PIXELWORKS, INC - Annual Report: 2005 (Form 10-K)
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2005
or
| o | 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: 000-30269
PIXELWORKS, INC.
(Exact name of registrant as specified in its charter)
| Oregon (State or other jurisdiction of incorporation or organization) |
91-1761992 (I.R.S. Employer Identification Number) |
|||
| 8100 SW Nyberg Road, Tualatin, OR (Address of principal executive offices) |
97062 (Zip code) |
(503) 454-1750 (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
None
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Common Stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or Section 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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the
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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
|
Accelerated filer þ | Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
Yes o No þ
Aggregate market value of voting Common Stock held by non-affiliates of the Registrant at June 30,
2005: $386,843,732. For purposes of this calculation, executive officers and directors are
considered affiliates.
Number of shares of Common Stock outstanding at February 28, 2006: 47,494,809.
Documents Incorporated by Reference
Portions of the registrant’s definitive proxy statement relating to its 2006 Annual Meeting of
Shareholders, to be filed subsequently — Part III.
PIXELWORKS, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2005
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2005
TABLE OF CONTENTS
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PART I
Item 1. Business.
Overview
We are a leading designer, developer and marketer of semiconductors and software for the advanced
display industry, including advanced televisions, multimedia projectors, digital streaming media
devices and liquid crystal display panels. Our system-on-chip semiconductors provide the
‘intelligence’ for these new types of displays and devices by processing and optimizing video and
computer graphic signals to produce high-quality images. Many of the world’s leading manufacturers
of consumer electronics and computer display products utilize our technology to enhance image
quality and ease of use of their products. Our goal is to provide all of the electronics necessary
to process the signal along its entire path through the system in order to provide a turnkey
solution for our customers.
The display industry is undergoing a transformation from displays using cathode ray tubes, or CRTs,
which have been the predominant display technology for more than 60 years and operate using analog,
or waveform, signals. A new generation of technologies are now available that utilize display
screens comprised of a grid of thousands of tiny picture elements, or pixels, and operate
digitally. Examples of these new types of displays include liquid crystal displays, plasma
displays, micro-mirror devices and other advanced display technologies.
During the transition to digital display technology, the way signal processing integrated circuits,
or ICs, are developed is shifting away from development by vertically integrated manufacturers
toward development by third-party companies like Pixelworks. We provide our customers, including
manufacturers, original equipment manufacturers, or OEMs, and systems integrators, with video and
graphics processing solutions that enable them to deliver to market rapidly an advanced display
system with industry-leading performance and features. By choosing this product development
strategy, our customers reduce their research and development costs, thereby reducing the cost of
the overall system. In addition, our customers can utilize a consistent design environment across
multiple product lines.
Concurrent with the move to new pixilated displays, broadcasters and consumer electronics
manufacturers are moving ahead with the introduction of video in digital formats, including the
much-anticipated high-definition television, or HDTV. Current broadcast standards were also
developed in the middle of the last century and were optimized for display on CRT televisions. The
signals are formatted in low resolutions that do not provide sufficient visual information and do
not look crisp when displayed on larger screens. The new digital television standards promise
cleaner broadcast signals that can transmit a high-definition signal in widescreen format for a
cinema-quality viewing experience.
More recently, a new technology is emerging to deliver video content over broadband networks using
Internet Protocol standards which is creating an entirely new delivery methodology of video to
consumers. Internet Protocol television, or IPTV, can stream live multicasts or stored content for
video-on-demand applications in formats that efficiently compress video data so that it can be sent
across networks. In order to access content currently, a set-top box is commonly needed since most
televisions do not have the capability to decode IPTV content.
We have a broad product line that uses proprietary technologies and advanced designs to address the
requirements of the industry we serve. Our products range from single-purpose discrete ICs to
system-on-chip ICs integrating a microprocessor, memory and image processing circuits that function
as a computer on a single chip. Pixelworks has expanded its technology portfolio through internal
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developments, acquisitions and co-developments with business partners. In the future, we plan to
introduce products that continue to integrate additional functionality and utilize more advanced
processes in order to improve performance and lower product costs.
Advanced Display Industry
Pixelworks serves four fast-growing markets in the advanced display industry that are reshaping how
business users and consumers interact with information and entertainment, including advanced
televisions, multimedia projectors, LCD panels and digital streaming media devices. The display
industry’s shift toward digital, fixed-pixel display technologies is creating a need for video
signal processing electronics that achieve the necessary performance, in terms of image quality,
ease of use and cost, to spur the transition to mainstream market adoption. These four markets are
in different stages of maturity and each have unique requirements and dynamics.
Advanced Television Market
While the CRT television is a widely accepted technology worldwide, the transition to digital-based
television is gaining momentum in the market. According to a display industry analyst, in 2005
non-CRT televisions using digital display technologies, referred to as advanced televisions,
comprised more than 15 percent of the 177 million television units sold worldwide. Advanced
televisions totaled 27.2 million units which marked an annual increase of 115 percent while the
total market grew by only 6 percent which illustrates the acceleration of adoption of advanced
television technologies.
Based on current analyst projections, advanced televisions using digital display technology that
would require digital video signal processing ICs is accelerating and will collectively overtake
CRT technology in 2009. The display technologies include liquid crystal displays, or LCDs, plasma
display panels, or PDPs, and rear-projection televisions using LCDs, digital micro-mirror devices,
or DMDs, and newer technology such as liquid crystal on silicon, or LCoS. While the entire
television market is forecast to grow from 177 million units in 2005 to more than 200 million units
in 2009, a compound annual growth rate of 3 percent, the advanced television portion of the market
is forecast to grow to 99.8 million units in 2009 for a compound annual growth rate of 38 percent.
Looking more closely at the growth forecasted, two sub-categories will drive the adoption of
advanced televisions as consumers choose thin-screen televisions for their homes. LCD televisions
are expected to lead the transition among advanced televisions rising from 19.6 million units in
2005 to 76.7 million units in 2009, a compound annual growth rate of 41 percent. Plasma display
televisions are expected to grow at nearly the rate of LCD televisions, although at approximately
one fifth of the overall unit volume due to their higher average selling price based on their
larger form factor. Plasma display televisions are estimated to grow from 4.9 million units in
2005 to 16.2 million units in 2009, a compound annual growth rate of 35 percent.
Rear-projection television, or RPTV, growth is projected to be modest between 2005 and 2009,
growing from 5.9 million units to 7.2 million units for a compound annual growth rate of 5 percent.
However, the underlying architecture of RPTV is shifting from older projection TVs using analog
CRT technology to newer digital technologies. In 2005, approximately 47 percent of RPTVs were
based on digital display technologies. That is expected to exceed 96 percent in 2009 with 6.9
million units, comprised of DMD, LCD and LCoS, for a combined compound annual growth rate of 26
percent.
Another sector of the advanced television market that has emerged for Pixelworks is CRT televisions
which utilize our discrete semiconductors for advanced video signal processing to enhance the
picture quality. A key component of this image enhancement is to de-interlace incoming television
signals for
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CRTs using progressive scanning. These types of televisions are referred to as advanced CRT
televisions and the market for these totaled 20.4 million units in 2005 and is expected to grow to
28.8 million in 2008 for a 12 percent annual growth rate.
Market forecasts indicate that the advanced television market is poised for robust growth over the
next several years. In addition to the introduction of new display technologies into the consumer
electronics marketplace, two major trends are driving the growth of advanced televisions worldwide:
the introduction of digital television standards and new entrants among television manufacturers.
The introduction of a new broadcast standard requiring the use of digital transmission rather than
analog methods is an important transition in the industry. Digital television offers a clearer
image than analog and enables the transmission of high-definition standards, a wide-screen format,
less interference and new types of applications such as interactivity and data transmission. In
the United States, the digital television standard is referred to as the ATSC format with similar
broadcast standards being developed in Europe and in Japan called DVB and ARIB, respectively.
The United States government is driving adoption of ATSC technology with a number of mandates. A
recent development in the United States is that the U.S. Congress declared in January 2006 that
analog television signal transmissions will cease on February 17, 2009. In order to facilitate
this transition, the U.S. Federal Communication Commission is mandating that televisions sold in
the United States include circuitry for receiving ATSC signals. Beginning in March 2007, all
televisions with a tuner and at least a 13-inch diagonal screen must include an ATSC receiver.
The second trend, the growth of new entrants into the television market, illustrates the shift in
the supply chain from electronics developed by vertically integrated manufacturers toward those
provided by third-party companies such as Pixelworks. With strong growth expected in advanced
televisions, consumer electronics and PC manufacturers are converging on the television as the
information and entertainment gateway. In addition, regional manufacturers in Asia are attempting
to gain a position in the market that further increases the competitive landscape.
Multimedia Projector Market
The multimedia projector market is maturing with steady growth as prices continue to decline and
manufacturers are introducing models for more targeted segments, including an emerging consumer
segment. In 2005, 4.1 million units were sold worldwide. A display industry analyst is
forecasting that in 2009 the multimedia projector market will expand to 13.1 million units, for a
compound annual growth rate of 33 percent. For the overall multimedia projector market, the
average selling price is expected to decrease from $1,578 in 2005 to $996 in 2009.
Two digital display technologies are currently used in multimedia projectors. In 2005,
approximately 51 percent of the market was using liquid crystal displays while the remainder was
utilizing digital micro-mirror devices, according to a display industry analyst. Models range from
larger units designed for installation, to ultra-portable devices weighing less than two and a half
pounds for maximum portability.
The largest segment of the market serves professional users who use multimedia projectors to
display presentation materials from PCs and for showing video presentations. Requirements for the
professional market include portability, compatibility with multiple sources and features that
ensure simple operation. While businesses will continue to purchase projectors, we expect the
growth in the professional segment to come mainly from the education and government sectors.
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The emerging market for consumer projectors for home entertainment continues to expand and open a
new opportunity for projector manufacturers. Consumers are discovering that they can have a
satisfying home cinema experience by investing in a sub-$1,000 multimedia projector. In order to
achieve attractive price targets, manufacturers are developing models using lower resolution
displays, often with 800-by-600 pixel resolution, also known as SVGA which is an acronym for Super
Video Graphics Array, and using lower cost liquid crystal displays. According to a display
industry analyst, the consumer market for multimedia projectors was 562,000 units in 2005 with the
segment growing to 2.5 million units in 2009 for a compound annual growth rate of 46 percent.
LCD Panel Market
We are entering the market to supply timing controller circuits for liquid crystal display panels
which are a key component in a number of consumer products, including flat-screen computer
monitors, flat-screen televisions and notebook computers. LCD panels are the primary technology
driving the conversion to digital display technologies due to their cost efficiency, performance
and manufacturability. The most advanced LCD manufacturers are using equipment capable of handling
glass substrates, the fundamental component in liquid crystal displays, exceeding 4 square meters
from which 12 32-inch diagonal displays can be yielded.
The total available market for the timing controller circuits consists of large-area liquid crystal
displays which, according to an industry analyst, consists of 217 million units worldwide in 2005,
with 47 percent for monitors, 36 percent for notebook computers and the remaining 17 percent for
televisions. By 2008, the market opportunity grows to 280 million units, for an annual growth rate
of 9 percent, and a slight increase in the share for monitors to 54 percent, with 30 percent and 16
percent to the notebook and television markets, respectively.
The end market for LCD panels is continuing to create demand for these products. LCD monitors
comprised 69 percent of the desktop monitor market, according to a display industry analyst, with
108 million units sold in 2005. By 2009, the desktop monitor market is forecast to exceed 93
percent of the total desktop monitors sold with more than 171 million units. The transition to LCD
displays in the television market is also underway with 11 percent of the total television units
sold worldwide in 2005 using LCD technology and nearly tripling the number of units in 2009 to
capture 38 percent of the total television market.
Digital Streaming Media Devices Market
Digital streaming media devices, formerly discussed as our advanced media processors market, is an
emerging class of electronics that deliver advanced video and audio content to displays over
broadband networks using Internet Protocol standards which have previously only been used for data
and graphic information. With the higher bandwidth capacities available on broadband networks,
advanced encoding and decoding compression standards are now able to transmit full-motion, standard
and high resolution video directly over the Internet.
Digital streaming devices range from mass-market applications for IPTV set-top boxes for receiving
and decoding video to products that serve specialized niches. IPTV can stream live multicasts or stored content for video-on-demand applications in formats that
are more efficient than standard broadcast television. In order to access IPTV content currently,
a set-top box is commonly needed since most televisions do not have the capability to decode IPTV
content. The market for IPTV set-top boxes, according to industry analysts, exceeded 4 million
units in 2005 and will approach 15 million units by 2008.
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A digital media adapter, or DMA, is a dedicated device for enabling viewing and listening of
content stored on a local computer over a network. DMAs connect via an Ethernet or wireless
connection and are able to search the host computer for digital video, digital photos and music and accesses them
remotely through an user-interface displayed on a television or monitor. Digital streaming media
devices also serve niche markets by enabling video conferencing, IP-based security and
surveillance, and professional broadcast encoders for converting and delivering video content over
a broadband network.
Our Products and Technologies
We design, develop and market ICs and software that optimize video and computer graphic signals for
a wide variety of displays used in business and consumer markets, including advanced televisions,
multimedia projectors, LCD panels and digital media streaming devices. We have a broad product
line that uses proprietary and licensed technologies and advanced designs to address the
requirements of the industry we serve. Our products range from single-purpose discrete ICs to
system-on-chip ICs integrating a microprocessor, memory and image processing circuits that function
as a computer on a single IC.
As the advanced display industry has grown rapidly, we have expanded and adapted our products to
meet the needs of manufacturers in terms of performance, cost and functionality. Our product
development strategy is to take a systems-level approach, which means we design products from the
manufacturers’ viewpoint in terms of analyzing how we can integrate maximum functionality at a
reasonable cost. We believe that by developing parts that anticipate the requirements of our
target markets, we will help accelerate the adoption of advanced display technologies.
Products
We currently have the following product categories in our portfolio:
ImageProcessor ICs. System-on-chip ICs include embedded microprocessors and digital signal
processing circuitry that control the operations and signal processing within the advanced display
system. ImageProcessor ICs are used in advanced televisions, multimedia projectors and LCD
monitors. Semiconductors in this category include circuitry for advanced image scaling, aspect
ratio conversion, color compensation, customizable on-screen display, automatic image optimization
and control of the operating system. ImageProcessor ICs can also include the following additional
functions: advanced de-interlacing circuitry; digital keystone correction; an analog-to-digital
controller, or ADC; a Digital Visual Interface, or DVI, receiver; and a High-Definition Multimedia
Interface, or HDMI, receiver.
ImageProcessor ICs were our first product offerings and continue to form the core of our business
in the advanced television and multimedia projector markets. We have continued to design the
architecture for optimal performance and manufactured the ICs on processes that align with our
customers’ requirements. Additionally, since our ImageProcessor ICs include the microprocessor for
the entire system, we provide a complete software development environment and operating system that
enables our customers to rapidly develop their products, customize the “look and feel” of their
products, and provide a consistent software architecture across product lines and product
categories. Our latest ImageProcessor IC, codename Pearl, targets the advanced television and
multimedia projector markets. Pearl products integrate our most advanced de-interlacing, video
decoding, HDMI and video enhancement processing technologies.
