105		9,473		9,562
Operating expenses		1,542		2,124		9,206
Total intangible amortization expense	$	10,647		11,597		18,768

As of February 1, 2014, we expect the amortization expense in future periods to be as follows (in thousands):

Fiscal years	Purchased IP-Amortizing		Developed Technology		Trademarks		Customer Relationships		Total
2015	$	3,135	$	4,282	$	118	$	1,265	$	8,800
2016		1,390		3,957		118		1,109		6,574
2017		41		2,957		118		796		3,912
2018		23		495		118		-		636
2019		-		-		104		-		104
Total	$	4,589	$	11,691	$	576	$	3,170	$	20,026

12.          Accrued liabilities and other long-term liabilities

Accrued liabilities consist of the following (in thousands):

	February 1, 2014		February 2, 2013
Income taxes payable, current portion	$	7,968	$	4,508
License fees		1,929		3,553
Deferred revenue		3,001		3,099
Rebates		3,587		1,475
Royalties		985		951
Warranties		620		1,447
Settlements		150		425
Other accrued liabilities		1,573		3,263
Total accrued liabilities	$	19,813	$	18,721

Other long-term liabilities consist of the following (in thousands):

	February 1, 2014		February 2, 2013
License fees	$	6,975	$	41
Other long-term liabilities		83		408
Total other long-term liabilities	$	7,058	$	449

13.          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.

61

Details of the change in accrued warranty for fiscal 2014, 2013 and 2012 are as follows (in thousands):

Fiscal Years	Balance Beginning of Period		Additions		Deductions			Balance End of Period
2012	$	1,300	$	1,082	$	(1,056	)	$	1,326
2013	$	1,326	$	1,188	$	(1,067	)	$	1,447
2014	$	1,447	$	39	$	(866	)	$	620

14.          Sale of development project

On March 8, 2013, we entered into an Asset Purchase Agreement with a third party (the “Buyer”) to sell certain development projects (intellectual property) and long-lived assets (the “Connectivity Assets”) related to the connectivity technology over coaxial cable market, including the transfer of 21 employees (the “Connectivity Employees”) to the Buyer. The aggregate carrying amount of the Connectivity Assets ultimately transferred was approximately $0.6 million and were classified as assets held for sale in prepaid expenses and other current assets in the accompanying consolidated balance sheet at February 2, 2013. We received an initial payment of $2.0 million in cash at the closing of the transaction and a payroll expense reimbursement payment of $0.6 million (as described more fully below). Under the terms of the Asset Purchase Agreement, if certain technical milestones were met by September 30, 2013 as a result of further development of the transferred technology by the Buyer, we were to be paid an additional $5.0 million in cash. 

In April 2013, upon receiving the closing consideration of $2.0 million, we recorded a gain of $1.1 million, net of the carrying value of the Connectivity Assets and fees for legal and bank services of approximately $0.4 million. The gain is included in “Gain on sale of development project” in the accompanying consolidated statements of operations for fiscal 2014. The gain was recorded in the first quarter of fiscal 2014 on the basis that we obtained a signed agreement, the closing consideration of $2.0 million was received (non-refundable), delivery of the underlying assets and intellectual property and transfer of employees occurred during the first quarter of fiscal 2014, and we do not have further obligations or deliverables under the Asset Purchase Agreement beyond May 4, 2013.  Additionally, in April 2013, in connection with the Asset Purchase Agreement, the Buyer reimbursed us for payroll expenses related to the employees transferred to the Buyer for the period from February 1, 2013 through the actual payroll transfer, totaling $0.6 million.

As the contingent consideration was uncertain at the time of the intial sale, the contingent payment was not recognized. Accordingly, payment consideration if and when the milestone is met associated with the technical milestone will be recorded as other income in our consolidated statements of operations in its entirety, which was due by September 30, 2013, in accordance with the Asset Purchase Agreement.

The Buyer has advised us that it does not believe the milestones had been met by September 30, 2013. We are currently pursuing our rights through the dispute provisions set forth in the Asset Purchase Agreement. The matter is at the procedural stage, and we intend to vigorously defend our position. To the extent we recognize any payment in regards to the milestone completion, we will recognize income upon receipt of any such proceeds from the Buyer.

15.         Restructuring costs

In fiscal 2013, as a result of significant expansion in our infrastructure and operational activities in connection with purchases and acquisitions that took place between fiscal years 2008 and 2013, and in response to certain redundancies, underperforming operations and delays in programs and product releases, we implemented a restructuring program to realign our global operating expenses with our new business conditions, and to improve efficiency, competitiveness and profitability. In fiscal 2013, we reduced our workforce by approximately 114 employees, implemented plans to scale down our reliance on contractors and consultants, impaired the unamortized value of certain software intellectual property licenses, which we no longer intend to use, initiated the closure of our facilities in Canada, Hong Kong and Japan and reduced our discretionary spending across all operational areas. We recorded $3.3 million in restructuring charges in fiscal 2013. Of the total restructuring charges recorded in fiscal 2013, less than $0.1 million was reflected in cost of revenue and $3.2 million was reflected in operating expenses. Costs relating to facilities closure or lease commitment are recognized when the facility has been exited. Terminations costs are recognized when the costs are deemed both probable and estimable.

In fiscal 2014, as part of our continuing efforts to reduce expenses, we incurred restructuring charges of approximately $2.3 million, of which $1.7 million was related to workforce reductions of 67 employees across several geographic regions and $0.6 million was related to early termination of lease agreements for locations in Canada and southern California. Of the total restructuring charges recorded in fiscal 2014, less than $0.1 million was reflected in cost of revenue and $2.3 million was reflected in operating expenses.

62

Expenses recognized for restructuring activities impacting our operating expenses are included in “Restructuring costs” in the consolidated statements of operations. Our restructuring measures could negatively impact our revenue and results of operations in the future as a result of less employees developing future products and working to sell our products.

A combined summary of the recent activity of the restructuring plans initiated by us is as follows (in thousands):

	Workforce Reduction			Asset Impairment			Facility Exit Costs			Total			Cumulative Restructuring Costs
Charges in fiscal 2013	$	2,167		$	1,089		$	8		$	3,264		$	3,264
Cash payments		(1,153	)		-			-			(1,153	)
Non-cash items		-			(1,089	)		-			(1,089	)
Liability, February 2, 2013		1,014			-			8			1,022			3,264
Charges in fiscal 2014		1,696			-			610			2,306			2,306
Cash payments		(2,347	)		-			(616	)		(2,963	)
Liability, February 1, 2014	$	363		$	-		$	2		$	365		$	5,570

16.          Commitments and contingencies

Commitments

Operating Leases

Our primary facility in Milpitas, California is leased under a non-cancelable lease, which was amended in September 2012 to extend the term through September 2015, and slightly decrease the monthly base rent. We also lease facilities in Shanghai, Shenzhen, Hong Kong, Taiwan, Vietnam, South Korea, Japan, Singapore, Israel, Germany, France, Denmark and The Netherlands.

