Note 14. Commitments and Contingencies

9 Months Ended

Nov. 02, 2013

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies Disclosure [Text Block]

14.          Commitments and contingencies

Commitments

Operating leases

Our primary facility is located in Milpitas, California. We also lease facilities in China, Denmark, France, Germany, The Netherlands, Hong Kong, Singapore, Taiwan, Vietnam, South Korea and Israel. We also lease vehicles under non-cancelable leases.

As further described in Note 11, in connection with certain restructuring measures adopted in fiscal 2013, we early terminated our non-cancelable lease agreement in Canada. In the second quarter of fiscal 2014, we could reasonably estimate the outcome and as a result, we reserved $0.8 million of cost accrual for that matter. 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 approximately $0.8 million to the landlord. In the third quarter of fiscal 2014, pursuant to our restructuring plan, we early terminated a facility lease for our location in southern California. See Note 11 for further information regarding the restructuring plan.

Future minimum annual payments under non-cancelable operating leases as of November 2, 2013 are as follows (in thousands):

Fiscal Year	Amount
2014 (remaining three months)	$	1,438
2015		4,356
2016		2,898
2017		1,641
2018		144
Total minimum lease payments	$	10,477

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 November 2, 2013, the total amount of outstanding non-cancelable purchase orders was approximately $16.6 million.

Design Tools

During the second quarter of fiscal 2014, we entered into an agreement with a vendor to purchase $12.9 million of design tools. In June 2013, approximately $1.3 million of related licenses were delivered to us. The remaining $11.6 million of licenses will be delivered in December 2013. Payments on the licenses are being made on a quarterly basis from June 2013 through March 2016. As of November 2, 2013 remaining payments for the licenses totaled $11.9 million.

Indemnifications

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

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 November 2, 2013.

Royalties

We pay royalties for the right to sell certain products under various license agreements.  During the three and nine months ended November 2, 2013, we recorded royalty expense of $0.5 million and $1.6 million, respectively, and $0.3 million and $1.5 million for the three and nine months ended October 27, 2012, 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 November 2, 2013, we had obtained grants from the OCS aggregating to $5.1 million for certain of our research and development projects in Israel. We completed the most recent of these projects in fiscal 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 November 2, 2013, our remaining obligation under these programs was $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. We have responded to those counter-claims. The parties are now conducting discovery in the matter. The trial date for the Litigation has been set for January 5, 2015.

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 8. 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 are 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 have filed motions to dismiss our claims and we have answered their motions. The Court has not yet ruled on their motions to dismiss. During the third quarter of fiscal 2014, we could reasonably estimate our potential range of loss on this matter. Accordingly, we have recognized an impairment of approximately $0.4 million on this receivable which is recorded in the “General and administrative” line of the condensed consolidated statements of operations. The net receivable of $1.4 million is presented in “Prepaid expenses and other current assets” in the accompanying condensed consolidated balance sheet at November 2, 2013.

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 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 set-top box business. On July 16, 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 DTV business. During the third quarter of fiscal 2014, we could reasonably estimate our exposure to these audits and as a result, we have accrued $0.1 million of penalties which was included in the sales and marketing expenses in the condensed consolidated statements of operations. As of November 2, 2013, the end of our third fiscal quarter 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

 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 11, and due to the lack of solvency and liquidity of our wholly-owned subsidiary in Canada (“Sigma Canada”), we 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 filed on May 30, 2013. Sigma Canada has appointed a Trustee in Canada to provide legal advice and assistance throughout the bankruptcy process. Based on our assessment of the financial condition and obligations of Sigma Canada, outstanding obligations beyond the filing date for bankruptcy were mainly related to the minimum monthly payment obligations under a non-cancellable operating lease agreement for office space. In accordance with the provisions of the lease agreement and communication with the landlord’s agent, if Sigma Canada exercised its early termination provision, 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 for a total exposure of up to $1.1 million. Were Sigma to elect to sublease the premises instead of exercising the option to terminate the lease, potential exposure could be reduced if an agreement were entered into in a reasonable timeframe and on reasonable terms.  We estimated, based on market data available to us, that the potential exposure could be approximately of $0.8 million adjusted for recovery from the bankruptcy estate. 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.