Video SignalProcessor ICs. Integrated circuits in this category are discrete semiconductors that
are companion chips for our ImageProcessor ICs and offer manufacturers more flexibility in their
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multimedia projection and advanced television system architectures. Video SignalProcessor ICs are
used to pre- and post-process video signals in conjunction with an ImageProcessor IC. By offering
these ICs, we can target specific needs in our markets and can perfect our technology developments
prior to integrating the technology into our ImageProcessor ICs.
We currently produce two classes of Video SignalProcessor ICs. The first category is the IC family
that performs de-interlacing. Currently, many video signals are delivered in an interlaced format
which means that each frame of video is sent in two sequential fields comprised of first the
odd-numbered rows and then the even-numbered. However, most advanced display technologies show
fields in a single frame so the two separate fields must be reconstituted into a single frame of
video information. This process presents many challenges and can introduce visual artifacts into
the image, but our Video SignalProcessor ICs use patented de-interlacing technology to maximize
video quality. We currently sell our de-interlacing Video SignalProcessor family into the advanced
television market, including the advanced CRT segment, as well as the multimedia projector market.
Our second class of Video SignalProcessor ICs are signal interface chips that combine a
multi-standard video decoder and analog-to-digital converter for processing current television
formats and new digital television standards. Certain versions also include a DVI receiver. We
currently offer our signal interfacing Video SignalProcessor family in the multimedia projector and
advanced television markets.
MediaProcessor ICs. We have developed a new class of products to support the display of new
digital television formats, including HDTV. The digital broadcast standards transmit data encoded
using a signal compression format known as “MPEG”, named for the Motion Picture Experts Group which
established it. Our MediaProcessor ICs decode MPEG video streams and are central to building
televisions to display the new digital standards. Our products, the PWM20XX family of
MediaProcessor ICs, resulted from our partnership with Toshiba. The MediaProcessor chip provides a
cost-effective, high-quality integrated solution for customers developing high definition
televisions.
Broadband Signal Processor ICs. Our Broadband Signal Processor ICs are programmable system-on-chip
ICs for handling IPTV video using multiple industry-standard compression decoding schemes.
Broadband Signal Processor ICs use a VLIW, or Very Long Instruction Word, microprocessor that
offers the flexibility and power to be customized for a variety of applications, including for
handling IPTV and digital media adapter encoding and decoding, videoconferencing and other
specialized applications.
Audio Processing and Video Demodulator ICs. We have developed a new line of discrete chips for
processing audio and video broadcast signals by serving as the IF, or Intermediate Frequency,
demodulator. The IF signal is the signal format isolated by the tuner and it combines all of the
video and audio information. A demodulator separates the various signal information and then
routes them to the proper circuitry within the system. Some of the chips in this category only
separate audio signals while others also serve as video IF demodulators for added functionality and
reduced costs in analog and digital advanced televisions.
Smart TCON ICs. The timing controller, or TCON, is a discrete semiconductor that is integrated
into a liquid crystal display panel. The TCON translates a signal from the image processing
electronics into a format which instructs each sub-pixel in the display as to the amount of light
it should emit during each screen refresh, which is usually 60 times per second. We have developed
a programmable timing controller technology that improves LCD performance by increasing response
speed and contrast while also lowering system costs by replacing the purpose-built discrete ICs
that are in use today.
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Technologies
In order to offer targeted products, our semiconductors are designed with a flexible chip
architecture that allows us to combine functional blocks of digital and mixed signal circuitry.
Accordingly, we develop technologies that can be implemented across multiple product lines.
Following is a description of selected technologies by target market.
Core Technologies for Advanced Displays
| • | Advanced Image Scaling and Shaping. Since advanced displays are typically fixed-pixel, digital display technologies, a constant challenge is to reconfigure incoming content in video or PC formats that does not match the display resolution. Pixelworks has developed innovative, industry-leading image scaling technologies that intelligently enlarge or compress images for display in different resolutions or aspect ratios, which is the ratio of width to height of display screens. This technology is essential for interfacing fixed resolution digital displays to the wide range of inputs that are present in today’s marketplace, including HDTV. In addition, our image processing technology incorporates proprietary programmable image scaling capable of resizing images to fit a wide variety of aspect ratios. | ||
| • | Adaptive Image Optimization. Our products must translate a broad range of signals in standard and non-standard formats. We use a proprietary image processing technique to identify the characteristics of an incoming signal and configure the system to produce the best possible image. | ||
| • | Color Compensation Technology. Our sophisticated custom color compensation technology makes it possible to display consistent color images from video and computer graphics, which use very different color palettes, on different display devices. Our color processing technology compensates for variations in the color performance of a display. Using our approach, any color can be addressed independently and adjusted without impacting other colors. | ||
| • | Fully Customizable On-Screen Display. Our technology couples an integrated on-screen display controller with our industry-first development application. These technologies allow customers who are designing ImageProcessor semiconductors into their display products to quickly develop and implement their own unique user interfaces with up to 256 colors that can incorporate graphics and colorful icons in start-up displays and menus. |
Advanced Television Technologies
We have a suite of technologies that are designed to serve the advanced television market which we
call DNX — Digital Natural ExpressionTM. Pixelworks’ DNXTM video processing
technology dramatically improves the quality of video images by combining multiple enhancement
techniques to deliver clear, natural-looking standard and high-definition video images. DNX
technology utilizes sophisticated digital video processing to deliver a lifelike picture through a
combination of techniques.
| • | DNX Motion-Adaptive De-Interlacing. We have developed a proprietary video processing technology to convert interlaced content into progressive content that virtually eliminates image artifacts such as stair-stepping, often referred to as ‘jaggies’ that can occur with less sophisticated techniques. Our motion-adaptive de-interlacing is able to analyze the content and apply the most appropriate methods for both standard television formats and also high-definition television formats. In addition, DNX Motion-Adaptive De-Interlacing automatically |
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| recognizes when incoming signals were originally captured on film so that special methods are employed to display the content. | |||
| • | DNX PixelBoostTM. A technology that improves pixel response to eliminate blurring in fast-motion video as seen on some LCD panels. LCD pixels are not able to turn on and off as rapidly as pixels in CRTs, which results in blurry images when content contains quick movements. PixelBoost technology can compensate for this property of LCD panels by manipulating the content in a way that makes it display more crisply on the screen. | ||
| • | DNX Rich Color Processing. A technology that renders more than one billion colors with 10-bit color processing and also optimizes content appearance for various display technologies. | ||
| • | DNX Video Enhancement Processing. Most content has been encoded in order to enhance its appearance on CRT-based televisions which makes it appear unnatural when displayed on LCDs, DMDs or plasma displays. Our DNX Video Enhancement Processing enables manufacturers to apply filters that compensate for the signals in order to produce sharp, rich picture quality. | ||
| • | DNX Noise Reduction. Digital displays often appear to create movement where none exists because pixels flicker in areas where there is no motion, creating a distracting shimmering effect. This is referred to as “noise”. We have developed proprietary technology that minimizes noise for a stable, accurate video image. |
Other key video technologies include:
| • | Digital Deflection Control. Digital Deflection Control, or DDC, technology is designed for advanced CRTs by reducing system complexity and cost, providing more control over how the image appears on-screen and improves system reliability. Current digital CRTs use discrete analog chips to manipulate the scanning beam in order to achieve accurate images. DDC digitally pre-processes the video signal in order to achieve the correct screen geometry and image positioning to compensate for geometric distortion inherent in CRT technology. | ||
| • | SteadySyncTM Weak Signal Compatibility. In many parts of the world, television viewers still receive their content via over-the-air broadcast. Our SteadySync technology is able to compensate for broadcast signals that are weak by being able to better lock onto a signal and display a picture. This technology helps users in under-served regions to better receive television broadcasts, which is attractive for manufacturers serving developing countries. | ||
| • | Intelligent Windowing. Intelligent windowing offers consumers control over how they view multiple content simultaneously. Our ImageProcessor ICs for advanced televisions are capable of displaying video and computer content in various, user-controlled formats such as side-by-side, Picture-In-Picture, or PIP, and Picture-On-Picture, or POP, where as many as 12 images from various other sources or channels can be monitored while watching a primary viewing window. Our Intelligent Windowing delivers additional flexibility with adjustable transparency and user-controlled resizing of windows. |
Multimedia Projector Technologies
| • | Digital Keystone Correction. We pioneered digital keystone correction technology and it is now established as a key feature in multimedia projectors. When projecting an image, if the |
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| digital projector is not perpendicular to the surface on which it is projecting the image, the image will be distorted. Our digital keystone correction modifies the geometry of the image in our ImageProcessor IC so that it will appear that the image is “squared up”, which allows a projector to be placed virtually anywhere in the room. Our ICs have the ability to adjust the image both vertically and horizontally. With our CornerKlickTM feature, a user can simply correct the image using our unique user interface. |
LCD Panel Technologies
| • | Smart Timing Controllers. Typically, every LCD module requires a specific IC called a timing controller, or TCON, that is a purpose-built, discrete component with the function of signaling the LCD module when to turn the pixels on and off. We have led the development of a new type of TCON that is programmable, or “smart”, so it is able to work with most LCD modules. LCD manufacturers benefit by no longer having to design and build a unique component for each module. Additionally, we implemented new signal processing techniques that enhance pixel response times and contrast ratios. |
Digital Streaming Media Device Technologies
| • | DreamStream Application Reference Software . DreamStream software is a production-ready platform for manufacturers developing digital media streaming devices for displaying video content using our Broadband Signal Processor ICs. DreamStream-enabled devices, including set-top boxes and digital media adapters, support industry-standard encoding and decoding compression schemes, as well as digital rights management, on-screen browser and wireless connectivity. |
Future Developments
Pixelworks has continued to expand its technology portfolio through internal developments,
acquisitions, co-developments with business partners, licensing and through selling of joint
reference designs. In the future, we plan to introduce products and technologies that will enable
us to provide the electronics solution for our customers for the entire signal path of an advanced
display.
Customers, Sales and Marketing
We have achieved design wins with global leaders in the business computing and consumer electronics
markets. The key elements of our sales and marketing strategy are to achieve design wins with
industry leading branded manufacturers in targeted markets and to continue building strong
customer-supplier relationships. Once a design win has been achieved, sales and marketing efforts
are focused on building long-term mutually beneficial business relationships with our customers by
providing superior technology and reducing their costs, which complements our customers’ product
development objectives and meets their expectations for price-performance and time to market.
Marketing efforts are focused on building market-leading brand awareness and preference for our
semiconductors.
Our global distribution channel is multi-tiered and involves:
| • | Distributors. Distributors are resellers in local markets who provide engineering support and stock our semiconductors in direct relation to specific manufacturing customer orders. Our distributors often have valuable and established relationships with our end customers, and in certain countries it is customary to sell to distributors. While distributor payment to us is not |
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| dependent upon the distributor’s ability to resell the product or to collect from the end customer, our distributors may provide longer payment terms to end customers than those we would offer. Sales to distributors accounted for 46%, 69% and 69% of total revenue for the years ended December 31, 2005, 2004 and 2003, respectively. | |||
| Our largest distributor, Tokyo Electron Device, or TED, is located in Japan. TED represented 22%, 31% and 39% of revenue for the years ended December 31, 2005, 2004 and 2003, respectively, and accounted for 16% and 26% of accounts receivable at December 31, 2005 and 2004, respectively. Revenue through TED to a single end customer, Seiko Epson Corporation, accounted for 10%, 8% and 7% of revenue for the years ended December 31, 2005, 2004 and 2003, respectively. No other single end customer accounted for more than 10% of revenue during the three years ended December 31, 2005. | |||
| Neoview, located in Taiwan, was historically our second largest distributor. Neoview represented 13% and 16% of revenue for the years ended December 31, 2004 and 2003, respectively. Effective February 4, 2005, we terminated our distributor relationship with Neoview and we now sell products directly to Taiwanese customers previously served by Neoview, as well as through our other Taiwanese distributors. Neoview represented 1% of revenue for the year ended December 31, 2005. | |||
| We also have distributor relationships in China and Europe. | |||
| • | Direct Relationships. We have established direct relationships with companies that manufacture advanced display systems. Some of our direct relationships are supported by manufacturer’s representatives, which are independent sales agents that represent us in local markets and provide engineering support but do not carry inventory. Revenue through direct relationships accounted for 54%, 31% and 31% of total revenue for the years ended December 31, 2005, 2004 and 2003, respectively. We have identified three classifications of direct relationships as follows: |
| o | Integrators. Integrators are OEM customers who build display devices based on specifications provided by branded manufacturers. | ||
| o | Branded Manufacturers. Branded manufacturers are globally recognized manufacturers who develop display device specifications, manufacture, market and distribute display devices either directly or through resellers to end-users. | ||
| o | Branded Suppliers. Branded suppliers are globally recognized suppliers who develop display device specifications and then source them from integrators, typically in Asia, and distribute them either directly or through resellers to end-users. |
Looking ahead, we anticipate an increase in the percentage of revenue through direct relationships.
An example of this transition is the termination of our distributor agreement with our former
Taiwanese distributor described above. We expect this change to strengthen our relationships with
our direct customers and to be cost effective.
Our sales and marketing team included 126 employees as of December 31, 2005. The sales and
marketing team includes 72 field application engineers who provide technical expertise and
assistance to manufacturing customers on final product development. We have sales, marketing and
support personnel in the U.S., China, Taiwan, Japan and Korea.
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Seasonality
Historically, our sales have been higher in the second half of the year, primarily due to holiday
demand for consumer electronics including advanced televisions and flat panel monitors.
Additionally, the multimedia projector market is subject to seasonality with higher shipments
typically occurring in the fourth quarter.
Geographic Concerns
Our global operations subject us to risks and difficulties associated with doing business outside
the U.S. These risks include foreign currency exchange rate fluctuations, political and economic
instability, reduced or limited protection of our intellectual property and increased transaction
costs. Our global operations also increase the complexity of our relationship with our
distributors and manufacturers due to varying time zones, languages and business customs.
Financial information regarding our domestic and foreign operations is presented in Note 8 of the
Notes to Consolidated Financial Statements included in Item 8. Financial Statements and
Supplementary Data.
Backlog
Our sales are made pursuant to customer purchase orders for delivery of standard products. The
quantity of products actually purchased by our customers, as well as shipment schedules, are
subject to frequent revisions that reflect changes in both the customers’ needs and in product
availability. Our entire order backlog is cancelable, with a portion subject to cancellation fees.
In light of industry practice and our own experience, we do not believe that backlog as of any
particular date is indicative of future results.
Research and Development
Our internal research and development efforts are focused on the development of our semiconductors
for the advanced television, multimedia projector, digital streaming media devices and LCD panel
markets. Our development efforts are focused on pursuing higher levels of integration and new
features in order to extend our system-on-chip semiconductors and discrete ICs to provide our
customers with electronics solutions, including software, service and support, that enable them to
introduce market leading products. These higher levels of integration are designed to reduce
components on circuit boards and help lower final systems costs for our customers.
In addition to our 72 field applications engineers, on December 31, 2005, we had 254 engineers,
technologists and scientists who are organized into the following functional groups: Integrated
Circuit Design, Software Engineering, Video and Image Processing Engineering, Display Interface
Engineering, Systems Engineering and Product and Test Engineering.
We have invested, and expect that we will continue to invest, significant resources in research and
development activities. Our research and development expenses were $51.8 million, $33.0 million
and $29.6 million in 2005, 2004, and 2003, respectively.