In fiscal 2014, pursuant to our restructuring plans, we early terminated our facility leases for our locations in Canada and southern California. During the third quarter of fiscal 2014, we entered into a settlement of all outstanding disputes between the parties and as a result of the settlement we paid $0.8 million to the landlord in Canada. We have estimated our exposure for the location in southern California and recorded a cost accrual of less than $0.1 million for that matter. See Note 15 for further information regarding the restructuring plan.

We also lease vehicles under non-cancelable leases.

Future minimum annual payments under operating leases are as follows (in thousands):

Fiscal Years	Operating Leases
2015	$	4,661
2016		2,944
2017		1,692
2018		144
Thereafter		-
Total minimum lease payments	$	9,441

Rent expense, recorded on a straight-line basis, was $4.8 million, $4.7 million and $2.6 million for fiscal 2014, 2013 and 2012, respectively.  

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 February 1, 2014, the total amount of outstanding non-cancelable purchase orders was approximately $17.4 million.

63

Design Tools

During fiscal 2014, we entered into an agreement with a vendor to purchase $12.9 million of design tools. Payments under this agreement are being made on a quarterly basis from June 2013 through March 2016. As of February 1, 2014 remaining payments under this agreement totaled $11.4 million. We have fully accrued this amount as of the end of the fiscal year.

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.

Our articles of incorporation and bylaws require that we indemnify our officers and directors against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceedings arising out of their services to us. In addition, we have entered into separate indemnification agreements with each of our directors and executive officers, which provide for indemnification of these individuals under similar circumstances and under additional circumstances. The indemnification obligations are more fully described in our charter documents and the form of indemnification agreement filed with our SEC reports. We purchase insurance to cover claims, or a portion of the claims, made against our directors and officers. Since a maximum obligation is not explicitly stated in our charter documents or in our indemnification agreements and will depend on the facts and circumstances that arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably estimated. The fair value of these obligations was zero on our consolidated balance sheet as of February 1, 2014.

Royalties

We pay royalties for the right to sell certain products under various license agreements.  During fiscal 2014, 2013 and 2012, we recorded royalty expense of $1.9 million, $2.7 million and $2.0 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 February 1, 2014, we had obtained grants from the OCS aggregating to $5.2 million for certain of our research and development projects in Israel.  We completed the most recent of these projects in 2013.  We are obligated to pay royalties to the OCS, amounting up to 4.5% of the sales of certain products up to an amount equal to grants received, plus LIBOR-based interest.  As of February 1, 2014, our remaining obligation under these programs was approximately $1.0 million.

Contingencies

Litigation

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.

In March 2013, we filed a motion to intervene in (and become a party to) U.S. Ethernet Innovations, LLC (USEI) v. AT&T Mobility, LLC (“AT&T”) and others, Case No. 5-10-cv-05254 CW, currently pending in the U.S. District Court for the Northern District of California, or the Litigation. In this Litigation, USEI filed a patent infringement complaint alleging that various AT&T products infringe USEI patents that have now expired, including alleging that set-top boxes deployed by AT&T that contain our SoCs infringe a USEI patent. USEI has made similar allegations that other defendants infringe this and other now expired USEI patents in this Litigation and other related cases. Further, other interveners have already been added to this Litigation and other related cases. USEI seeks monetary damages, attorney’s fees, and an injunction against AT&T, other defendants and other interveners. AT&T, other defendants and other interveners have denied the allegations of infringement made by USEI and asserted that USEI’s patents are invalid, unenforceable, and not infringed. The Court granted our motion to intervene. As a result, we filed a declaratory judgment complaint. USEI answered this complaint and asserted counter-claims against us, for which we have responded. The parties have now completed fact discovery and have moved on to expert discovery. USEI attempted to expand the scope of claims to cover all of our semiconductors; however, the court approved our motion to limit the case to only those devices initially claimed in the original USEI filing. Case management hearings for this multi-party suit have resulted in the court entertaining separate sequential trials for the various interveners remaining in the case. Intel Corporation, as one intervener, has requested that it proceed first, which would set a precedent for all subsequent trials. The trial date currently set by the court for the first trial is January 5, 2015.

64

In April 2013, we initiated a lawsuit against Trident and NXP Semiconductors Netherlands B.V. (“NXP”) Adv. Aoc. No. 13-50940 (CSS) in the United States Bankruptcy Court for the District of Delaware. Trident filed for voluntarily petition under Chapter 11 bankruptcy on January 4, 2012. In May 2012, we entered into an Asset Purchase Agreement (“APA”) with Trident to acquire certain assets of its digital television and PC television businesses, as further discussed in Note 10. In connection with the APA, we entered into a Transition Services Agreement (“TSA”) under which Trident agreed to provide certain transition services to us following the closing, including management of billings and collections with their former customers and payment to former vendors, among others. We were seeking recovery of $1.8 million that we paid to Trident to specifically pay to NXP, on our behalf pursuant to the TSA, for purchases of inventory that Trident, on our behalf, made from NXP during the month of June 2012. NXP claimed they had not received payment of $1.8 million from Trident and reduced such amount from our inventory prepayment balance with NXP. Both Trident and NXP filed motions to dismiss our claims and we answered their motions. During the third quarter of fiscal 2014, we could reasonably estimate our potential range of loss on this matter, and we recognized an impairment of approximately $0.4 million on this receivable which is included in “General and administrative” in the accompanying consolidated statements of operations. On February 3, 2014, we entered into a settlement agreement with the parties and pursuant to the settlement agreement, Trident agreed to pay us approximately $1.4 million. The net receivable of $1.4 million is included in “Prepaid expenses and other current assets” in the accompanying consolidated balance sheet at February 1, 2014.

In February 2014, Mentor Graphics Corporation (“Mentor”) filed a complaint against us, Case No. 3-14-cv00742, in the U.S. District Court for the Northern District of California, for unspecified damages alleging copyright infringement, breach of contract, unjust enrichment and a request for audit and accounting relating to that certain Reference Platform License Agreement for Embedded Software, dated March 28, 2008 (the “Mentor Agreement”) by and between Trident Microsystems, Inc. (“Trident”) and Mentor. The Mentor Agreement was assigned to us in connection with our acquisition of assets related to the DTV business of Trident. We have filed our answer to this complaint, denying the substantive allegations. We believe this complaint is without merit and intend to defend ourselves vigorously.

