Note 15. Commitments and Contingencies

12 Months Ended

Feb. 02, 2013

Commitments and Contingencies Disclosure [Text Block]

15.          Commitments and contingencies

Commitments

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 Canada, China, Denmark, France, Germany, The Netherlands, Hong Kong, Israel, Japan, California, Singapore, Taiwan and Vietnam, and vehicles in Israel under non-cancelable leases.  Future minimum annual payments under operating leases are as follows (in thousands, except for years):

Fiscal Years	Operating Leases
2014	$	5,495
2015		4,310
2016		2,862
2017		1,647
2018		150
Total minimum lease payments	$	14,464

Rent expense, recorded on a straight-line basis, was $4.7 million, $2.6 million and $2.6 million for fiscal 2013, 2012 and 2011, 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 2, 2013, the total amount of outstanding non-cancelable purchase orders was approximately $16.7 million.

Indemnifications

In certain limited circumstances, we have agreed and may agree in the future to indemnify certain customers against patent infringement claims from third parties related to our intellectual property.  In these limited circumstances, the terms and conditions of sale generally limit the scope of the available remedies to a variety of industry-standard methods including, but not limited to, a right to control the defense or settlement of any claim, procure the right for continued usage, and a right to replace or modify the infringing products to make them non-infringing.  To date, we have not incurred or accrued any significant costs related to any claims under such indemnification provisions.

Our corporate 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 2, 2013.

Royalties

We pay royalties for the right to sell certain products under various license agreements.  During fiscal 2013, 2012 and 2011, we recorded royalty expense of $2.7 million, $2.0 million and $3.2 million, respectively, which was recorded to cost of revenue.

Our wholly owned subsidiary, Sigma Designs Israel S.D.I. 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 2, 2013, we had obtained grants from the OCS aggregating to $4.8 million for certain of our research and development projects in Israel.  We completed the most recent of these projects in 2007.  We are obligated to pay royalties to the OCS, amounting 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 2, 2013, our remaining obligation under these programs was $0.7 million.

Contingencies

Litigation

On August 6, 2011, Powerline Innovations, LLC, or Powerline, filed suit against us, certain of our subsidiaries and many other named defendants, including Qualcomm Incorporated, Qualcomm Atheros, Inc., Broadcom Corporation and ST Microelectronics N.V. in the United States District Court for the Eastern District of Texas asserting infringement of U.S. Patent No. 5,471,190.  The Powerline complaint sought unspecified monetary damages and injunctive relief and has been settled for an immaterial amount.  

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.

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 and the Company paid an amount of $6.0 million in the fourth quarter of fiscal 2013. The remaining $0.3 million will be paid in fiscal 2014 as per the settlement agreement.  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.  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 December 4, 2012, 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 DTV business.  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 Media player business.  As of February 2, 2013, 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.

Early termination lease agreement for office-space

In connection with our restructuring measures adopted during the third and fourth quarters of fiscal 2013, as further described in Note 14, and due to the lack of solvency and liquidity of our wholly owned subsidiary in Canada (“Sigma Canada”), we have decided to close down the operations of Sigma Canada.  On February 23, 2013, our Board of Directors approved the filing for bankruptcy of Sigma Canada, which we intend to file by the end of April 2013.  Sigma Canada has appointed a Trustee in Canada to provide legal advice and assistance throughout the bankruptcy process.  Based on our current assessment of the financial condition and obligations of Sigma Canada, outstanding obligations beyond April 2013, upon filing for bankruptcy, are mainly related to payment obligations under a non-cancellable operating lease agreement for office space entered with a Canadian Landlord (“Landlord”).  In accordance with the provisions of the lease agreement and current communication with the Landlord’s agent, if Sigma Canada exercises an early termination Sigma Canada would be liable for an early termination penalty of $0.3 million and monthly lease payments of approximately $45,000 from May 2013 through May 2015, totaling $1.1 million.  Due to the insolvency of Sigma Canada, and that we do not have any plans to reactivate our operations in Canada in the near term, the Trustee has advised us that Sigma Canada will not be obligated to pay any rental obligations after the filing for bankruptcy. Since it is not probable that Sigma Canada will be liable for the payment of any contractual obligations upon filing for bankruptcy we did not record any restructuring costs associated with the early termination of this agreement in fiscal 2013.