Manufacturing
Our products require advanced semiconductor processing and packaging technologies. Within the
semiconductor industry we are known as a “fabless” company, meaning that we do not fabricate the
semiconductors that we design and develop, but instead rely on third parties to manufacture our
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products. We have IC foundry relationships with Infineon, Semiconductor Manufacturing
International Corporation, or SMIC, Taiwan Semiconductor Manufacturing Corporation, or TSMC, and
Toshiba. This approach allows us to concentrate our resources on product design and development
where we believe we have greater competitive advantages. However, as the estimated time for us to
adapt a product’s design to a particular contract manufacturer’s process is at least four months,
there is no readily available alternate supply for any specific product.
Intellectual Property
We rely on a combination of nondisclosure agreements and copyright, trademark and trade secret laws
to protect the algorithms, design and architecture of our system-on-chip technology. As of
December 31, 2005, we held 36 patents and had 94 patent applications pending, which relate
generally to improvements in the visual display of digital image data including, but not limited
to, improvements in image scaling, image correction, automatic image optimization and video signal
processing for digital displays.
We intend to seek patent protection for other significant technologies that we have already
developed and expect to seek patent protection for future products as necessary. Any future
patents may not be granted and if granted may be invalidated, circumvented, challenged or licensed
to others.
To supplement the technologies that we develop internally, we have licensed rights to use
intellectual properties held by third parties, and we may license additional technology rights in
the future. If any of these agreements terminate, we would be required to exclude the licensed
technology from our existing and future product lines.
The semiconductor industry is characterized by frequent litigation regarding patent and other
intellectual property rights. We have indemnification obligations with respect to the infringement
of third party intellectual property rights. There is no intellectual property litigation
currently pending against us. However, we may, from time to time, receive notifications of claims
that we may be infringing patents or other intellectual property rights owned by third parties. If
it is necessary or desirable, we may seek licenses under those patents or intellectual property
rights. However, we cannot be sure that licenses will be offered or that the terms of any offered
licenses would be acceptable to us.
Competition
In general, the market for semiconductors is intensely competitive. Our market is characterized by
rapid technological change, evolving industry standards, compressed product life cycles and
declining average selling prices. We believe the principal factors impacting competition in our
markets are levels of product integration, functional versatility provided by software, compliance
with industry standards, time to market, cost, product performance, system design costs,
intellectual property, customer relationships and reputation.
Our current products face competition from specialized display controller developers and in-house
display control ICs designed by our customers and potential customers. Additionally, new,
alternative display processing technologies and industry standards may emerge that directly compete
with technologies that we offer.
We compete with specialized and diversified electronics and semiconductor companies that offer
display processors or scaling components. Some of these include ATI, Genesis Microchip, I-Chips,
ITE, JEPICO Corp., Macronix, Mediatek, Media Reality Technologies, Micronas, MStar Semiconductor,
Inc., Realtek, Renesas Technology, Sigma Designs, Silicon Image, Silicon Optix,
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STMicroelectronics, Sunplus Technology, Techwell, Topro, Trident, Trumpion, Weltrend, Zoran and
other companies. Potential competitors may include diversified semiconductor manufacturers and the
semiconductor divisions or affiliates of some of our customers, including Intel, Koninlijke Philips
Electronics, LG Electronics, Matsushita Electric Industrial, Mitsubishi, National Semiconductor,
NEC, nVidia, Samsung Electronics, Sanyo Electric Company, Sharp Corporation, Sony Corporation,
Texas Instruments and Toshiba Corporation. In addition, start-up companies may seek to compete in
our markets.
Employees
As of December 31, 2005, we had a total of 469 employees – 254 in engineering, 126 in sales and
marketing, of which 72 are field application engineers and 54 sales and marketing staff, 23 in
operations, and 66 in administration, including finance, information technology, human resources
and general administration. Of these employees, 199 are in the United States. None of our
employees are represented by a collective bargaining agreement, nor have we experienced any work
stoppage. We consider our relationship with our employees to be good. Our future success will
depend in large part on our ability to continue to attract, retain, and motivate highly skilled and
qualified personnel.
Available Information
We file annual, quarterly and special reports, proxy statements and other information with the
Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 as amended (the
“Exchange Act”). You can inspect and copy our reports, proxy statements and other information
filed with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W. in Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the
Public Reference Room. The SEC maintains an Internet Web site at http://www.sec.gov where you can
obtain most of our SEC filings. In addition, you can inspect our reports, proxy materials and
other information at the offices of the Nasdaq Stock Market at 1735 K Street NW, Washington D.C.
20006. We also make available free of charge through a link on our website at www.pixelworks.com
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after they are filed electronically with the SEC.
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Item 1A. Risk Factors.
Investing in our shares of common stock involves a high degree of risk. If any of the following
risks occur, the market price of our shares of common stock could decline and investors could lose
all or part of their investment.
(Dollars in thousands, except per share data)
RISKS RELATED TO OUR OPERATIONS
We face considerable business and financial risks related to our acquisition of Equator
Technologies, Inc.
In June 2005, we completed the acquisition of Equator Technologies, Inc. (“Equator”), a privately
held company, for an aggregate purchase price of $118,116. The acquisition of Equator required a
substantial expenditure and involves substantial risks on our part. Equator’s current product
offerings and technological developments relate to internet protocol television (“IPTV”) set-top
boxes, digital media appliances, videoconferencing devices and security devices. These are
emerging technologies and the markets they serve are developing and largely untested, and we do not
have direct experience developing and selling products into these markets. In addition, in making
the acquisition of Equator we have made certain assumptions and projections with respect to the
following: Equator’s revenue for future quarters; our expectations regarding the growth of the
markets Equator serves; the ability of Equator to develop and introduce new products and software
and the risk that customers will not accept those new products and software; and the synergies we
believe we can realize from the acquisition. We cannot be sure that such assumptions are correct.
For these reasons, we cannot provide assurance that the acquisition of Equator will produce the
revenues, earnings or business synergies that we anticipate, or that it will perform as expected.
We may be unable to successfully integrate Equator Technologies, Inc., and any future acquisition
or equity investment we make could disrupt our business and severely harm our financial condition.
We may not be able to successfully integrate businesses, products, technologies or personnel of
Equator, or of any other entity that we might acquire in the future, and any failure to do so could
disrupt our business and seriously harm our financial condition. In addition, if we acquire
companies with weak internal controls, it will take time to get the acquired company up to the same
level of operating effectiveness as Pixelworks and to implement adequate internal control,
management, financial and operating reporting systems. Our inability to address these risks could
negatively affect our operating results.
To date, we have acquired Panstera, Inc. in January 2001, nDSP in January 2002, Jaldi Semiconductor
in September 2002 and Equator in June 2005. In March 2003, we announced the execution of a
definitive merger agreement with Genesis Microchip, Inc.; however, the merger was terminated in
August of 2003, and we incurred $8,949 of expenses related to the transaction. In the third quarter
of 2003, we made an investment of $10,000 in Semiconductor Manufacturing International Corporation
(SMIC). We intend to continue to consider investments in or acquisitions of complementary
businesses, products or technologies.
The acquisitions of Panstera, nDSP and Jaldi contained a very high level of risk primarily because
the investments were made based on in-process technological development that may not have been
completed, or if completed, may not have become commercially viable.
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These and any future acquisitions and investments could result in:
| • | issuance of stock that dilutes current shareholders’ percentage ownership; | |
| • | incurrence of debt; | |
| • | assumption of liabilities; | |
| • | amortization expenses related to other intangible assets; | |
| • | impairment of goodwill; | |
| • | large and immediate write-offs; or | |
| • | decrease in cash that could otherwise serve as working capital. |
Our operation of any acquired business will also involve numerous risks, including, but not limited
to:
| • | problems combining the acquired operations, technologies or products; | |
| • | unanticipated costs; | |
| • | diversion of management’s attention from our core business; | |
| • | adverse effects on existing business relationships with customers; | |
| • | risks associated with entering markets in which we have no or limited prior experience; and | |
| • | potential loss of key employees, particularly those of the acquired organizations. |
Goodwill represents a significant portion of our total assets.
As of December 31, 2005, goodwill amounted to $133,731 or approximately 32% of our total assets. We
are required to review goodwill for possible impairment on an annual basis or when events and
circumstances arise which indicate a possible impairment. The review of goodwill for impairment may
result in large write-offs of goodwill, which could have a material adverse effect on our results
of operations. Due to the fact that the market value of our reporting unit is approaching book
value, it is at least reasonably possible that we will have an impairment in the near term.
The year ended December 31, 2004 was our first year of annual profitability since inception and we
may be unable to achieve profitability in future periods.
While we had net income of $21,781 for the year ended December 31, 2004, we incurred a net loss of
$42,610 for the year ended December 31, 2005 and our accumulated deficit is $102,198 through
December 31, 2005. The year ended December 31, 2004 was our first year of annual profitability
since inception. We expect our research and development and selling, general and administrative
expenses to continue to increase. Given expected increases in operating expenses, we must increase
revenues and gross profit to become profitable again. We cannot be certain that we will achieve
profitability in the future or, if we do, that we can sustain or increase profitability on a
quarterly or annual basis. This may in
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turn cause the price of our common stock to decline. In addition, if we are not profitable in the
future we may be unable to continue our operations.
Fluctuations in our quarterly operating results make it difficult to predict our future performance
and may result in volatility in the market price of our common stock.
Our quarterly operating results have varied from quarter to quarter and are likely to vary in the
future based on a number of factors related to our industry and the markets for our products. Some
of these factors are not in our control and any of them may cause the price of our common stock to
fluctuate. These factors include, but not limited to:
| • | our success in integrating the operations of our recently acquired subsidiary, Equator Technologies, Inc.; |
| • | demand for multimedia projectors, advanced televisions, LCD panels, and digital streaming media devices; |
| • | demand for our products and the timing of orders for our products; |
| • | the deferral of customer orders in anticipation of new products or product enhancements from us or our competitors or due to a reduction in our end customers’ demand; |
| • | the loss of one or more of our key distributors or customers or a reduction, delay or cancellation of orders from one or more of these parties; |
| • | changes in the available production capacity at the semiconductor fabrication foundries that manufacture our products and changes in the costs of manufacturing; |
| • | our ability to provide adequate supplies of our products to customers and avoid excess inventory; |
| • | the announcement or introduction of products and technologies by our competitors; |
| • | changes in product mix, product costs or pricing, or distribution channels; and |
| • | general economic conditions and economic conditions specific to the advanced display and semiconductor markets. |
These factors are difficult or impossible to forecast, and these or other factors could seriously
harm our business. We anticipate the rate of new orders may vary significantly from quarter to
quarter.
Our operating expenses and inventory levels are based on our expectations of future revenues and
our operating expenses are relatively fixed in the short term. Consequently, if anticipated sales
and shipments in any quarter do not occur when expected, operating expenses and inventory levels
could be disproportionately high, and our operating results for that quarter and, potentially,
future quarters may be negatively impacted. Any shortfall in our revenues would have a direct
impact on our business. In addition, fluctuations in our quarterly results could adversely affect
the price of our common stock in a manner unrelated to our long-term operating performance. Because
our operating results are volatile and difficult to predict, you should not rely on the results of
one quarter as an indication of our future performance. It is possible that in some future quarter
our operating results will fall below the expectations of securities analysts and investors. In
this event, the price of our common stock may decline significantly.
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Our products are characterized by average selling prices that decline over relatively short time
periods, which will negatively affect financial results unless we are able to reduce our product
costs or introduce new products with higher average selling prices.
Average selling prices for our products decline over relatively short time periods while many of
our product costs are fixed. When our average selling prices decline, our gross profits decline
unless we are able to sell more units or reduce the cost to manufacture our products. Our operating
results are negatively affected when revenue or gross profit margins decline. We have experienced
these results and expect that we will continue to experience them in the future, although we cannot
predict when they may occur or how severe they will be.
Our highly integrated products and high-speed mixed signal products are difficult to manufacture
without defects and the existence of defects could result in an increase in our costs and delays in
the availability of our products.
The manufacture of semiconductors is a complex process and it is often difficult for semiconductor
foundries to produce semiconductors free of defects. Because many of our products are more highly
integrated than other semiconductors and incorporate mixed analog and digital signal processing and
embedded memory technology, they are even more difficult to produce without defects.
The ability to manufacture products of acceptable quality depends on both product design and
manufacturing process technology. Since defective products can be caused by design or manufacturing
difficulties, identifying quality problems can occur only by analyzing and testing our
semiconductors in a system after they have been manufactured. The difficulty in identifying defects
is compounded because the process technology is unique to each of the multiple semiconductor
foundries we contract with to manufacture our products. Failure to achieve defect-free products due
to their increasing complexity may result in an increase in our cost and delays in the availability
of our products. For example, we have experienced field failures of our semiconductors in certain
customer system applications that required us to institute additional semiconductor level testing.
As a result of these field failures we incurred costs due to customers returning potentially
affected products. Additionally, customers have experienced delays in receiving product shipments
from us that resulted in the loss of revenue and profits. Shipment of defective products may also
harm our reputation with customers.
If we do not achieve additional design wins in the future, our ability to grow would be seriously
limited.
Our future success will depend on developers of advanced display products designing our products
into their systems. To achieve design wins we must define and deliver cost-effective, innovative
and integrated semiconductors. Once a supplier’s products have been designed into a system, the
developer may be reluctant to change its source of components due to the significant costs
associated with qualifying a new supplier. Accordingly, the failure on our part to obtain
additional design wins with leading branded manufacturers or integrators, and to successfully
design, develop and introduce new products and product enhancements could harm our business,
financial condition and results of operations.
Achieving a design win does not necessarily mean that a developer will order large volumes of our
products. A design win is not a binding commitment by a developer to purchase our products. Rather,
it is a decision by a developer to use our products in the design process of that developer’s
products. Developers can choose at any time to discontinue using our products in their designs or
product development efforts. If our products are chosen to be incorporated into a developer’s
products, we may still not realize significant revenues from that developer if that developer’s
products are not commercially successful or if that developer chooses to qualify a second source.
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Because of the complex nature of our semiconductor designs and of the associated manufacturing
process and the rapid evolution of our customers’ product designs, we may not be able to develop
new products or product enhancements in a timely manner, which could decrease customer demand for
our products and reduce our revenues.
The development of our semiconductors, some of which incorporate mixed analog and digital signal
processing, is highly complex. These complexities require that we employ advanced designs and
manufacturing processes that are unproven. We have experienced increased development time and
delays in introducing new products that resulted in significantly less revenue than originally
expected for those products. We will not always succeed in developing new products or product
enhancements nor will we always do so in a timely manner. Acquisitions have significantly added to
the complexity of our product development efforts. We must now coordinate very complex product
development programs between multiple geographically dispersed locations.
Many of our designs involve the development of new high-speed analog circuits that are difficult to
simulate and that require physical prototypes not required by the primarily digital circuits we
currently design. The result could be longer and less predictable development cycles.
Successful development and timely introduction of new or enhanced products depends on a number of
other factors, including, but not limited to:
| • | accurate prediction of customer requirements and evolving industry standards, including video decoding, digital interface and content piracy protection standards; |
| • | development of advanced display technologies and capabilities; |
| • | timely completion and introduction of new product designs; |
| • | use of advanced foundry processes and achievement of high manufacturing yields; and |
| • | market acceptance of the new products. |
If we are not able to successfully develop and introduce our products in a timely manner, our
business and results of operations will be adversely affected.