Third-party licensed technology

We license technologies from various third parties and incorporate that technology into our products. Some of these licenses require us to pay royalties and others require us to report sales activities so that royalties may be collected from our customers. From time to time, we are audited by licensors of these technologies for compliance with the terms of these licenses. In the first quarter of fiscal 2013, we settled one such audit for $1.4 million. In the third quarter of fiscal 2013, we settled another audit for $6.3 million. In addition, in the third quarter of fiscal 2013, we settled another audit for $0.3 million payable in four quarterly equal installments commencing in September 2012. Concurrently, we negotiated a license agreement for this technology for a period of three years for an amount of $3.5 million, also payable in four quarterly equal installments commencing in September 2012. The full amount of the license fees was recorded as purchased IP in fiscal 2013 and will be amortized over the license term. On February 28, 2013, we received a letter from another technology licensor notifying us of their intent to audit our compliance with the terms of a license agreement that we use in our set-top box business. During the third quarter of fiscal 2014, we could reasonably estimate our probable exposure to this audit and as a result, we have accrued $0.1 million of penalties which was included in sales and marketing expenses in the accompanying consolidated statements of operations. As of February 1, 2014, the end of our fiscal year to which this report relates, we believe we were in compliance with our license agreements. However, we could be required to make additional payments as a result of pending or future compliance audits. For license agreements where we have royalty obligations, we charge any settlement payments that we make in connection with audits to cost of revenue. For license agreements where we simply have reporting obligations, we treat any settlement payments as penalties and charge the amounts to operating expenses in sales and marketing. As of February 1, 2014, we had no other pending audits related to third-party licensed technology.

17.          Net income (loss) per share

Basic net income (loss) and diluted loss per share for the periods presented are computed by dividing net income (loss) by the weighted average number of common shares outstanding.  Diluted net income per share is computed by including dilutive options.

The following table sets forth the basic and diluted net income (loss) per share computed for fiscal 2014, 2013 and 2012 (in thousands, except per share amounts):

	Fiscal Years Ended
	February 1, 2014			February 2, 2013			January 28, 2012
Net income (loss), as reported	$	(11,049	)	$	(101,768	)	$	(168,045	)
Weighted-average common shares outstanding- basic		34,206			33,205			32,036
Weighted-average common shares outstanding- diluted		34,206			33,205			32,036
Net income (loss) per share- basic	$	(0.32	)	$	(3.06	)	$	(5.25	)
Net income (loss) per share- diluted	$	(0.32	)	$	(3.06	)	$	(5.25	)

65

The following table sets forth the excluded anti-diluted and excluded potentially dilutive securities for fiscal 2014, 2013 and 2012 (in thousands):

	Fiscal Years Ended
	February 1, 2014		February 2, 2013		January 28, 2012
Stock options excluded because exercise price is in excess of average stock price		4,326		5,401		4,940
Stock options excluded because the effect of including would be anti-dilutive		19		137		353
Restricted stock awards and units excluded because potential buyback shares exceed weighted average restricted stock units and awards outstanding		180		255		-
Restricted stock awards and units excluded because the effect of including would be anti-dilutive		69		89		-

18.          Equity incentive plans and employee benefits

Stock incentive plans

We have adopted equity incentive plans that provide for the grant of stock awards to employees, directors and consultants that 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 February 1, 2014, 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.

Our 2009 Incentive Plan provides for the grant of stock options, restricted stock, restricted stock units, and 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 February 1, 2014, 1,978,874 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 Options Outstanding			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
As of January 29, 2011		6,084,125		$	12.26		6.9
Granted (Weighted average fair value of $5.26)		532,800			10.22
Cancelled		(479,119	)		11.87
Exercised		(291,779	)		5.14
As of January 28, 2012		5,846,027			12.47		6.2
Granted (Weighted average fair value of $2.77)		205,000			5.77
Cancelled		(848,930	)		12.35
Exercised		(146,310	)		2.60
As of February 2, 2013		5,055,787			12.50		4.9
Granted (Weighted average fair value of $2.36)		690,423			5.39
Cancelled		(1,631,375	)		12.78
Exercised		(20,214	)		2.64
As of February 1, 2014		4,094,621		$	11.24		4.8	$	67,124
Ending vested and expected to vest		4,062,314		$	11.28		4.8	$	67,124
Ending exercisable		2,989,653		$	12.79		4.1	$	33,456

66

The aggregate intrinsic value, as of February 1, 2014, in the table above represents the total pretax intrinsic value, based on our closing stock price of $4.69 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 plans during fiscal 2014, 2013 and 2012 were less than $0.1 million, $0.5 million and $1.6 million, respectively, determined as of the exercise date.  The total fair value of options which vested during fiscal 2014, 2013 and 2012 was $4.1 million, $7.2 million and $10.5 million, respectively.

The options outstanding and currently exercisable as of February 1, 2014 were in the following exercise price ranges:

Options Outstanding and Exercisable
Range of Exercise Prices			Number Oustanding as of 2/1/14		Weighted Average Remaining Contractual Term		Weighted Average Exercise Price		Number Exercisable as of 2/1/14		Weighted Average Exercise Price
$0.92	-	$4.98		667,796		6.79	$	5.37		9,373	$	1.12
$5.43	-	$7.86		387,434		6.69	$	6.12		207,888	$	6.19
$7.89	-	$10.59		678,722		4.52	$	9.86		590,823	$	9.76
$10.87	-	$10.87		356,500		4.53	$	10.87		356,400	$	10.87
$11.06	-	$11.06		386,447		2.46	$	11.06		386,447	$	11.06
$11.07	-	$11.09		570,884		5.20	$	11.08		501,325	$	11.08
$11.40	-	$12.02		392,070		3.99	$	11.60		326,062	$	11.56
$12.08	-	$15.91		419,793		3.48	$	14.25		377,627	$	14.23
$16.25	-	$41.58		184,975		3.80	$	32.82		183,708	$	32.93
$45.83	-	$45.83		50,000		3.76	$	45.83		50,000	$	45.83
				4,094,621		4.80	$	11.24		2,989,653	$	12.79

As of February 1, 2014, the unrecorded stock-based compensation balance related to stock options outstanding excluding estimated forfeitures was $3.2 million and will be recognized over an estimated weighted average amortization period of 1.7 years.  The amortization period is based on the expected remaining vesting term of the options.

Restricted Stock Awards

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. These RSAs vest over one to five years according to the terms specified in the individual grants.  As of February 1, 2014, the unrecognized stock-based compensation balance related to RSAs outstanding excluding estimated forfeitures was $0.7 million and will be recognized over an estimated weighted average amortization period of 1.8 years.  The following table sets forth the shares of restricted stock awards outstanding as of February 1, 2014:

	Restricted Stock Awards			Weighted Average Grant Date Fair Value per Award		Aggregate Value
As of January 29, 2011		85,137		$	13.39	$	1,139,984
Granted		163,070			6.91
Vested		(17,028	)		13.39
As of January 28, 2012		231,179			8.82		2,038,473
Granted		10,980			6.83
Vested		(78,848	)		8.77
As of February 2, 2013		163,311			8.71		1,422,439
Granted		-			-
Cancelled/forfeited		(13,175	)		9.50
Vested		(61,758	)		8.49
As of February 1, 2014		88,378		$	8.75	$	773,308

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 February 1, 2014, the unrecognized stock-based compensation balance related to RSUs outstanding excluding estimated forfeitures was $2.3 million and will be recognized over an estimated weighted average amortization period of 2.0 years.  

67

The following table sets forth the shares of RSUs outstanding as of February 1, 2014:

	Restricted Stock Units			Weighted Average Grant Date Fair Value per Unit		Aggregate Value
As of January 29, 2011		-		$	-	$	-
Granted		597,500			6.52
Cancelled/forfeited		(50,000	)		6.64
As of January 28, 2012		547,500			6.51		3,566,040
Granted		313,003			6.03
Vested		(118,766	)		6.51
Cancelled/forfeited		(109,475	)		6.45
As of February 2, 2013		632,262			6.28		3,972,964
Granted		213,886			4.99
Vested		(210,720	)		6.11
Cancelled/forfeited		(166,921	)		6.26
As of February 1, 2014		468,507		$	5.78	$	2,707,970

Employee stock purchase plan

In July 2010, our shareholders approved the 2010 Employee Stock Purchase Plan (the “2010 Purchase Plan”).  A total of 2,500,000 shares were reserved for issuance under the 2010 Purchase Plan which replaced the 2001 Purchase Plan as of January 1, 2011.  The 2010 Purchase Plan is implemented by offerings of rights to eligible employees.  Each offering will be in such form and will contain such terms and conditions as our Board or a committee thereof will deem appropriate, subject to compliance with applicable regulations.  The provisions of separate offerings need not be identical.  Under the terms of the offerings that have commenced to date under the 2010 Purchase Plan, eligible employees may authorize payroll deductions of up to 15% of their regular base salaries to purchase common stock at 85% of the fair market value of our common stock at the beginning or end of the six-month offering period, whichever is lower.  The maximum number of shares that can be purchased in any single offering period is limited under the terms of the offering, including a limitation that an eligible employee cannot purchase in any single offering period more than 1,500 shares of common stock, as adjusted in accordance with the terms of the 2010 Purchase Plan.  These terms will automatically apply to future offerings under the 2010 Purchase Plan unless modified by the Board or a committee thereof.

During fiscal 2014, 2013 and 2012, 618,670, 887,723 and 682,451 shares of our common stock were purchased at an average price of $4.16, $4.72 and $5.68 per share, respectively.  As of February 1, 2014, we had granted 2,188,844 of the 2,500,000 shares of common stock reserved for issuance under the 2010 Purchase Plan.  

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 pricing 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.

68

The fair value of each stock option and employee stock purchase plan right was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

	Fiscal Years Ended
Stock options	February 1, 2014			February 2, 2013			January 28, 2012
Expected volatility		46.91	%		51.31	%		52.01	%
Risk-free interest rate		1.44	%		0.92	%		1.60	%
Expected term (in years)		5.18			5.87			5.94
Dividend yield		0	%		0	%		0	%
Weighted average fair value at grant date	$	2.36		$	2.77		$	5.27

	Fiscal Years Ended
Employee stock purchase plan	February 1, 2014			February 2, 2013			January 28, 2012
Expected volatility		38.92	%		37.84	%		46.03	%
Risk-free interest rate		0.10	%		0.13	%		0.08	%
Expected term (in years)		0.50			0.49			0.49
Dividend yield		0	%		0	%		0	%
Weighted average fair value at grant date	$	1.27		$	1.47		$	1.85

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.

The following table sets forth the total stock-based compensation expense that is included in each functional line item in the consolidated statements of operations (in thousands):

	Fiscal Years Ended
	February 1, 2014		February 2, 2013		January 28, 2012
Cost of revenue	$	267	$	487	$	478
Research and development		3,381		5,740		6,277
Sales and marketing		1,275		1,811		2,137
General and administrative		1,891		2,557		3,133
Total stock-based compensation	$	6,814	$	10,595	$	12,025

Non-employee related stock-based compensation

We record stock-based compensation expense for options issued to non-employees based on the fair value of the options as estimated in the period they vest, using the Black-Scholes option pricing model.  There were no stock options granted to non-employees during fiscal 2014, 2013, and 2012. The Black-Scholes option pricing model for fiscal 2012 includes the following weighted average assumptions; expected stock price volatility of 54.0%, weighted average contractual term of 5.0 years, dividend yield of zero percent and risk-free interest rates of 1.13%.  Total non-employee stock-based compensation recorded during fiscal 2014, 2013, and 2012 was zero, zero and $2,000, respectively.

Shares reserved for future issuance

We had the following shares of common stock reserved for future issuance upon exercise or issuance of equity instruments at February 1, 2014:

	Shares Reserved
Stock options outstanding		4,094,621
Authorized for future grants under stock incentive plans		1,978,874
Authorized for future issuance under stock purchase plans		311,156
Restricted stock units outstanding		468,507
Shares reserved for future issuance		6,853,158

69

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 $17,500 in calendar year 2013.  Employees age 50 or over may elect to contribute an additional $5,500.  Through December 1, 2012, we sponsored a matching contribution program whereby we match contributions made by each employee at a rate of $0.25 per $1.00 contributed.  The matching program was suspended effective December 1, 2012. The matching contributions we made to the 401(k) tax deferred savings plan totaled zero, $0.8 million and $0.8 million for fiscal 2014, 2013 and 2012, respectively.

Endowment insurance pension plan

Related to our acquisition of our DTV business in the second quarter of fiscal 2013, we added operations in Shanghai, China.  It is required by the “Procedures of Shanghai Municipality on Endowment Insurance for Town Employees” to provide pension insurance for Shanghai employees.  The plan is managed by the local authority and it is a mandatory plan.  Under the current plan, the employee will contribute 8.0% of the annual base to the plan and the employer will match 21% of the annual base.  For calendar year 2013, the annual base is capped at RMB 14,076 per employee.  During fiscal 2014 and 2013, we made matching contributions of $2.1 million and $1.1 million, respectively.