Integration of software in our products adds complexity and cost that may affect our ability to
achieve design wins and may affect our profitability.
Our products incorporate software and software development tools. The integration of software adds
complexity, may extend our internal development programs and could impact our customers’
development schedules. This complexity requires increased coordination between hardware and
software development schedules and may increase our operating expenses without a corresponding
increase in product revenue. Some customers and potential customers may choose not to use our
products because of the additional requirements of implementing our software, preferring to use a
product that works with their existing software. This additional level of complexity lengthens the
sales cycle and may result in customers selecting competitive products requiring less software
integration.
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A significant amount of our revenue comes from a few customers and distributors. Any decrease in
revenues from, or loss of, any of these customers or distributors could significantly reduce our
total revenues.
We are and will continue to be dependent on a limited number of large distributors and customers
for a substantial portion of our revenue. Sales to distributors represented 46%, 69% and 69% of
total revenue for the years ended December 31, 2005, 2004 and 2003, respectively. Sales to
Tokyo Electron Device, or TED, our Japanese Distributor, represented 22%, 31% and 39% of our total revenue for the
years ended December 31, 2005, 2004 and 2003, respectively. Sales to our top five end customers
accounted for approximately 34%, 33% and 35% of total revenue for the years ended December 31,
2005, 2004 and 2003, respectively. As a result of this distributor and end customer concentration,
any one of the following factors could significantly impact our revenues:
| • | a significant reduction, delay or cancellation of orders from one or more of our key distributors, branded manufacturers or integrators; or | |
| • | a decision by one or more significant customers to select products manufactured by a competitor, or its own internally developed semiconductor, for inclusion in future product generations. |
The display manufacturing market is highly concentrated among relatively few large manufacturers.
We expect our operating results to continue to depend on revenues from a relatively small number of
customers.
The concentration of our accounts receivable with a limited number of customers exposes us to
increased credit risk and could harm our operating results and cash flows.
At December 31, 2005, we had three customers that each represented more than 10% of our accounts
receivable. At December 31, 2004, we had two customers that each represented more than 10% of our
accounts receivable. TED represented 16% and 26% of total accounts receivable
at December 31, 2005 and 2004, respectively. The failure to pay this balance by this or any other
customer would result in an expense that would increase our operating expenses and would reduce our
cash flows.
International sales account for almost all of our revenue, and if we do not successfully address
the risks associated with our international operations, our revenue could decrease.
Sales outside the U.S. accounted for approximately 96%, 99% and 99% of total revenue in 2005, 2004
and 2003, respectively. We anticipate that sales outside the U.S. will continue to account for a
substantial portion of our revenue in future periods. In addition, customers who incorporate our
products into their products sell a substantial portion outside of the U.S., thereby exposing us
indirectly to further international risks. In addition, all of our products are manufactured
outside of the U.S. We are, therefore, subject to many international risks, including, but not
limited to:
| • | increased difficulties in managing international distributors and manufacturers of our products and components due to varying time zones, languages and business customs; | |
| • | foreign currency exchange fluctuations such as the devaluation in the currencies of Japan, People’s Republic of China (“PRC”), Taiwan and Korea that could result in an increased cost of procuring our semiconductors; | |
| • | potentially adverse tax consequences; |
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| • | difficulties regarding timing and availability of export and import licenses, which have limited our ability to freely move demonstration equipment and samples in and out of Asia; |
| • | political and economic instability, particularly in the PRC, Japan, Taiwan ,Korea and Turkey; |
| • | reduced or limited protection of our intellectual property, significant amounts of which are contained in software, which is more prone to design piracy; |
| • | increased transaction costs related to sales transactions conducted outside of the U.S., such as charges to secure letters of credit for foreign receivables; |
| • | difficulties in maintaining sales representatives outside of the U.S. that are knowledgeable about our industry and products; |
| • | changes in the regulatory environment in the PRC, Japan, Taiwan, Korea and Turkey that may significantly impact purchases of our products by our customers; |
| • | outbreaks of SARS, bird flu or other pandemics in the PRC or other parts of Asia; and |
| • | difficulties in collecting accounts receivable. |
Our growing presence and investment within the Peoples Republic of China subjects us to risks of
economic and political instability in the area, which could adversely impact our results of
operations.
A substantial and potentially increasing portion of our products are manufactured by foundries
located in the PRC and a large number of our customers are geographically concentrated in the PRC.
In addition, approximately 45% of our employees are located in this area and we made an investment
of $10,000 in SMIC, located in Shanghai, China in the third quarter of 2003. Disruptions from
natural disasters, health epidemics (including new outbreaks of SARS or bird flu) and political,
social and economic instability may affect the region, and would have a negative impact on our
results of operations. In addition, the economy of the PRC differs from the economies of many
countries in respects such as structure, government involvement, level of development, growth rate,
capital reinvestment, allocation of resources, self-sufficiency, rate of inflation and balance of
payments position, among others. In the past, the economy of the PRC has been primarily a planned
economy subject to state plans. Since the entry of the PRC into the World Trade Organization in
2002, the PRC government has been reforming its economic and political systems. These reforms have
resulted in significant economic growth and social change. We cannot assure, however, that the
PRC’s policies for economic reforms will be consistent or effective. Our results of operations and
financial position may be harmed by changes in the PRC’s political, economic or social conditions.
Our dependence on selling through distributors and integrators increases the complexity of managing
our supply chain and may result in excess inventory or inventory shortages.
Selling through distributors and integrators reduces our ability to forecast sales and increases
the complexity of our business. Since our distributors act as intermediaries between us and the
companies using our products, we must rely on our distributors to accurately report inventory
levels and production forecasts. Some of our products are sold to integrators, who then integrate
our semiconductors into a system that is then sold to an original equipment manufacturer or “OEM.”
This adds another layer between us and the ultimate source of demand for our products, the
consumer. These arrangements
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require us to manage a more complex supply chain and monitor the financial condition and
creditworthiness of our distributors, integrators and customers. Our failure to manage one or more
of these challenges could result in excess inventory or shortages that could seriously impact our
operating revenue or limit the ability of companies using our semiconductors to deliver their
products.
Dependence on a limited number of sole-source, third-party manufacturers for our products exposes
us to shortages based on capacity allocation or low manufacturing yield, errors in manufacturing,
price increases with little notice, volatile inventory levels and delays in product delivery, which
could result in delays in satisfying customer demand, increased costs and loss of revenues.
We do not own or operate a semiconductor fabrication facility and we do not have the resources to
manufacture our products internally. We rely on third-party foundries for wafer fabrication and
other contract manufacturers for assembly and testing of our products. Our requirements represent
only a small portion of the total production capacity of our contract manufacturers. Our
third-party manufacturers have in the past re-allocated capacity to other customers even during
periods of high demand for our products. We expect that this may occur again in the future. We have
limited control over delivery schedules, quality assurance, manufacturing yields, potential errors
in manufacturing and production costs. We do not have long-term supply contracts with our
third-party manufacturers so they are not obligated to supply us with products for any specific
period of time, in any specific quantity or at any specific price, except as may be provided in a
particular purchase order. From time to time our third-party manufacturers increase prices charged
to manufacture our products with little notice. This requires us to either increase the price we
charge for our products or suffer a decrease in our gross margins. We try not to maintain
substantial inventories of products, but need to order products well in advance of receiving firm
purchase orders for those products which could result in excess inventory or inventory shortages.
If we are unable to obtain our products from manufacturers on schedule, our ability to satisfy
customer demand will be harmed, and revenue from the sale of products may be lost or delayed. If
orders for our products are cancelled, expected revenues would not be realized. In addition, if the
price charged by our third-party manufacturers increases we will be required to increase our
prices, which could harm our competitiveness. For example, in the fourth quarter of 2005, one of
our third-party manufacturers experienced temporary manufacturing delays due to unexpected process
problems, which caused delays in delivery of our products making it difficult for us to satisfy our
customer demand.
The concentration of our manufacturers and customers in the same geographic region increases our
risk that a natural disaster, labor strike or political unrest could disrupt our operations.
Most of our current manufacturers and customers are located in the PRC, Japan, Korea and Taiwan.
The risk of earthquakes in the Pacific Rim region is significant due to the proximity of major
earthquake fault lines in the area. Common consequences of earthquakes include power outages and
disruption and/or impairment of production capacity. Earthquakes, fire, flooding, power outages and
other natural disasters in the Pacific Rim region, or political unrest, labor strikes or work
stoppages in countries where our manufacturers and customers are located likely would result in the
disruption of our manufacturers’ and customers’ operations. Any disruption resulting from
extraordinary events could cause significant delays in shipments of our products until we are able
to shift our manufacturing from the affected contractor to another third-party vendor. There can be
no assurance that alternative capacity could be obtained on favorable terms, if at all.
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We use a COT, or customer owned tooling, process for manufacturing some of our products which
exposes us to the possibility of poor yields and unacceptably high product costs.
We are building many of our products on a customer owned tooling basis, also known in the
semiconductor industry as COT, where we directly contract the manufacture of wafers and assume the
responsibility for the assembly and testing of our products. As a result, we are subject to
increased risks arising from wafer manufacturing yields and risks associated with coordination of
the manufacturing, assembly and testing process. Poor product yields would result in higher product
costs, which could make our products uncompetitive with products offered by our competitors if we
chose to increase our prices, or could result in low gross profit margins if we did not increase
our prices.
We are dependent on our foundries to implement complex semiconductor technologies, which could
adversely affect our operations if those technologies are unavailable, delayed or inefficiently
implemented.
In order to increase performance and functionality and reduce the size of our products, we are
continuously developing new products using advanced technologies that further miniaturize
semiconductors. However, we are dependent on our foundries to develop and provide access to the
advanced processes that enable such miniaturization. We cannot be certain that future advanced
manufacturing processes will be implemented without difficulties, delays or increased expenses. Our
business, financial condition and results of operations could be materially and adversely affected
if advanced manufacturing processes are unavailable to us, substantially delayed or inefficiently
implemented.
Manufacturers of our semiconductor products periodically discontinue manufacturing processes, which
could make our products unavailable from our current suppliers.
Semiconductor manufacturing technologies change rapidly and manufacturers typically discontinue
older manufacturing processes in favor of newer ones. Once a manufacturer makes the decision to
retire a manufacturing process, notice is generally given to its customers. Customers will then
either retire the affected part or develop a new version of the part that can be manufactured on
the newer process. In the event that a manufacturing process is discontinued, our products could
become unavailable from our current suppliers. Additionally, migrating to a new, more advanced
process requires significant expenditures for research and development. A significant portion of
our products use embedded DRAM technology and the required manufacturing process for this
technology may only be available for the next two years. We also utilize 0.18um, 0.15um and 0.13um
standard logic processes, which may only be available for the next five to seven years. We have
commitments from our suppliers to notify us in the event of a discontinuance of a manufacturing
process in order to assist us with product transitions.
If we have to qualify a new contract manufacturer or foundry for any of our products, we may
experience delays that result in lost revenues and damaged customer relationships.
None of our products are fabricated by more than one supplier. Additionally, our products require
manufacturing with state-of-the-art fabrication equipment and techniques. Because the lead-time
needed to establish a relationship with a new contract manufacturer is at least nine months, and
the estimated time for us to adapt a product’s design to a particular contract manufacturer’s
process is at least four months, there is no readily available alternative source of supply for any
specific product. This could cause significant delays in shipping products, which may result in
lost revenues and damaged customer relationships.
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Our future success depends upon the continued services of key personnel, many of whom would be
difficult to replace and the loss of one or more of these employees could seriously harm our
business by delaying product development.
Our future success depends upon the continued services of our executive officers, key hardware and
software engineers, and sales, marketing and support personnel, many of whom would be difficult to
replace. The loss of one or more of these employees, particularly Allen Alley, our President and
Chief Executive Officer, could seriously harm our business. In addition, because of the highly
technical nature of our business, the loss of key engineering personnel could delay product
introductions and significantly impair our ability to successfully create future products. We
believe our success depends, in large part, upon our ability to identify, attract and retain
qualified hardware and software engineers, and sales, marketing, finance and managerial personnel.
Competition for talented personnel is intense and we may not be able to retain our key personnel or
identify, attract or retain other highly qualified personnel in the future. We have experienced,
and may continue to experience, difficulty in hiring and retaining employees with appropriate
qualifications. If we do not succeed in hiring and retaining employees with appropriate
qualifications, our product development efforts, revenues and business could be seriously harmed.
Because we do not have long-term commitments from our customers, and plan purchases based on
estimates of customer demand which may be inaccurate, we must contract for the manufacture of our
products based on those potentially inaccurate estimates.
Our sales are made on the basis of purchase orders rather than long-term purchase commitments. Our
customers may cancel or defer purchase orders at any time. This process requires us to make
multiple demand forecast assumptions, each of which may introduce error into our estimates. If our
customers or we overestimate demand, we may purchase components or have products manufactured that
we may not be able to use or sell. As a result, we would have excess inventory, which would
negatively affect our operating results. Conversely, if our customers or we underestimate demand or
if sufficient manufacturing capacity is unavailable, we would forego revenue opportunities, lose
market share and damage our customer relationships.
Development projects may cause us to incur substantial operating expenses without the guarantee of
any associated revenue or far in advance of revenue.
We have development projects that consume large amounts of engineering resources far in advance of
product revenue. Our work under these projects is technically challenging and places considerable
demands on our limited resources, particularly on our most senior engineering talent, and may not
result in revenue for twelve to eighteen months, if at all. In addition, allocating significant
resources to these projects may detract from or delay the completion of other development projects.
Any of these development projects could be canceled at any time without notice. These factors could
have a material and adverse effect on our long-term business and results of operations.
Because of our long product development process and sales cycle, we may incur substantial expenses
before we earn associated revenues and may not ultimately sell as many units of our products as we
forecasted.
We develop products based on anticipated market and customer requirements and incur substantial
product development expenditures, which can include the payment of large up-front, third-party
license fees and royalties, prior to generating associated revenues. Because the development of our
products incorporates not only our complex and evolving technology, but also our customers’
specific requirements, a lengthy sales process is often required before potential customers begin
the technical evaluation of our products. Our customers typically perform numerous tests and
extensively evaluate our products before
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incorporating them into their systems. The time required for testing, evaluation and design of our
products into a customer’s equipment can take up to nine months or more. It can take an additional
nine months before a customer commences volume shipments of systems that incorporate our products.
Even when we achieve a design win, the customer may never ship systems incorporating our products.
We cannot assure that the time required for the testing, evaluation and design of our products by
our customers would not exceed nine months. Because of this lengthy development cycle, we will
experience delays between the time we incur expenditures for research and development, sales and
marketing, inventory levels and the time we generate revenues, if any, from these expenditures.
Additionally, if actual sales volumes for a particular product are substantially less than
originally forecasted, we may experience large write-offs of capitalized license fees, product
masks and prepaid royalties that would negatively affect our operating results.
Shortages of other key components for our customers’ products could delay our ability to sell our
products.
Shortages of components and other materials that are critical to the design and manufacture of our
customers’ products could limit our sales. These components include liquid crystal display panels
and other display components, analog-to-digital converters, digital receivers and video decoders.