Retirement pension plans

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 discretionary matching contribution program whereby we contribute 4.5% of our employee’s annual salary.  During fiscal 2014, 2013 and 2012, we made matching contributions of $0.2 million, $0.2 million and $0.2 million, respectively.

We contribute to a government managed labor pension fund for the benefit of qualified employees who are based in Taiwan.  Under this plan, Taiwan based employees may elect to reduce their current annual taxable compensation up to 6% of their annual salary and we are required to match 6% of their annual salary. During fiscal 2014, 2013 and 2012, we made matching contribution of $0.1 million, $0.1 million and $0.1 million, respectively.

Related to our acquisition of our DTV business in the second quarter of fiscal 2013, we added operations in Waalre, The Netherlands. We maintain a retirement pension plan for the benefit of qualified employees who are employed by Sigma Designs Netherlands. Under the current plan, employees contribute 1.7% of their annual pensionable salary to the plan and we match 22% of their annual pensionable salary.  During fiscal 2014 and 2013, we made matching contributions of $0.4 million and $0.2 million to this plan, respectively.

Related to our acquisition of our DTV business in the second quarter of fiscal 2013, we added operations in Freiburg, Germany. We maintain a retirement pension plan for the benefit of qualified employees who are employed by Sigma Designs Germany. Under the current plan, we have a discretionary matching contribution program whereby we contribute 4% of our employees' annual salary.  During fiscal 2014 and 2013, we made less than $0.1 million and zero matching contributions to this plan, respectively.

Severance plan

We maintain a severance plan for several 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 February 1, 2014, we have an accrued severance liability of $1.2 million partially offset by $1.2 million of severance employee funds.

Employee termination benefits

Termination benefits are payable when an employee is involuntarily terminated, or whenever an employee accepts voluntary termination in exchange for termination benefits. For the accounting treatment and timing recognition of involuntarily termination benefits, we distinguish between one-time termination benefit arrangements and ongoing termination benefit arrangements. A one-time termination benefit arrangement is established by a termination plan and applies to a specified termination event. One-time involuntary termination benefits are recognized as a liability when the termination plan meets certain criteria and has been communicated to employees. If employees are required to render future service in order to receive these one-time termination benefits, the liability is recognized ratably over the future service period. Termination benefits other than one-time termination benefits are termination benefits for which the communication criterion is not met but that are committed to by management, or termination obligations that are not specifically determined in a new and single plan. These termination benefits include all legal, contractual and past practice termination obligations to be paid to employees in case of involuntary termination. These termination benefits are accrued for when commitment creates a present obligation to our employees for the benefits expected to be paid, when it is probable that employees will be entitled to the benefits and the amount can be reasonably estimated.  As discussed in Note 15, during fiscal 2014 and 2013, we adopted restructuring plans resulting in employee termination costs of $1.7 million and $2.2 million, which are recorded in restructuring costs in the accompanying consolidated statements of operations for fiscal 2014 and 2013, respectively.

70

19.          Income taxes

Loss before income taxes consists of the following (in thousands):

	Fiscal Years Ended
	February 1, 2014			February 2, 2013			January 28, 2012
United States	$	6,694		$	(5,274	)	$	(12,366	)
International		(14,793	)		(75,747	)		(160,645	)
Total	$	(8,099	)	$	(81,021	)	$	(173,011	)

The federal, state and foreign income tax provision is summarized as follows (in thousands):

	Fiscal Years Ended
	February 1, 2014			February 2, 2013			January 28, 2012
Current
Federal	$	1,116		$	(162	)	$	2,003
State		18			15			(27	)
Foreign		(2,324	)		8,496			3,397
Total current		(1,190	)		8,349			5,373
Deferred:
Federal		2,762			15,932			(3,434	)
Foreign		1,378			(3,534	)		(6,905	)
Total deferred		4,140			12,398			(10,339	)
Total provision (benefit)	$	2,950		$	20,747		$	(4,966	)

The tax effects of significant items comprising our deferred tax assets and liabilities are as follows (in thousands):

	February 1, 2014			February 2, 2013
Deferred tax assets:
Net operating loss	$	4,999		$	8,426
Investment impairment		1,704			1,519
Allowance, reserve and other		6,700			8,126
Depreciation		1,222			2,598
Tax credits		6,642			10,936
Stock-based compensation		9,661			10,840
Total gross deferred tax assets		30,928			42,445
Valuation allowance		(26,479	)		(33,305	)
Total net deferred tax assets		4,449			9,140
Deferred tax liabilities:
Acquired intangibles and other		(842	)		(1,395	)
Total net deferred tax assets	$	3,607		$	7,745

We must regularly assess the likelihood that future taxable income levels will be sufficient to ultimately realize the tax benefits of our deferred tax assets.  During the third quarter of fiscal 2013, we concluded it was necessary to establish a valuation allowance for certain deferred tax assets (DTA) related to Federal taxes in the United States. Due to the history of losses in the United States, it was determined that it is more likely than not that certain Federal DTAs would not be recognized. As of February 1, 2014, we continue to maintain a full valuation allowance against our US Federal and California deferred tax assets and a partial valuation allowance against foreign net operating losses.  However, as a result of our continued efforts to reduce expenses, improve efficiency, competitiveness and profitability, our US operations were profitable in fiscal 2014. If we continue to sustain profitability in the future, it is possible that our net deferred tax assets will become realizable and a valuation allowance may no longer be needed. The valuation allowance decreased by $6.8 million in fiscal 2014.

71

As of February 1, 2014, net operating loss carry forwards amounted to approximately $22.1 million and $34.4 million for federal and California tax purposes, respectively, which will begin to expire in fiscal 2015 through 2034. Of the total net operating loss carryover, the tax effect of $13.6 million federal and $3.4 million state losses will be recorded to additional paid-in capital when utilized in the future. We also had federal and state research credit carryovers of $16.2 million and $16.3 million, respectively.  Federal research credits will start expiring from fiscal 2019. The state research credit has no expiration.  Of the total research credit carryover, the tax effect of $12.5 million federal and $2.3 million state losses will be recorded to additional paid-in capital when utilized in the future. We also have $15.9 million of foreign operating loss carry forwards through the acquisition of a foreign operation. 

Net operating losses and tax credit carry forwards as of February 1, 2014 are as follows (in thousands):

	Amount		Range of Expiration Years
Net operating losses, federal	$	22,080	2023	-	2033
Net operating losses, state		34,379	2015	-	2034
Net operating losses, foreign		15,861		Indefinite
Tax credits, federal		16,235	2019	-	2034
Tax credits, state		16,347		Indefinite

Current federal and California tax laws include substantial restrictions on the utilization of net operating losses and tax credits in the event of an “ownership change” of a corporation.  Accordingly, our ability to utilize net operating loss and tax credit carry forwards may be limited as a result of such ownership changes.  Such a limitation could result in the expiration of carry forwards before they are utilized.