During 2000, some of our customers experienced delays in the availability of key components from
other suppliers, which, in turn, caused a delay in demand for the products that we supplied to our
customers.
Shortages of materials used in the manufacturing of our products may increase our costs or limit
our revenues and impair our ability to ship our products on time.
From time to time, shortages of materials that are used in our products may occur. In particular,
we may experience shortages of semiconductor wafers and packages. If material shortages occur, we
may incur additional costs or be unable to ship our products to our customers in a timely fashion,
both of which could harm our business and negatively impact our earnings.
Our products could become obsolete if necessary licenses of third-party technology are not
available to us or are only available on terms that are not commercially viable.
We license technology from third parties that is incorporated into our products or product
enhancements. Future products or product enhancements may require additional third-party licenses
that may not be available to us or on terms that are commercially reasonable. If we are unable to
obtain any third-party license required to develop new products and product enhancements, we may
have to obtain substitute technology of lower quality or performance standards or at greater cost,
either of which could seriously harm the competitiveness of our products. We currently have access
to certain key technology, owned by independent third parties, through license agreements. In the
event of a change in control at the licensor, it may become difficult to attain access to such
licensed technology.
We may not be able to respond to the rapid technological changes in the markets in which we
compete, or we may not be able to comply with industry standards in the future making our products
less desirable or obsolete.
The markets in which we compete or seek to compete are subject to rapid technological change,
frequent new product introductions, changing customer requirements for new products and features,
and evolving industry standards. The introduction of new technologies and the emergence of new
industry standards could render our products less desirable or obsolete, which could harm our
business. Examples of changing industry standards include the introduction of high-definition
television (ATSC and DVB), or HDTV, new video decoding technology (such as H.264 or Windows Media
9), new digital receivers and
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displays with resolutions that have required us to accelerate development of new products to meet
these new standards.
Our software development tools may be incompatible with industry standards and challenging to
implement, which could slow product development or cause us to lose customers and design wins.
Our existing products incorporate complex software tools designed to help customers bring products
into production. Software development is a complex process and we are dependent on software
development languages and operating systems from vendors that may compromise our ability to design
software in a timely manner. Also, software development is a volatile market and new software
languages are introduced to the market that may be incompatible with our existing systems and
tools. New software development languages may not be compatible with our own, requiring significant
engineering efforts to migrate our existing systems in order to be compatible with those new
languages. Existing or new software development tools could make our current products obsolete or
hard to use. Software development disruptions could slow our product development or cause us to
lose customers and design wins.
Our integrated circuits and software could contain defects, which could reduce sales of those
products or result in claims against us.
Despite testing by both our customers and us, errors or performance problems may be found in
existing or new semiconductors and software. This could result in a delay in the recognition or
loss of revenues, loss of market share or failure to achieve market acceptance. These defects may
cause us to incur significant warranty, support and repair costs, and could also divert the
attention of our engineering personnel from our product development efforts and harm our
relationships with our customers. The occurrence of these problems could result in the delay or
loss of market acceptance of our semiconductors and would likely harm our business. Defects,
integration issues or other performance problems in our semiconductors and software could result in
financial or other damages to our customers or could damage market acceptance of our products. Our
customers could also seek damages from us for their losses. A product liability claim brought
against us, even if unsuccessful, would likely be time consuming and costly to defend.
Others may bring infringement actions against us that could be time consuming and expensive to
defend.
We may become subject to claims involving patents or other intellectual property rights. For
example, in early 2000, we were notified by InFocus Corporation (“InFocus”) that we were infringing
on patents held by InFocus. In February 2000, we entered into a license agreement with InFocus
granting us the right to use the technology covered by those InFocus patents. As a result, we
recorded a charge of $4,078 for patent settlement expense in the first quarter of 2000.
Intellectual property claims could subject us to significant liability for damages and invalidate
our proprietary rights. In addition, intellectual property claims may be brought against customers
that incorporate our products in the design of their own products. These claims, regardless of
their success or merit and regardless of whether we are named as defendants in a lawsuit, would
likely be time consuming and expensive to resolve and would divert the time and attention of
management and technical personnel. Any future intellectual property litigation or claims also
could force us to do one or more of the following:
| • | stop selling products using technology that contains the allegedly infringing intellectual property; | |
| • | attempt to obtain a license to the relevant intellectual property, which may not be available on reasonable terms or at all; |
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| • | attempt to redesign those products that contain the allegedly infringing intellectual property; and | |
| • | pay damages for past infringement claims that are determined to be valid or which are arrived at in settlement of such litigation or threatened litigation. |
If we are forced to take any of the foregoing actions, we may be unable to manufacture and sell our
products, which could seriously harm our business. In addition, we may not be able to develop,
license or acquire non-infringing technology under reasonable terms. These developments could
result in an inability to compete for customers or could adversely affect our results of
operations.
Our limited ability to protect our intellectual property and proprietary rights could harm our
competitive position by allowing our competitors to access our proprietary technology and to
introduce similar products.
Our ability to compete effectively with other companies will depend, in part, on our ability to
maintain the proprietary nature of our technology, including our semiconductor designs and
software. We rely on a combination of patent, copyright, trademark and trade secret laws, as well
as nondisclosure agreements and other methods, to protect our proprietary technologies. We hold 36
patents and have 94 patent applications pending for protection of our significant technologies. We
cannot assure you that the degree of protection offered by patents or trade secret laws will be
sufficient. Furthermore, we cannot assure you that any patents will be issued as a result of any
pending applications, or that, if issued, any claims allowed will be sufficiently broad to protect
our technology. In addition, it is possible that existing or future patents may be challenged,
invalidated or circumvented. Competitors in both the U.S. and foreign countries, many of whom have
substantially greater resources, may apply for and obtain patents that will prevent, limit or
interfere with our ability to make and sell our products, or develop similar technology
independently or design around our patents. Effective copyright, trademark and trade secret
protection may be unavailable or limited in foreign countries. In addition, we provide the computer
programming code for our software to selected customers in connection with their product
development efforts, thereby increasing the risk that customers will misappropriate our proprietary
software.
We have incurred substantial indebtedness as a result of the sale of convertible debentures.
In the second quarter of 2004, we issued $150,000 of 1.75% convertible debentures due 2024 in a
private placement pursuant to Rule 144A and Regulation S under the Securities Act of 1933. As a
result of this indebtedness, our principal obligations increased substantially. These debt
obligations could materially and adversely affect our ability to obtain debt financing for working
capital, acquisitions or other purposes, limit our flexibility in planning for or reacting to
changes in our business, reduce funds available for use in our operations and could make us more
vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service
obligations will be dependent upon our future performance, which will be subject to financial,
business and other factors affecting our operations, many of which are beyond our control.
Failure to manage our expansion effectively could adversely affect our ability to increase our
business and our results of operations.
Our ability to successfully market and sell our products in a rapidly evolving market requires
effective planning and management processes. We continue to increase the scope of our operations
and have increased our headcount from 349 employees at the end of 2004 to 469 at December 31, 2005.
Our past growth, and our expected future growth, places a significant strain on our management
systems and resources including our financial and managerial controls, reporting systems and
procedures. To manage our growth effectively, we must implement and improve operational and
financial systems, train and
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manage our employee base and attract and retain qualified personnel with relevant experience. We
must also manage multiple relationships with customers, business partners, contract manufacturers,
suppliers and other third parties. Moreover, we could spend substantial amounts of time and money
in connection with our rapid growth and may have unexpected costs. Our systems, procedures or
controls may not be adequate to support our operations and we may not be able to expand quickly
enough to exploit potential market opportunities. While we have not, to date, suffered any
significant adverse consequences due to our growth, if we do not continue to manage growth
effectively our operating expenses could increase more rapidly than our revenue, adversely
affecting our statement of operations.
Risks Related to Our Industry
Failure of consumer demand for advanced displays and other digital display technologies to increase
would impede our growth and adversely affect our business.
Our product development strategies anticipate that consumer demand for advanced televisions,
multimedia projectors, liquid crystal display panels, digital streaming media devices and other
emerging display technologies will increase in the future. The success of our products is dependent
on increased demand for these display technologies. The potential size of the market for products
incorporating these display technologies and the timing of its development are uncertain and will
depend upon a number of factors, all of which are beyond our control. In order for the market in
which we participate to grow, advanced display products must be widely available and affordable to
consumers. In the past, the supply of advanced display products has been cyclical. We expect this
pattern to continue. Undercapacity in the advanced display market may limit our ability to increase
our revenues because our customers may limit their purchases of our products if they cannot obtain
sufficient supplies of LCD panels or other advanced display components. In addition, advanced
display prices may remain high because of limited supply, and consumer demand may not grow.
If products incorporating our semiconductors are not compatible with computer display protocols,
video standards and other devices, the market for our products will be reduced and our business
prospects could be significantly limited.
Our products are incorporated into our customers’ products, which have different parts and
specifications and utilize multiple protocols that allow them to be compatible with specific
computers, video standards and other devices. If our customers’ products are not compatible with
these protocols and standards, consumers will return these products, or consumers will not purchase
these products, and the markets for our customers’ products could be significantly reduced. As a
result, a portion of our market would be eliminated, and our business would be harmed.
Intense competition in our markets may reduce sales of our products, reduce our market share,
decrease our gross profit and result in large losses.
Rapid technological change, evolving industry standards, compressed product life cycles and
declining average selling prices are characteristics of our market and could have a material
adverse effect on our business, financial condition and results of operations. As the overall price
of advanced flat panel display screens continues to fall, we may be required to offer our products
to manufacturers at discounted prices due to increased price competition. At the same time, new,
alternative technologies and industry standards may emerge that directly compete with technologies
that we offer. We may be required to increase our investment in research and development at the
same time that product prices are falling. In addition, even after making this investment, we
cannot assure you that our technologies will be superior to those of our competitors or that our
products will achieve market acceptance, whether for performance or price reasons. Failure to
effectively respond to these trends could reduce the demand for our products.
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We compete with specialized and diversified electronics and semiconductor companies that offer
advanced display, digital TV and IPTV semiconductor products. Some of these include ATI, Genesis
Microchip, I-Chips, ITE, JEPICO Corp., Macronix, Mediatek, Media Reality Technologies, Micronas,
MStar Semiconductor, Inc., Realtek, Renesas Technology, Sigma Designs, Silicon Image, Silicon
Optix, STMicroelectronics, Sunplus Technology, Techwell, Topro, Trident, Trumpion, Weltrend, Zoran
and other companies. Potential competitors may include diversified semiconductor manufacturers and
the semiconductor divisions or affiliates of some of our customers, including Intel, Koninlijke
Philips Electronics, LG Electronics, Matsushita Electric Industrial, Mitsubishi, National
Semiconductor, NEC, nVidia, Samsung Electronics, Sanyo Electric Company, Sharp Corporation, Sony
Corporation, Texas Instruments and Toshiba Corporation. In addition, start-up companies may seek
to compete in our markets. Many of our competitors have longer operating histories and greater
resources to support development and marketing efforts. Some of our competitors may operate their
own fabrication facilities. These competitors may be able to react more quickly and devote more
resources to efforts that compete directly with our own. In the future, our current or potential
customers may also develop their own proprietary technologies and become our competitors. Our
competitors may develop advanced technologies enabling them to offer more cost-effective and higher
quality semiconductors to our customers than those offered by us. Increased competition could harm
our business, financial condition and results of operations by, for example, increasing pressure on
our profit margin or causing us to lose sales opportunities. We cannot assure you that we can
compete successfully against current or potential competitors.
The cyclical nature of the semiconductor industry may lead to significant variances in the demand
for our products and could harm our operations.
In the past, the semiconductor industry has been characterized by significant downturns and wide
fluctuations in supply and demand. Also, during this time, the industry has experienced significant
fluctuations in anticipation of changes in general economic conditions, including economic
conditions in Asia and North America. The cyclical nature of the semiconductor industry has led to
significant variances in product demand and production capacity. We may experience periodic
fluctuations in our future financial results because of changes in industry-wide conditions.
Other Risks
The anti-takeover provisions of Oregon law and in our articles of incorporation could adversely
affect the rights of the holders of our common stock by preventing a sale or takeover of us at a
price or prices favorable to the holders of our common stock.
Provisions of our articles of incorporation and bylaws and provisions of Oregon law may have the
effect of delaying or preventing a merger or acquisition of us, making a merger or acquisition of
us less desirable to a potential acquirer or preventing a change in our management, even if the
shareholders consider the merger or acquisition favorable or if doing so would benefit our
shareholders. In addition, these provisions could limit the price that investors would be willing
to pay in the future for shares of our common stock. The following are examples of such provisions
in our articles of incorporation or bylaws:
| • | our board of directors is authorized, without prior shareholder approval, to increase the size of the board. Our articles of incorporation provide that if the board is increased to eight or more members, the board will divided into three classes serving staggered terms, which would make it more difficult for a group of shareholders to quickly change the composition of our board; | |
| • | our board of directors is authorized, without prior shareholder approval, to create and issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us or change our control, commonly referred to as “blank check” preferred stock; | |
| • | members of our board of directors can only be removed for cause; |
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| • | the board of directors may alter our bylaws without obtaining shareholder approval; and | |
| • | shareholders are required to provide advance notice for nominations for election to the board of directors or for proposing matters to be acted upon at a shareholder meeting. |
Our principal shareholders have significant voting power and may take actions that may make it more
difficult to sell our shares at a premium to take over candidates.
Our executive officers, directors and other principal shareholders, in the aggregate, beneficially
own 23,222,641 shares or approximately 48% of our outstanding common stock and exchangeable shares
as of February 28, 2006. These shareholders currently have, and will continue to have, significant
influence with respect to the election of our directors and approval or disapproval of our
significant corporate actions. This influence over our affairs might be adverse to the interest of
our other shareholders. In addition, the voting power of these shareholders could have the effect
of delaying or preventing a change in control of our business or otherwise discouraging a potential
acquirer from attempting to obtain control of us, which could prevent our other shareholders from
realizing a premium over the market price for their common stock.
The price of our common stock has and may continue to fluctuate substantially.
Investors may not be able to sell shares of our common stock at or above the price they paid due to
a number of factors, including, but not limited to:
| • | actual or anticipated fluctuations in our operating results; |
| • | actual reduction in our operating results due solely to the adoption of Statement of Financial Accounting Standards No. 123R, which requires, among other things, the expensing of stock options beginning in 2006; |
| • | changes in expectations as to our future financial performance; |
| • | changes in financial estimates of securities analysts; |
| • | announcements by us or our competitors of technological innovations, design wins, contracts, standards or acquisitions; |
| • | the operating and stock price performance of other comparable companies; |
| • | announcements of future expectations by our customers; |
| • | changes in market valuations of other technology companies; and |
| • | inconsistent trading volume levels of our common stock. |
In particular, the stock prices of technology companies similar to us have been highly volatile.
These fluctuations often have been unrelated or disproportionate to the operating performance of
those companies. Market fluctuations as well as general economic, political and market conditions
including recessions, interest rate changes or international currency fluctuations, may negatively
impact the market price of our common stock. Therefore, the price of our common stock may decline,
and the value of your investment may be reduced regardless of our performance.
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We may be unable to meet our future capital requirements, which would limit our ability to grow.
We believe our current cash and marketable security balances will be sufficient to meet our capital
requirements for the next twelve months. However, we may need, or could elect to seek, additional
funding prior to that time. To the extent that currently available funds are insufficient to fund
our future activities, we may need to raise additional funds through public or private equity or
debt financing. Additional funds may not be available on terms favorable to us or our shareholders.
Further, if we issue equity securities, our shareholders may experience additional dilution or the
new equity securities may have rights, preferences or privileges senior to those of our common
stock. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our
products, take advantage of future opportunities or respond to competitive pressures or
unanticipated requirements.
We may be unable to meet changing laws, regulations and standards relating to corporate governance
and public disclosure.
We are spending an increasing amount of management time and external resources to comply with
changing laws, regulations and standards relating to corporate governance and public disclosure,
including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ Stock Market rules. In
particular, Section 404 of the Sarbanes-Oxley Act of 2002 requires management’s annual review and
evaluation of our internal control systems, and attestations of the effectiveness of these systems
by our independent registered public accounting firm. The process of documenting and testing our
controls has required that we hire additional personnel and outside advisory services and has
resulted in additional accounting and legal expenses. While we invested significant time and money
in our effort to evaluate and test our internal control over financial reporting, a material
weakness was identified in our internal control over financial reporting in 2004. In addition,
there are inherent limitations to the effectiveness of any system of disclosure controls and
procedures, including cost limitations, the possibility of human error, judgments and assumptions
regarding the likelihood of future events, and the circumvention or overriding of the controls and
procedures. Accordingly, even effective disclosure controls and procedures can provide only
reasonable assurance of achieving their control objectives.
Item 1B.
Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
We lease approximately 80,000 square feet in two buildings in Tualatin, Oregon, which house our
corporate headquarters and include engineering, operations, sales and marketing and administrative
facilities. These leases expire at various dates through February 2009.
We lease approximately 39,000 square feet in two buildings in Campbell, California. These leases
expire in May and October of 2006, and we have entered into a lease agreement for approximately
37,000 square feet of replacement space commencing June of 2006. We lease approximately 18,000
square feet in Ontario, Canada and 8,000 square feet in Seattle, Washington. Our Ontario lease
expires in August 2008 and our Seattle lease expires in October 2011. The facilities in
California, Canada and Washington house engineering and sales and marketing facilities.
We lease approximately 57,000 square feet in three cities in China for purposes of engineering
and sales and customer support. Our China leases expire at various dates through December
2006. We also lease approximately 26,000 square feet in two cities in Taiwan for purposes of sales
and customer support
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and operations and logistics, and 4,000 square feet in two cities in Japan for purposes of
sales and customer support. Our Taiwan and Japan leases expire at various dates through November
2008 and March of 2007, respectively.
Item 3. Legal Proceedings.
We are involved in litigation from time to time that is routine in nature and incidental to our
business. We believe that the outcome of any such current litigation would not have a material
adverse effect on our financial condition, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of our security holders during the fourth quarter of the
fiscal year ended December 31, 2005.
PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our Common Stock is listed for trading on the Nasdaq National Market under the symbol “PXLW”.
The stock began trading on May 19, 2000. The following table sets forth, for the periods
indicated, the highest and lowest sales prices of the Common Stock.
| Fiscal 2005 | High | Low | ||||||
Fourth Quarter |
$ | 6.74 | $ | 4.97 | ||||
Third Quarter |
$ | 11.78 | $ | 6.25 | ||||
Second Quarter |
$ | 9.32 | $ | 6.90 | ||||
First Quarter |
$ | 12.44 | $ | 7.55 | ||||
| Fiscal 2004 | High | Low | ||||||
Fourth Quarter |
$ | 12.80 | $ | 10.11 | ||||
Third Quarter |
$ | 15.32 | $ | 7.50 | ||||
Second Quarter |
$ | 20.74 | $ | 14.61 | ||||
First Quarter |
$ | 17.93 | $ | 10.95 | ||||
As of February 28, 2006, there were 222 shareholders of record (excluding individual
participants in securities positions listings), and the last per share sales price of the Common
Stock on that date was $4.51.
The payment of dividends is within the discretion of our Board of Directors and will depend on
our earnings, capital requirements and operating and financial condition, among other factors. To
date, we have not declared any cash dividends and we currently expect to retain any earnings to
finance the expansion and development of our business.
Information with respect to equity compensation plans is included in the 2006 Proxy Statement and
is incorporated herein by reference.
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Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operation” and Item 8. “Financial
Statements and Supplementary Data”.
Statement of Operations Data
| Year Ended December 31, | ||||||||||||||||||||
| 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
Revenue, net |
$ | 171,704 | $ | 176,211 | $ | 140,921 | $ | 102,641 | $ | 90,808 | ||||||||||
Cost of revenue |
108,748 | 90,991 | 78,674 | 52,545 | 47,167 | |||||||||||||||
Gross profit |
62,956 | 85,220 | 62,247 | 50,096 | 43,641 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Research and development |
51,814 | 32,969 | 29,580 | 31,182 | 24,875 | |||||||||||||||
Selling, general and administrative |
30,616 | 23,736 | 20,797 | 16,576 | 17,387 | |||||||||||||||
Restructuring |
1,162 | — | 5,049 | — | — | |||||||||||||||
Amortization of goodwill and acquired
intangible assets |
1,084 | 486 | 486 | 242 | 15,982 | |||||||||||||||
Merger-related expenses |
— | — | 8,949 | — | — | |||||||||||||||
In-process research and development |
— | — | — | 24,342 | 32,400 | |||||||||||||||
Total operating expenses |
84,676 | 57,191 | 64,861 | 72,342 | 90,644 | |||||||||||||||
Income (loss) from operations |
(21,720 | ) | 28,029 | (2,614 | ) | (22,246 | ) | (47,003 | ) | |||||||||||
Interest and other income, net |
1,532 | 1,742 | 1,177 | 2,275 | 4,444 | |||||||||||||||
Income (loss) before income
taxes |
(20,188 | ) | 29,771 | (1,437 | ) | (19,971 | ) | (42,559 | ) | |||||||||||
Provision for (recovery of) income taxes |
22,422 | 7,990 | (907 | ) | 880 | — | ||||||||||||||
Net income (loss) |
$ | (42,610 | ) | $ | 21,781 | $ | (530 | ) | $ | (20,851 | ) | $ | (42,559 | ) | ||||||
Net income (loss) per share: |
||||||||||||||||||||
Basic |
$ | (0.90 | ) | $ | 0.47 | $ | (0.01 | ) | $ | (0.48 | ) | $ | (1.05 | ) | ||||||
Diluted |
$ | (0.90 | ) | $ | 0.45 | $ | (0.01 | ) | $ | (0.48 | ) | $ | (1.05 | ) | ||||||
Weighted average shares outstanding: |
||||||||||||||||||||
Basic |
47,337 | 46,673 | 45,337 | 43,397 | 40,662 | |||||||||||||||
Diluted |
47,337 | 52,062 | 45,337 | 43,397 | 40,662 | |||||||||||||||
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Balance Sheet Data
| December 31, | ||||||||||||||||||||
| 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Cash and cash equivalents |
$ | 68,604 | $ | 32,585 | $ | 16,490 | $ | 17,577 | $ | 43,288 | ||||||||||
Working capital |
139,291 | 209,653 | 91,681 | 95,776 | 98,820 | |||||||||||||||
Total assets |
421,556 | 423,569 | 233,317 | 227,212 | 202,839 | |||||||||||||||
Long-term liabilities,
net of current portion |
163,357 | 150,365 | 100 | — | — | |||||||||||||||
Total shareholders’ equity |
215,217 | 252,023 | 220,305 | 214,816 | 193,633 | |||||||||||||||
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operation. |
Forward-looking Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operation and
other sections of this Report contain “forward-looking statements” within the meaning of the
Securities Litigation Reform Act of 1995 that are based on current expectations, estimates,
beliefs, assumptions and projections about our business. Words such as “expects,” “anticipates,”
“intends,” “plans,” “believes,” “seeks,” “estimates” and variations of such words and similar
expressions are intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks and uncertainties that are difficult to
predict. Actual outcomes and results may differ materially from what is expressed or forecasted in
such forward-looking statements due to numerous factors. Such factors include, but are not limited
to, increased competition, continued adverse economic conditions in the U.S. and internationally,
including adverse economic conditions in the specific markets for our products, adverse business
conditions, failure to design, develop and manufacture new products, lack of success in
technological advancements, lack of acceptance of new products, unexpected changes in the demand
for our products and services, the inability to successfully manage inventory pricing pressures,
failure to reduce costs or improve operating efficiencies, changes to and compliance with
international laws and regulations, currency fluctuations and our ability to attract, hire and
retain key and qualified employees. These forward-looking statements speak only as of the date on
which they are made, and we do not undertake any obligation to update any forward-looking statement
to reflect events or circumstances after the date of this Annual Report on Form 10-K. If we do
update or correct one or more forward-looking statements, you should not conclude that we will make
additional updates or corrections with respect thereto or with respect to other forward-looking
statements.
(Dollars in thousands, except per share data)
Overview
We are a leading designer, developer and marketer of semiconductors and software for use in
advanced televisions, multimedia projectors, digital streaming media devices and liquid crystal
display (“LCD”) panel products. Our system-on-chip and discrete semiconductors provide the
‘intelligence’ for these new types of displays and devices by processing and optimizing video and
computer graphic signals to produce high-quality images. Many of the world’s leading manufacturers
of consumer electronics and computer display products utilize our technology to enhance image
quality and ease of use of their products. Our goal is to provide all of the electronics necessary
to process the signal along its entire path through the system in order to provide a turnkey
solution for our customers.
We sell our products worldwide through a direct sales force and indirectly through distributors and
manufacturers’ representatives. We sell to distributors in Japan, Taiwan, China and Europe, and
our manufacturers’ representatives support some of our European and Korean sales. Sales to
distributors
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represented 46%, 69% and 69% of total revenue for the years ended December 31, 2005,
2004 and 2003, respectively. Our distributors typically provide engineering support to our end
customers and often have valuable and established relationships with our end customers. In certain
countries it is customary to sell to distributors. While distributor payment to us is not
dependent upon the distributor’s ability to resell the product or to collect from the end customer,
the distributors may provide longer payment terms to end customers than those we would offer.
Historically, significant portions of our revenue have been generated by sales to a relatively
small number of end customers and distributors. Our top five end customers accounted for 34%, 33%
and 35% of our total revenue for the years ended December 31, 2005, 2004 and 2003, respectively.
Significant portions of our products are sold overseas. Sales outside the U.S. accounted for
approximately 96%, 99% and 99% of total revenue for the years ended December 31, 2005, 2004 and
2003, respectively. Our integrators, branded manufacturers and branded suppliers incorporate our
products into systems that are sold worldwide. All of our revenue to date has been denominated in
U.S. dollars.
On June 14, 2005, we acquired all of the outstanding shares of Equator Technologies, Inc.
(“Equator”) for $118,116, which consisted of cash of $107,854, the value of 1,263,417 options
exchanged of $8,336, plus acquisition costs of $1,926. The acquisition was accounted for using the
purchase method of accounting and the results of Equator’s operations are included in our financial
statements beginning on June 14, 2005.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based on our
consolidated financial statements, which have been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”). The preparation of financial statements in conformity
with GAAP requires us to make estimates and judgments that affect the amounts reported in the
financial statements and accompanying notes. On an on-going basis, we evaluate our estimates,
including those related to product returns, warranty obligations, inventories, property and
equipment, intangible assets, income taxes, litigation and other contingencies. We base our
estimates on historical experience and various other assumptions that we believe to be reasonable
under the circumstances. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial statements:
Revenue Recognition. We recognize revenue in accordance with Staff Accounting Bulletin No. 104,
Revenue Recognition. Accordingly, revenue is recognized when an authorized purchase order has been
received, title and risk of loss have transferred, the sales price is fixed or determinable, and
collectibility of the receivable is reasonably assured. This generally occurs upon shipment of the
underlying merchandise.
Sales Returns and Allowances. Our customers do not have a stated right to return product except
for replacement of defective products under our warranty program discussed below. However, we have
accepted customer returns on a case-by-case basis as customer accommodations in the past. As a
result, we provide for these returns in our reserve for sales returns and allowances. The reserve
is estimated at the end of each reporting period based on historical experience and knowledge of
any applicable events or transactions.
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Certain of our distributors have stock rotation provisions in their distributor agreements, which
allow them to return 5-10% of the products purchased in the prior six months in exchange for
products of equal value. We analyze historical stock rotations at the end of each reporting
period. To date, returns under the stock rotation provisions have been nominal.
Certain distributors also have price protection provisions in their distributor agreements with us.
Under the price protection provisions, we grant distributors credit if they purchased product for
a specific customer and we subsequently lower the price to the customer such that the distributor
can no longer earn its negotiated margin on in-stock inventory. At the end of each reporting
period, we estimate a reserve for price protection credits based on historical experience and
knowledge of any applicable events or transactions. The reserve for price protection is included
in our reserve for sales returns and allowances.
Product Warranties. We warrant that our products will be free from defects in materials and
workmanship for a period of twelve months from delivery. Warranty repairs are guaranteed for the
remainder of the original warranty period. Our warranty is limited to repairing or replacing
products, or refunding the purchase price.
At the end of each reporting period, we estimate a reserve for warranty returns based on historical
experience and knowledge of any applicable events or transactions. While we engage in extensive
product quality programs and processes, which include actively monitoring and evaluating the
quality of our suppliers, should actual product failure rates or product replacement costs differ
from our estimates, revisions to the estimated warranty liability may be required.
Allowance for Doubtful Accounts. We offer credit to customers after careful examination of their
creditworthiness. We maintain an allowance for doubtful accounts for estimated losses that may
result from the inability of our customers to make required payments. We evaluate the balance in
the allowance based on our historical write-off experience and the age of outstanding receivables
at the end of each reporting period. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments, additional allowances
may be required.
Inventory Valuation. We record a reserve against our inventory for estimated obsolete,
unmarketable, and otherwise impaired products by calculating the difference between the cost of
inventory and the estimated market value based upon assumptions about future demand and market
conditions. We review our inventory at the end of each reporting period for valuation issues. If
actual market conditions are less favorable than those we projected at the time the reserve was
recorded, additional inventory write-downs may be required.
Useful Lives and Recoverability of Equipment and Other Long-Lived Assets. In accordance with
Statement of Financial Accounting Standards No. (“SFAS”) 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, we evaluate the remaining useful life and recoverability of
equipment and other assets, including identifiable intangible assets with definite lives, whenever
events or changes in circumstances indicate that the carrying amount of the assets may not be
recoverable. If there is an indicator of impairment, we prepare an estimate of future,
undiscounted cash flows expected to result from the use of each asset and its eventual disposition.
If these cash flows are less than the carrying value of the asset, we adjust the carrying amount
of the asset to its estimated fair value.
Goodwill. Goodwill represents the excess of cost over the fair value of net assets acquired in
business combinations and is not amortized. We test goodwill annually for impairment, and more
frequently if events and circumstances indicate that it might be impaired. The impairment tests
are performed in accordance with SFAS 142, Goodwill and Other Intangible Assets. Accordingly, an
impairment loss is
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recognized to the extent that the carrying amount of goodwill exceeds its
implied fair value. This determination is made at the reporting unit level. We have assigned all
goodwill to a single, enterprise-level reporting unit. The impairment test consists of two steps.