The effective tax rate of our provision for (benefit from) income taxes differs from the federal statutory rate as follows (in thousands):

	Fiscal Years Ended
	February 1, 2014			February 2, 2013			January 28, 2012
Computed at federal statutory rate of 35%	$	(2,835	)	$	(28,357	)	$	(60,554	)
State taxes provision (benefit), net of federal benefit		12			10			(33	)
Uncertain tax positions		253			219			441
Difference between statutory rate and foreign effective tax rate		5,316			31,469			49,839
Stock-based compensation expense		2,769			2,391			746
Change in federal valuation allowance		(1,933	)		16,704			-
Tax credits		(561	)		(1,516	)		(1,326	)
Goodwill and intangible assets impairment		-			-			5,646
Other		(71	)		(128	)		275
Total	$	2,950		$	20,747		$	(4,966	)

Included in the balance of unrecognized tax benefits as of February 1, 2014 are $6.8 million of tax benefits that, if recognized, would reduce our effective tax rate.  The remaining amount would be offset by the reversal of related deferred tax assets on which a valuation allowance is placed.  A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	Fiscal Years Ended
	February 1, 2014			February 2, 2013			January 28, 2012
Beginning balance	$	26,743		$	22,389		$	20,337
Additions based on tax positions related to the current year		2,772			4,616			1,965
Additions for tax positions of prior years		575			283			404
Reductions for tax positions of prior year		(7,139	)		(252	)		(268	)
Settlements		(5,175	)		-			-
Lapse of status of limitation		(337	)		(293	)		(49	)
Ending balance	$	17,439		$	26,743		$	22,389

We have adopted the accounting policy that interest and penalties recognized are classified as part of our income taxes.  In fiscal 2014, we reduced our accrual of such interest and penalties expense by $1.0 million.  In fiscal 2013, we increased our accrual of such interest and penalties expense by $0.3 million.  As of February 1, 2014 and February 2, 2013, the balance of such accrued interest and penalties was $0.3 million and $1.3 million, respectively.

72

Our operations are subject to income and transaction taxes in the United States and in multiple foreign jurisdictions.  Significant estimates and judgments are required in determining our worldwide provision for income taxes.  Some of these estimates are based on interpretations of existing tax laws or regulations.  The ultimate amount of tax liability may be uncertain as a result.

During fiscal 2014, we reduced our unrecognized tax benefits by $9.3 million, primarily related to settlements with the Israeli and Singaporean authorities. Our Israel subsidiary and the Israeli Tax Authorities settled all outstanding items related to fiscal years 2009 through 2012. As a result of the settlement, the Company recognized a net tax benefit to the provision for income tax of $4.3 million. 

In February 2013, our Denmark subsidiary reached an audit agreement with the Danish Taxing Authorities to reduce our net operating losses in Denmark by DKK 75 million. The disallowed net operating losses were subject to a valuation allowance in the past and the audit adjustment did not result in a financial charge. With regards to our Singapore subsidiary, we have reached an agreement with the Singapore authorities that our incentives would not extend beyond February 29, 2012, but that we will be able to retain the benefits previously realized. As a result of the agreement, the Company recognized a net tax benefit to the provision for income tax of $1.1 million.

Our tax filings for the fiscal years from 1991 to 2013 remain open in various taxing jurisdictions. We do not anticipate that our unrecognized tax benefit will change significantly in the coming fiscal year.

U.S. income taxes and foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries were not provided for on a cumulative total of $28.7 million of undistributed earnings of certain foreign subsidiaries as of the end of fiscal 2014. The Company intends to reinvest these earnings indefinitely in its foreign subsidiaries. If these earnings were distributed to the United States in the form of dividends or otherwise, the Company would be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

We benefit from tax incentives granted by local tax authorities in certain foreign jurisdictions.  The Economic Development Board of Singapore granted development and expansion incentives to our wholly-owned subsidiary in Singapore in 2008 for a period of four years, which ended February 29, 2012.  The impact of this tax holiday was to increase net income by approximately $2.0 million or $0.06 per diluted share in fiscal 2012, $6.7 million, or $0.21 per diluted share, in fiscal 2011, $7.0 million, or $0.25 per diluted share, in fiscal 2010, and $6.5 million, or $0.23 per diluted share, in fiscal 2009.

Our acquired Israeli subsidiary, Sigma Designs Israel S.D.I. (formerly known as CopperGate Communications Ltd.), was granted Approved Enterprise and Beneficiary Enterprise status under the Law for the Encouragement of Capital Investments in 2004 and 2009. Sigma Designs Israel’s income is tax-exempt for a period of two years commencing with the year it first earns taxable income, and subject to corporate taxes at the reduced rate for an additional period of eight years.  The impact of this tax holiday was to increase net income by approximately $3.1 million, or $0.09 per diluted share, in fiscal 2014, $3.4 million, or $0.10 per diluted share, in fiscal 2013, and $2.0 million, or $0.06 per diluted share, in fiscal 2012. 

20.          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, 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, expense or net income.

We sell our products into four primary target markets, which are the DTV market, home networking market, set-top box market, and home control market. We also have license revenue, included in the license and other market, which we receive from the license of our technology to third parties. Starting with the first quarter of fiscal 2014, we have defined the DTV market to include all products that are sold into digital televisions as well as other adjacent markets using chipset products that are designed for video post-processing and have eliminated the prosumer and industrial audio/video market as a separate revenue segment as the majority of demand accruing from these sales will be represented in the DTV market segment. Also starting with the first quarter of fiscal 2014, we have defined the set-top box market to include all set-top box products delivering IP streaming video, including hybrid versions of these products, and we have eliminated the connected media player market as a separate revenue market as the majority of demand accruing from these sales will be represented in the set-top box market segment.

73

The following table sets forth net revenue attributable to each target market (in thousands):

	Fiscal Years Ended
	February 1, 2014		February 2, 2013		January 28, 2012
DTV	$	49,600	$	76,614	$	12,351
Home networking		72,927		79,492		68,266
Set-top box		38,483		42,205		90,780
Home control		20,704		12,342		11,092
License and other		17,479		5,960		128
Net revenue	$	199,193	$	216,613	$	182,617

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

	Fiscal Years Ended
	February 1, 2014		February 2, 2013		January 28, 2012
Asia	$	144,483	$	150,658	$	166,583
North America		28,795		17,006		8,982
Europe		22,262		41,283		5,718
Other Regions		3,653		7,666		1,334
Net revenue	$	199,193	$	216,613	$	182,617

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

	Years Ended
	February 1, 2014		February 2, 2013		January 28, 2012
China, including Hong Kong	$	95,009	$	112,915	$	141,122
Hungary		12,531		31,044		20
Taiwan		12,479		14,192		13,982
United States		27,875		14,771		6,818
Thailand		24,490		5,281		3,323
Rest of the world		26,809		38,410		17,352
Net revenue	$	199,193	$	216,613	$	182,617

Our long-lived assets consist primarily of our software, equipment, leasehold improvements, and intangible assets.

The following table sets forth our long-lived assets by geographic region based on the location of the asset (in thousands):

	Fiscal Years Ended
	February 1, 2014		February 2, 2013
United States	$	20,838	$	20,045
All other countries		36,031		33,634
Total long-lived assets	$	56,869	$	53,679

74

The following table sets forth major direct customers accounting for 10% or more of our net revenue:

	Fiscal Years Ended
	February 1, 2014		February 2, 2013			January 28, 2012
TP Vision		*		14	%		*
Flextronics		*		12	%		*
Motorola		*		*			17	%
Gemtek		*		*			22	%

*Accounted for less than 10% of our net revenue.

Four customers accounted for 15%, 12%, 11% and 10% of total accounts receivable at February 1, 2014. Two customers accounted for 18% and 16% of total accounts receivable at February 2, 2013.

21.          Quarterly financial information (unaudited)

The following table presents unaudited quarterly financial information for each of our most recent eight fiscal quarters (in thousands, except per share amounts):

	Fiscal Quarters Ended
	February 1, 2014			November 2, 2013			August 3, 2013			May 4, 2013			February 2, 2013			October 27, 2012			July 28, 2012			April 28, 2012
Net revenue	$	38,497		$	54,394		$	53,762		$	52,540		$	44,199		$	63,905		$	68,251		$	40,258
Gross profit		22,046			31,083			28,066			26,946			13,868			25,482			30,580			21,095
Income (loss) from operations		(5,079	)		1,454			(1,847	)		(4,100	)		(35,262	)		(20,861	)		(13,262	)		(13,961	)
Net income (loss)		1,253			(2,978	)		(4,791	)		(4,533	)		(35,197	)		(39,451	)		(13,418	)		(13,702	)
Basic and diluted net income (loss) per share	$	0.04		$	(0.09	)	$	(0.14	)	$	(0.13	)	$	(1.05	)	$	(1.18	)	$	(0.41	)	$	(0.42	)

22.          Subsequent events

In March 2014, as part of our continuing efforts to reduce expenses, we reduced our workforce by 26 employees in Israel. As a result, we incurred restructuring charges of approximately $0.9 million.

75

ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We are committed to maintaining disclosure controls and procedures designed to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures and implementing controls and procedures.

As of February 1, 2014, the end of the period covered by this Annual Report on Form 10-K, we have, with the participation of our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and effectiveness of our disclosure controls and procedures, as such terms are defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities and Exchange Act of 1934 as amended (the “Exchange Act”).  Based on this evaluation, we have concluded that our disclosure controls and procedures were effective as of February 1, 2014.

Management’s Report on Internal Control over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) under the Exchange Act.  Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States.  All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation and may not prevent or detect misstatements.  Projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of February 1, 2014.  In making this assessment, we used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Based on this assessment, we concluded that our internal control over financial reporting was effective as of February 1, 2014.

Armanino LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this Annual Report on Form 10-K, has also assessed the effectiveness of internal control over financial reporting as of February 1, 2014.  Their attestation report is included herein under Part II, Item 8.

Changes in Internal Control over Financial Reporting

During the fourth quarter ended February 1, 2014, there were no changes in our internal control over financial reporting (as defined in Rule 13(a) – 15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  

ITEM 9B.    OTHER MATTERS

None.

PART III

ITEM 10.     DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE

The information required by this item is incorporated by reference from the information in the sections captioned “Election of Directors-Nominees,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Election of Directors-Code of Ethics,” and “Election of Directors-Committees of the Board,” which will appear in the 2014 Proxy Statement we will deliver to our shareholders in connection with our Annual Meeting of Shareholders or in an amendment to this Form 10-K to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this report on Form 10-K.  Certain information required by this item concerning executive officers is set forth in Part I of this Report under the caption “Executive Officers and Key Employees” and is incorporated herein by reference.

76

ITEM 11.     EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from the information in the sections captioned “Executive Compensation,” and “Election of Directors-Fiscal 2014 Director Compensation,” which will appear in the 2014 Proxy Statement we will deliver to our shareholders in connection with our Annual Meeting of Shareholders or in an amendment to this Form 10-K to be filed with the Securities and Exchange within 120 days after the close of the fiscal year covered by this report on Form 10-K.

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

The information required by this item is incorporated by reference from the sections captioned “Security Ownership of Certain Beneficial Owners and Management,” and “Equity Compensation Plan Information,” which will appear in the 2014 Proxy Statement we will deliver to our shareholders in connection with our Annual Meeting of Shareholders or in an amendment to this Form 10-K to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this report on Form 10-K.

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated by reference from the sections captioned “Election of Directors-Certain Relationships and Related Transactions,” and “Election of Directors-Corporate Governance and Other Matters,” which will appear in the 2014 Proxy Statement we will deliver to our shareholders in connection with our Annual Meeting of Shareholders or in an amendment to this Form 10-K to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this report on Form 10-K.

ITEM 14.     PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item is incorporated by reference from the sections captioned “Report of the Audit Committee” and “Ratification of Selection of Independent Auditors,” which will appear in the 2014 Proxy Statement we will deliver to our shareholders in connection with our Annual Meeting of Shareholders or in an amendment to this Form 10-K to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this report on Form 10-K.

PART IV

ITEM 15.     EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as part of this Annual Report on Form 10-K:

1. Consolidated Financial Statements

Financial Statements	Page
Report of Independent Registered Public Accounting Firm	43
Consolidated Balance Sheets	44
Consolidated Statements of Operations	45
Consolidated Statements of Comprehensive Loss	45
Consolidated Statements of Shareholders’ Equity	46
Consolidated Statements of Cash Flows	47
Notes to Consolidated Financial Statements	48

2. Consolidated Financial Statements Schedules

Schedule II—Valuation and Qualifying Accounts and Reserves 79

All other schedules have been omitted as they are not required, not applicable or the required information is otherwise included.

(b) Exhibits:

The exhibits listed on the accompanying index to exhibits immediately following the financial statement schedules are incorporated by reference into this Annual Report on Form 10-K.

77

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Milpitas, State of California, on the 17th day of April, 2014.