First, we determine the fair value of the reporting unit. The fair value is then compared to its
carrying amount. Second, if the carrying amount of the reporting unit exceeds its fair value, an
impairment loss is recognized for any excess of the carrying amount of the reporting unit’s
goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit in a manner similar to a purchase
price allocation in accordance with SFAS 141, Business Combinations. The residual fair value after
this allocation is the implied fair value of the reporting unit goodwill. We perform our annual
impairment test in the first quarter of each year. We did not record any goodwill impairment
charges in 2005, 2004 or 2003 as a result of the impairment tests performed. We performed our 2006
annual impairment test on January 1, 2006 and determined no impairment existed. Due to the fact
that the market value of our reporting unit is approaching book value, it is at least reasonably
possible that we will have an impairment in the near term and, therefore, we may be required to
perform the impairment test at additional times during the year.
Income Taxes. Deferred income taxes are provided for temporary differences between the amount of
assets and liabilities for financial and tax reporting purposes. We record a valuation allowance
to reduce our deferred tax assets to the amount that is more likely than not to be realized.
Should we determine that we will not be able to realize all or part of our net deferred tax asset
in the future, an adjustment to the deferred tax asset would be charged to income in the period
such determination was made.
Tax contingency reserves are recorded to address potential exposures involving tax positions we
have taken that could be challenged by taxing authorities. These potential exposures result from
the varying applications of statutes, rules, regulations and interpretations. Our tax contingency
reserves contain assumptions based on past experiences and judgments about potential actions by
taxing jurisdictions. The ultimate resolution of these matters may be greater or less than the
amount that we have accrued.
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Results of Operations
The following table sets forth certain financial data for the periods indicated:
| Year Ended December 31, | ||||||||||||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||||||||||||
| Dollars | % of sales | Dollars | % of sales | Dollars | % of sales | |||||||||||||||||||
Revenue, net |
$ | 171,704 | 100.0 | % | $ | 176,211 | 100.0 | % | $ | 140,921 | 100.0 | % | ||||||||||||
Cost of revenue |
108,748 | 63.3 | 90,991 | 51.6 | 78,674 | 55.8 | ||||||||||||||||||
Gross profit |
62,956 | 36.7 | 85,220 | 48.4 | 62,247 | 44.2 | ||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Research and development |
51,814 | 30.2 | 32,969 | 18.7 | 29,580 | 21.0 | ||||||||||||||||||
Selling, general and administrative |
30,616 | 17.8 | 23,736 | 13.5 | 20,797 | 14.8 | ||||||||||||||||||
Restructuring |
1,162 | 0.7 | — | 0.0 | 5,049 | 3.6 | ||||||||||||||||||
Amortization of acquired intangible assets |
1,084 | 0.6 | 486 | 0.3 | 486 | 0.3 | ||||||||||||||||||
Merger-related expenses |
— | 0.0 | — | 0.0 | 8,949 | 6.4 | ||||||||||||||||||
Total operating expenses |
84,676 | 49.3 | 57,191 | 32.5 | 64,861 | 46.0 | ||||||||||||||||||
Income (loss) from operations |
(21,720 | ) | (12.6 | ) | 28,029 | 15.9 | (2,614 | ) | (1.9 | ) | ||||||||||||||
Interest income |
5,658 | 3.3 | 3,823 | 2.2 | 1,188 | 0.8 | ||||||||||||||||||
Interest expense |
(2,637 | ) | (1.5 | ) | (1,609 | ) | (0.9 | ) | (11 | ) | (0.0 | ) | ||||||||||||
Realized loss on sale of marketable securities |
(779 | ) | (0.5 | ) | — | 0.0 | — | 0.0 | ||||||||||||||||
Amortization of debt issuance costs |
(710 | ) | (0.4 | ) | (472 | ) | (0.3 | ) | — | 0.0 | ||||||||||||||
Interest and other income, net |
1,532 | 0.9 | 1,742 | 1.0 | 1,177 | 0.8 | ||||||||||||||||||
Income (loss) before income taxes |
(20,188 | ) | (11.8 | ) | 29,771 | 16.9 | (1,437 | ) | (1.0 | ) | ||||||||||||||
Provision for (recovery of) income taxes |
22,422 | 13.1 | 7,990 | 4.5 | (907 | ) | (0.6 | ) | ||||||||||||||||
Net income (loss) |
$ | (42,610 | ) | (24.8 | )% | $ | 21,781 | 12.4 | % | $ | (530 | ) | (0.4 | )% | ||||||||||
Percentages may not add due to rounding.
Revenue, net
Revenue, net decreased $4,507, or 3%, in 2005 compared to 2004, and increased $35,290, or 25%, in
2004 compared to 2003. The decrease in 2005 from 2004 is attributable to a decrease in average
selling prices of 10%, partially offset by an increase in units sold of 9%. Additionally, we
experienced a reduction in revenue from the multimedia projector market as a result of a shift in
the projection display technology from high temperature polysilicon displays to digital light
processing (DLP) displays for end user products. DLP display based products grew in market share
compared to high temperature polysilicon based products in 2005 and DLP products do not incorporate
our technology. The loss of revenue from the multimedia projector market was partially offset by
growth in the advanced television market and our entry into digital streaming media devices market.
The increase in 2004 from 2003 resulted from an increase in units sold of 38%, partially offset by
a decrease in average selling prices of
9%. Average selling prices for our products decline over relatively short periods of time due to
aggressive pricing competition, and we expect to continue to experience downward pressure on our
selling prices in future periods.
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Revenue by market as a percentage of total revenue was as follows:
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Advanced television |
52 | % | 43 | % | 27 | % | ||||||
Multimedia projector |
31 | % | 45 | % | 53 | % | ||||||
Digital streaming media devices |
8 | % | 0 | % | 0 | % | ||||||
LCD monitor |
7 | % | 10 | % | 18 | % | ||||||
Other |
2 | % | 2 | % | 2 | % | ||||||
Advanced Television
Revenue in the advanced television market has increased as a percent of total revenue from 2003
through 2005. The increase is primarily attributable to growth in overall consumer demand for
increasingly feature-rich LCD televisions, progressive scan televisions, plasma displays and
digital rear projection televisions. Units sold to the advanced television market increased 28%
from 2004 to 2005, and 121% from 2003 to 2004. These increases included increases in units sold to
LCD television, advanced CRT television, and plasma display panel manufacturers.
Multimedia Projector
Multimedia projector revenue as a percent of total revenue decreased in part due to the increase in
advanced television revenue. The 2005 decrease in multimedia projector revenue is also
attributable to market share lost in the DLP sector of the market. In 2004, total multimedia
projector revenue increased as a result of market growth driven by the introduction of “sub-$1,000”
projectors. Units sold to the multimedia projector market decreased 16% from 2004 to 2005, but
increased 25% from 2003 to 2004.
Digital Streaming Media Devices
Revenue in the digital streaming media devices market resulted from our acquisition of Equator in
June 2005. This market includes videoconferencing, set-top box, and other miscellaneous
applications, which include broadcasting, coding and imaging.
LCD Monitor
Revenue in the LCD monitor market has decreased as a percent of revenue from 2003 to 2005. This is
primarily attributable to our decision to focus on higher end products and discontinued development
of mainstream products for this market, rather than any particular industry dynamics. We expect
LCD monitor revenue to continue to decrease as we pursue opportunities in the LCD panel market.
Other
During the fourth quarter of 2005, we had nominal LCD panel revenue. In the future, we expect
revenue from this developing market to grow as we are able to secure design wins. Revenue from
sources other than those identified above is not expected to be significant in the near future.
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Cost of sales and gross profit
Cost of sales includes purchased materials, assembly, test, labor and overhead, warranty expense,
royalties, provisions for slow moving and obsolete inventory, amortization of the fair value
adjustment on acquired inventory, amortization of acquired developed technology, amortization of
acquired backlog, and stock-based compensation. Gross profit decreased to 36.7% in 2005 from 48.4%
in 2004, and increased in 2004 from 44.2% in 2003.
The decrease in gross profit in 2005 compared to 2004 is partially due to an increase in
acquisition-related amortization in 2005. In 2005, amortization of the inventory fair value
adjustment, amortization of acquired developed technology, and amortization of acquired backlog was $10,332,
or 6% of revenue. In 2004, amortization of developed technology was $529, or 0.3% of revenue, and
there was no amortization of inventory fair value adjustment or amortization of acquired backlog.
Future amortization expense of acquired developed technology will be approximately $7,889, $7,889, $7,889,
$7,404 and $3,373 for the years ending December 31, 2006, 2007, 2008, 2009 and 2010.
In addition to the acquisition-related amortization, our gross profit decreased in 2005 from 2004
as a result of average selling prices in the multimedia projector market and advanced television
market declining at a more rapid rate than average product costs, and to higher warranty and
royalty costs.
The increase in gross profit in 2004 compared to 2003 resulted from higher material margin in the
advanced television, multimedia projector and LCD monitor markets. The increases in material
margin resulted from a decrease in our average material costs and a shift in the mix of products
sold. The most significant margin improvement came in our LCD monitor market, where we focused on
higher margin business.
Declines in gross profit margin are characteristic of our industry and the markets we serve, and we
expect declines to occur again in the future, however we cannot predict when or how severe they
will be. As a result, we actively seek ways to reduce the cost to manufacture our products and
introduce new products with higher margins.
Research and development
Research and development expense includes compensation and related costs for personnel,
depreciation and amortization, fees for outside services, expensed equipment, and allocations for
facilities and information technology expenses.
Research and development expense increased $18,845, or 57.2%, to $51,814 in 2005 from $32,969 in
2004. This increase is primarily due to the following:
| • | Compensation expense increased $6,850, due to an increase in headcount in research and development cost centers to 254 at December 31, 2005 from 164 at December 31, 2004. This increase includes 49 in our Shanghai design center, and 41 that resulted from our acquisition of Equator. These increases were partially offset by a decrease in Tualatin headcount, which was primarily attributable to the restructuring we initiated in October of 2005. | |
| • | Development related expenses, including non-recurring engineering and outside services, increased $4,415. | |
| • | Depreciation and amortization expense increased $3,875, primarily due to increased licensed technology and software asset purchases. |
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| • | Facilities and information technology expenses allocated to research and development increased $3,293. The increase in facilities and information technology expenses was driven by increases in headcount in information technology departments, increases in rent expense, which were in part attributable to the addition of Equator, increases in depreciation and amortization expense, increases in expensed equipment and software, and increases in telephone and other communications charges. | |
| • | Stock-based compensation increased $536 due to the assumption of Equator outstanding stock options. |
Research and development expense increased $3,389, or 11.5%, to $32,969 in 2004 from $29,580 in
2003. This increase is primarily due to the following:
| • | Depreciation and amortization expense increased $1,642 due to higher licensed technology and software purchases in 2004. |
| • | Non-recurring engineering and outside services expenses increased $1,233. |
| • | Compensation expense increased $409 due to an increase in headcount in research and development cost centers to 164 at December 31, 2004 from 121 at December 31, 2003. |
| • | Travel-related expenses increased $387. |
| • | Facilities and information technology expenses allocated to research and development increased $310. The increase in facilities and information technology expenses was driven primarily by increases in headcount in information technology departments and increased telephone and other communications charges. |
| • | Loss on asset disposals increased $303 due to write offs of licensed technology, software and tooling in 2004. |
| • | Expensed equipment and software increased $183. |
| • | Stock-based compensation expense decreased $1,146, which is primarily attributable to our use of the accelerated method of expense recognition, under which more expense is recognized in earlier periods. |
We expect to make significant investments in research and development in support of our new product
development programs.
Selling, general and administrative
Selling, general and administrative expense includes compensation and related costs for personnel,
travel, outside services, sales commissions, allocations for facilities and information technology
expenses, and overhead incurred in our sales, marketing, customer support, management, legal and
other professional and administrative support functions.
Selling, general and administrative expense increased $6,880, or 29.0%, to $30,616 in 2005 from
$23,736 in 2004. This increase is primarily due to the following:
| • | Compensation expense increased $3,963, due to an increase in headcount in selling, general and administrative cost centers to 172 at December 31, 2005 from 153 as of December 31, 2004. This increase includes 10 that resulted from our acquisition of Equator. |
| • | Facilities and information technology expenses allocated to selling, general and administrative increased $1,562. The increase in facilities and information technology expenses was driven by increases in headcount in information technology departments, increases in rent expense, which were in part attributable to the addition of Equator, increases in depreciation and amortization expense, increases in expensed equipment and software, and increases in telephone and other communications charges. |
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| • | Sales commission expense increased $908, primarily due to our acquisition of Equator. |
| • | Travel-related expenses increased $727. |
Selling, general and administrative expense increased $2,939, or 14.1%, to $23,736 in 2004 compared
to $20,797 in 2003. This increase is primarily due to the following:
| • | Compensation expense increased $1,610 due to an increase in sales and marketing and administrative personnel to 153 as of December 31, 2004 from 96 as of December 31, 2003. |
| • | Outside services increased $783 and includes accounting and legal fees related to patent applications, restructuring corporate subsidiaries in China, and consulting fees related to Sarbanes-Oxley compliance. |
| • | Travel-related expenses increased $393, primarily due to the increase in headcount and an increase in customer visits. |
| • | Sales commission expense increased $299 due to higher revenue. |
| • | Expensed equipment increased $171. |
| • | Depreciation and amortization expense increased $262, due to increased purchases of property and equipment. |
| • | Recruiting expenses increased $161, which is related to the increase in headcount. |
| • | Investor relations expense increased $123. |
| • | Stock-based compensation expense decreased $1,545, which is attributable to our use of the accelerated method of expense recognition. |
We expect to make significant investments in our selling, general and administrative infrastructure
to support the global expansion and scalability of our business systems and increased sales-related
costs.
Restructuring
In October 2005, we initiated a restructuring plan to improve the effectiveness and timeliness of
our product development efforts in order to reduce our overall development costs. The
restructuring resulted in a reduction-in-force of 36 employees during the fourth quarter of 2005.
These employees were given severance benefits, which were expensed and paid in the fourth quarter
of 2005. The total amount of these benefits was approximately $1,162. As of December 31, 2005, we
had a nominal amount accrued related to this restructuring, which was paid in January 2006.
In September 2003, we initiated a restructuring to better position the Company to compete in the
advanced television market. The restructuring included the discontinuation of all research and
development efforts related to two products. As a result of these actions, we determined that
certain tangible and intangible assets related to the discontinued development efforts were
permanently impaired. The net book value of the impaired assets totaled $3,927 at the
discontinuation date, and this amount was recognized as a restructuring expense in the third
quarter of 2003. In addition, we implemented a reduction-in-force in the fourth quarter of 2003.
The terminated employees were granted termination benefits. The total amount of these
benefits was approximately $916 and was expensed in the fourth quarter of 2003. We also subleased
approximately 4,000 square feet of our California office as a result of the restructuring. We
included the present value of the difference between the future minimum lease payments and the
non-cancelable sublease rentals in restructuring expense during the fourth quarter of 2003. This
amount totaled $188. We did not incur any amounts related to this restructuring in 2004 or 2005.
We did not have any material amounts accrued related to this restructuring at December 31, 2004.