SIGMA DESIGNS, INC.
By:	/s/ Thinh Q. Tran
	Thinh Q. Tran
	President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thinh Q. Tran and Elias N. Nader, and each of them, jointly and severally, his true and lawful attorneys-in-fact, each with full power of substitution and resubstitution, for him in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do if personally present, hereby ratifying and confirming all that each said attorney-in-fact and agent, or his or her substitute or substitutes or any of them, may lawfully do or cause to be done by virtue hereof.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS ANNUAL REPORT ON FORM 10-K HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:

Signature	Title	Date
/s/  Thinh Q. Tran	President, and Chief Executive Officer	April 17, 2014
Thinh Q. Tran	(Principal Executive Officer)
/s/ Elias N. Nader	Chief Financial Officer and Secretary	April 17, 2014
Elias N. Nader	(Principal Financial and Accounting Officer)
/s/ Mark J. Bonney	Director	April 17, 2014
Mark J. Bonney
/s/ J. Michael Dodson	Lead Independent Director	April 17, 2014
J. Michael Dodson
/s/ Martin Manniche	Director	April 17, 2014
Martin Manniche
/s/ Pete Thompson	Director	April 17, 2014
Pete Thompson

78

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

Classification	Balance Beginning of Period		Additions: Provision for (Recovery of)			Deductions: (Write-offs) Recoveries of			Balance End of Period
Allowance for returns, doubtful accounts and discounts:	(in thousands)
Fiscal Years
2012	$	602	$	54		$	(119	)	$	537
2013		537		(158	)		(84	)		295
2014	$	295	$	98		$	(93	)	$	300

79

INDEX TO EXHIBITS

Exhibit Number Description Filed Herewith or Incorporated Herein by Reference to

3.1	Second Restated Articles of Incorporation.	Incorporated by reference to exhibit filed with the Registration Statement on Form S-1 (No. 33-17789) filed October 8, 1987, Amendment No. 1 thereto filed June 9, 1988 and Amendment No. 2 thereto filed June 14, 1988, which Registration Statement became effective June 14, 1988.
3.2	Certificate of Amendment to the Second Restated Articles of Incorporation dated June 22, 2001.	Incorporated by reference to exhibit 3.1 filed with the Registration Statement on Form S-8 (No. 333-64234) filed on June 29, 2001.
3.3	Amended and Restated Bylaws of Sigma.	Incorporated by reference to exhibit 3.1 filed with the Current Report on Form 8-K on August 3, 2012.
3.4	Certificate of Determination of Preferences of Series A Preferred Stock dated June 13, 1997.	Incorporated by reference to exhibit 3.3 filed with the Registrant’s Form S-1 filed on September 14, 2007.
3.5	Certificate of Determination of Preferences of Series B Preferred Stock dated January 30, 1998.	Incorporated by reference to exhibit 3.4 filed with the Registrant’s Form S-1 filed on September 14, 2007.
3.6	Certificate of Determination of Preferences of Series C Preferred Stock dated January 20, 1999.	Incorporated by reference to exhibit 3.5 filed with the Registrant’s Form S-1 filed on September 14, 2007.
3.7	Certificate of Amendment to the Second Restated Articles of Incorporation dated January 28, 2008.	Incorporated by reference to exhibit 3.7 filed with the Annual Report on Form 10-K filed on April 2, 2008.
10.1*	Amended and Restated 1994 Stock Plan and form of Stock Option Agreement.	Incorporated by reference to exhibit 4.1 filed with the Registration Statement on Form S-8 (No. 333-86875) filed on September 10, 1999.
10.2*	1994 Director Stock Option Plan and form of Director Option Agreement.	Incorporated by reference to exhibit filed with the Registration Statement on Form S-3 (No. 33-74308) filed on January 28, 1994, Amendment No. 1 thereto filed February 24, 1994, Amendment No. 2 thereto filed March 3, 1994, Amendment No. 3 thereto filed March 4, 1994 and Amendment No. 4 thereto filed March 8, 1994.
10.3*	2001 Employee Stock Option Plan.	Incorporated by reference to exhibit 4.1 filed with the Registration Statement on Form S-8 (333-64234) filed on June 29, 2001.

10.4* 2001 Employee Stock Purchase Plan and Form of Subscription Agreement. Incorporated by reference to exhibit 4.2 filed with the Registration Statement on Form S-8 (333-64234) filed on June 29, 2001.

10.5	Industrial Lease by and between AMB Property, L.P. and Sigma dated February 22, 2007.	Incorporated by reference to exhibit 10.15 filed with the Annual Report on Form 10-K for the fiscal year ended February 3, 2007.
10.6*	2003 Director Stock Option Plan.	Incorporated by reference to exhibit 99.1 filed with the Registration Statement on Form S-8 filed on July 11, 2003.
10.7*	Sigma Designs Employee Stock Purchase Plan.	Incorporated by reference to exhibit 10.1 filed with the Current Report on Form 8-K filed on July 13, 2011.
10.8*	Amended and Restated 2009 Stock Incentive Plan and forms of agreements thereto.	Incorporated by reference to exhibit 10.1 filed with the Current Report on Form 8-K filed on July 14, 2011.

80

10.9*	CopperGate Communications Ltd. 2003 Share Option Plan.	Incorporated by reference to exhibit 99.1 filed with the Registration Statement on Form S-8 filed on November 16, 2009.
10.10	Settlement Agreement dated August 2, 2012 by and among Sigma Designs, Inc. and the entities and natural persons listed on Exhibit A thereto and their respective affiliates.	Incorporated by reference to exhibit 10.1 filed with the Current Report on Form 8-K filed on August 3, 2012.
10.11	Form of Director and Officer Indemnification Agreement.	Incorporated by reference to exhibit 10.2 filed with the Current Report on Form 8-K filed on August 3, 2012.
21.1	Subsidiaries of the Registrant.	Filed herewith.
23.1	Consent of Independent Registered Public Accounting Firm (Armanino LLP).	Filed herewith.
24.1	Power of Attorney (contained in the signature page to this Annual Report on Form 10-K).	Filed herewith.
31.1	Certification of the President and Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a).	Filed herewith.
31.2	Certification of the Chief Financial Officer and Secretary pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a).	Filed herewith.
32.1**	Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith.
32.2**	Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith.
101.INS***	XBRL Instance.
101.SCH***	XBRL Taxonomy Extension Schema.
101.CAL***	XBRLTaxonomy Extension Calculation.
101.DEF***	XBRL Taxonomy Extension Definition.
101.LAB***	XBRL Taxonomy Extension Labels.
101.PRE***	XBRL Taxonomy Extension Presentation.

*	Indicates management contract or compensatory plan or arrangement.
**	In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Exchange Act.
***	XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

81