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Amortization of acquired intangible assets
We recorded customer relationships and trademark assets in connection with the acquisition of
Equator in June 2005, and an assembled workforce asset as a result of the Jaldi asset acquisition
in September 2002. These acquired intangible assets are amortized on a straight line basis over
the following useful lives: customer relationships, 3 years; trademark, 1 year; and assembled
workforce, 3 years. At December 31, 2005, the assembled workforce asset is fully amortized.
Future amortization expense of the customer relationships and trademark assets will be
approximately $1,225, $1,133 and $519 in the years ending December 31, 2006, 2007 and 2008,
respectively.
Merger-related expenses
Merger-related expenses totaling $8,949 in 2003, represent costs related to our proposed merger
with Genesis Microchip. The proposed merger was terminated August 5, 2003, and in the termination
agreement, we agreed to pay a $5,500 termination fee to Genesis Microchip. The fee was payable
immediately and was expensed in the third quarter of 2003. Additional merger-related expenses
incurred consisted primarily of legal fees.
Interest and other income, net
Interest and other income, net consists of the following:
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Interest income |
$ | 5,658 | $ | 3,823 | $ | 1,188 | ||||||
Interest expense |
(2,637 | ) | (1,609 | ) | (11 | ) | ||||||
Realized loss on sale of marketable securities |
(779 | ) | — | — | ||||||||
Amortization of debt issuance costs |
(710 | ) | (472 | ) | — | |||||||
| $ | 1,532 | $ | 1,742 | $ | 1,177 | |||||||
Interest income includes interest earned on cash equivalents and short- and long-term marketable
securities. Interest income increased $1,835, or 48.0%, from 2004 to 2005 and increased $2,635, or
222%, from 2003 to 2004. The increase in interest income from 2003 to 2005 is attributable to the
investment of the proceeds from the issuance of our 1.75% convertible subordinated debentures,
which were issued in May and June 2004.
Interest expense consists of interest payable on the debentures. Interest expense increased $1,028
from 2004 to 2005 and $1,598 from 2003 to 2004. The increase in interest expense from 2003 to 2005
is due to the issuance of the debentures in May and June 2004.
During the second quarter of 2005, we realized a $779 loss on the sale of marketable securities
used to fund the acquisition of Equator.
Debt issuance costs related to the debentures have been capitalized and are included in long-term
assets in our consolidated balance sheets. The debt issuance costs are being amortized over seven years.
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Provision for (recovery of) income taxes
We recorded income tax expense of $22,422 for the year ended December 31, 2005 despite the
recognition of a pre-tax book loss. This was attributable primarily to the fourth quarter addition
of approximately $31,900 of valuation allowance against essentially all net deferred tax assets and
contingent amounts relating to permanent establishment in foreign jurisdictions. The tax detriment
of these items was partially offset by federal, state and foreign tax credits and tax-exempt
interest generated during the year, and a refund relating to Jaldi’s foreign research and
experimentation credits. SFAS 109 requires that a valuation allowance be recorded when it is more
likely than not that some portion of the deferred tax assets will not be realized. We considered future taxable income by jurisdiction,
the scheduled reversal of deferred tax liabilities and tax planning
strategies when making this assessment. As of December 31, 2005, we have approximately $72,540 of
valuation allowance recorded on the consolidated balance sheet. Should the valuation
allowance be
released in future periods, approximately $31,298 will be recognized as a reduction of goodwill.
We recorded income tax expense of $7,990 for the year ended December 31, 2004. Tax expense was
lower than the expected expense based on the statutory rates due to several permanent differences,
primarily relating to federal and state research and experimentation tax credits. The tax benefit
of these items is partially offset by an increase in the federal tax rate from 34% to 35%, along
with contingent amounts established for penalties and interest associated with additional tax
potentially due in foreign jurisdictions.
We recorded an income tax benefit of $907 for the year ended December 31, 2003. The tax benefit
exceeded the expected benefit based on the statutory rates due to several permanent differences
including, but not limited to, federal and state research and experimentation tax credits,
stock-based compensation expense and amortization of acquired developed technology. The tax
benefit of these items is partially offset by an increase in the valuation allowance against net
operating loss carryforwards at Jaldi, due to the implementation of a research and development
contract between Pixelworks and the subsidiary.
As of December 31, 2005, we have generated deductible temporary differences along with net
operating loss and tax credit carryforwards. We have approximately $146,320, $77,910 and $6,432 of
net operating loss carryforwards to offset future taxable income and approximately $13,550, $5,824
and $2,754 of tax credit carryforwards to offset future tax for federal, state and foreign
purposes, respectively. The carryforwards begin expiring in 2006 if not used. Utilization of a
portion of the net operating loss and credit carryforwards is subject to an annual limitation due
to the ownership change provisions of the Internal Revenue Code of 1986 and similar state
provisions.
Liquidity and Capital Resources
Cash and cash equivalents and short- and long-term marketable securities
At December 31, 2005 we had cash and cash equivalents of $68,604, short- and long-term marketable
securities of $77,033 and working capital of $139,291. Cash provided by operating activities
during the year ended December 31, 2005 was $534 compared to $27,685 and $11,029 for the years
ended December 31, 2004 and 2003, respectively.
Cash provided by investing activities during the year ended December 31, 2005 was $33,506. This
compares to cash used in investing activities of $161,745 and $15,053 during the years ended
December 31, 2004 and 2003, respectively. Cash provided by investing activities during 2005
consists primarily of cash received from the sales and maturities of marketable securities, offset
by cash used to purchase marketable securities, cash used to acquire Equator, cash used for
payments on accrued liabilities related to equipment and other asset acquisitions, and cash used to
purchase equipment and other assets. Cash used in investing activities during 2004 and 2003
consists primarily of cash used to purchase marketable securities, cash used to purchase property
and equipment and other assets and investments,
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and cash used for payments on accrued liabilities related to equipment and other asset purchases,
offset by proceeds from maturities of marketable securities.
Cash provided by financing activities was $1,979 during the year ended December 31, 2005. This
compares to cash provided by financing activities of $150,155 and $2,937 during the years ended
December 31, 2004 and 2003, respectively. Cash provided by financing activities for 2005, 2004,
and 2003, consists primarily of proceeds received from the issuance of common stock from the
exercise of stock options and purchases of common stock through our employee stock purchase plan.
Additionally, cash provided by financing activities during 2004 included net proceeds of $145,500
from the issuance of long-term debt (see capital resources below).
We anticipate that our existing cash and investment balances will be adequate to fund our operating
and investing needs for the next twelve months and the foreseeable future. From time to time, we
may evaluate acquisitions of businesses, products or technologies that compliment our business.
Any such transactions, if consummated, may consume a material portion of our working capital or
require the issuance of equity securities that may result in dilution to existing shareholders.
Accounts receivable, net
Accounts receivable, net increased to $19,927 at December 31, 2005 from $14,605 at December 31,
2004. The increase in accounts receivable is primarily due to the acquisition of Equator which
contributed $2,066 to the consolidated accounts receivable balance as of December 31, 2005. The
increase is also due to higher revenue during the fourth quarter of 2005 compared to the fourth
quarter of 2004. Average days sales outstanding increased to 41 days at December 31, 2005 compared
to 34 days at December 31, 2004.
Inventories, net
Inventories, net increased to $26,577 at December 31, 2005 from $18,575 at December 31, 2004. The
increase in inventory is primarily due to the acquisition of Equator which contributed $6,917 to
the net consolidated inventory balance as of December 31, 2005. Inventory turnover on an
annualized basis was 4 as of December 31, 2005 and 2004. As of December 31, 2005, this represents
approximately thirteen weeks of inventory on hand.
Capital resources
On May 18, 2004, we issued $125,000 of convertible subordinated debentures (“the debentures”) due
2024 in a private offering pursuant to Rule 144A under the
Securities Act of 1933 (“Securities Act”) and outside of
the United States in accordance with Regulation S under the Securities Act. On June 4, 2004, we
issued an additional $25,000 of debentures pursuant to the exercise of an option granted to the
initial purchasers. We intend to use the net proceeds from this offering for general corporate
purposes, including potential acquisitions. The debentures have been registered with the SEC for
resale under the Securities Act.
The debentures bear interest at a rate of 1.75% per annum and interest is payable on May 15 and
November 15 of each year. The debentures are convertible, under certain circumstances, into our
common stock at a conversion rate of 41.0627 shares of common stock per $1 principal amount of
debentures for a total of 6,159,405 shares. This is equivalent to a conversion price of
approximately $24.35 per share. We may redeem some or all of the debentures for cash on or after
May 15, 2011 at a price equal to 100% of the principal amount of the debentures plus accrued and
unpaid interest. The holders of the debentures have the right to require us to purchase all or a
portion of their debentures on
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May 15, 2011, May 15, 2014 and May 15, 2019 at a price equal to 100% of the principal amount plus
accrued and unpaid interest. In addition, we are not precluded from repurchasing outstanding
debentures in the open market.
In February 2006, we repurchased $10,000 of our outstanding debentures in cash in the open market,
resulting in a gain of approximately $3,000, which will be recorded as other income in the first
quarter of 2006.
Contractual Payment Obligations
A summary of our contractual commitments and obligations as of December 31, 2005 is as follows:
| Payments Due By Period | ||||||||||||||||||||
| Less than 1 | More than | |||||||||||||||||||
| Contractual Obligation | Total | year | 1-3 years | 3-5 years | 5 years | |||||||||||||||
Long-term debt |
$ | 150,000 | $ | — | $ | — | $ | — | $ | 150,000 | ||||||||||
Interest on long-term debt |
14,109 | 2,625 | 5,250 | 5,250 | 984 | |||||||||||||||
Payments on accrued
balances related to
asset purchases |
24,652 | 11,940 | 12,712 | — | — | |||||||||||||||
Estimated Q1 2006
purchase commitments to
contract manufacturers |
18,860 | 18,860 | — | — | — | |||||||||||||||
Operating leases |
15,367 | 4,472 | 5,972 | 2,482 | 2,441 | |||||||||||||||
The lease payments above are net of sublease rentals of $40 for the year ending December
31, 2006.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a
material current or future effect on our financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards No. (“SFAS”) 154, Accounting Changes and Error Corrections-a replacement of
APB Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”). SFAS 154 requires retrospective
application to prior periods’ financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative effect of the
change. When it is impracticable to determine the period-specific effects of an accounting change
on one or more individual prior periods presented, SFAS 154 requires that the new accounting
principle be applied to the balances of assets and liabilities as of the beginning of the earliest
period for which retrospective application is practicable, and that a corresponding adjustment be
made to the opening balance of retained earnings (or other appropriate components of equity in the
statement of financial position) for that period, rather than being reported in an income
statement. When it is impracticable to determine the cumulative effect of applying a change in
accounting principle to all prior periods, SFAS 154 requires that the new accounting principle be
applied as if it were adopted prospectively from the earliest date practicable. SFAS 154 is
effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. We will adopt SFAS 154 on January 1, 2006. We do not expect the adoption of
SFAS 154 to have a material impact on our consolidated financial statements.
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In December 2004, the FASB issued SFAS 123 (Revised), Share Based Payment (“SFAS 123R”). SFAS 123R
replaced SFAS 123 and no longer allows public companies to apply the intrinsic value based method
of accounting for stock compensation described in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. Under SFAS 123R, public entities must measure the cost
of employee services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. The cost must be recognized over the period during which an
employee is required to provide service in exchange for the award (usually the vesting period).
SFAS 123R also requires the recognition of compensation expense for the fair value of any unvested
stock option awards outstanding at the date of adoption over the remaining vesting period. We will
adopt SFAS 123R on January 1, 2006. We believe stock-based compensation will be $2,700 to $3,300
for the first quarter of 2006. We expect the adoption of 123R to have an adverse effect on our
consolidated statements of operations and earnings per share in all future periods.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Our primary market risk exposure is the impact of interest rate fluctuations on interest income
earned on our investment portfolio. We mitigate risks associated with such fluctuations, as well
as the risk of loss of principal, by investing in high-credit quality securities and limiting
concentrations of issuers and maturity dates. Derivative financial instruments are not part of our
investment portfolio.
As of December 31, 2005, we had convertible subordinated debentures of $150 million outstanding
with a fixed interest rate of 1.75%. Interest rate changes affect that fair value of these notes,
but do not affect our earnings or cash flow. In February 2006, we purchased $10 million of our
1.75% convertible debentures for $6.8 million in cash in the open market.
All of our sales are denominated in U.S. dollars and as a result, we have relatively little
exposure to foreign currency exchange risk with respect to our sales. We have employees located in
offices in Canada, Japan, Taiwan and the People’s Republic of China and as such, a portion of our
operating expenses are denominated in foreign currencies. Accordingly, our operating results are
affected by changes in the exchange rate between the U.S. dollar and those currencies. Any future
strengthening of those currencies against the U.S. dollar could negatively impact our operating
results by increasing our operating expenses as measured in U.S. dollars. While we cannot
reasonably estimate the effect that an immediate 10% change in foreign currency exchange rates
would have on our operating results or cash flows, we believe that the effect would not be
material. We do not currently hedge against foreign currency rate fluctuations.
Item 8. Financial Statements and Supplementary Data.
The financial statements and reports included in Item 8 are as follows:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2005 and 2004
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the years ended
December 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2005 and 2004
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the years ended
December 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Pixelworks, Inc.:
Pixelworks, Inc.:
We have audited the accompanying consolidated balance sheets of Pixelworks, Inc. and subsidiaries
as of December 31, 2005 and 2004, and the related consolidated statements of operations,
shareholders’ equity and comprehensive income (loss) and cash flows for each of the years in the
three-year period ended December 31, 2005. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements 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 audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Pixelworks, Inc. and subsidiaries as of December 31,
2005 and 2004, and the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2005, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Pixelworks, Inc.’s internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 13, 2006 expressed an unqualified opinion on management’s assessment of,
and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
Portland, Oregon
March 13, 2006
March 13, 2006
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PIXELWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| December 31, | ||||||||
| 2005 | 2004 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 68,604 | $ | 32,585 | ||||
Short-term marketable securities |
59,888 | 160,213 | ||||||
Accounts receivable, net |
19,927 | 14,605 | ||||||
Inventories, net |
26,577 | 18,575 | ||||||
Prepaid expenses and other current assets |
7,277 | 4,856 | ||||||
Total current assets |
182,273 | 230,834 | ||||||
Long-term marketable securities |
17,145 | 79,483 | ||||||
Property and equipment, net |
29,029 | 12,444 | ||||||
Other assets, net |
18,277 | 12,969 | ||||||
Debt issuance costs, net |
3,780 | 4,483 | ||||||
Acquired intangible assets, net |
37,321 | 2,520 | ||||||
Goodwill |
133,731 | 80,836 | ||||||
Total assets |
$ | 421,556 | $ | 423,569 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 7,206 | $ | 5,946 | ||||
Accrued liabilities and current portion of long-term liabilities |
26,269 | 12,842 | ||||||
Income taxes payable |
9,507 | 2,393 | ||||||
Total current liabilities |
42,982 | 21,181 | ||||||
Long-term liabilities, net of current portion |
13,357 | 365 | ||||||
Long-term debt |
150,000 | 150,000 | ||||||
Total liabilities |
206,339 | 171,546 | ||||||
Commitments and contingencies |
||||||||
Shareholders’ Equity: |
||||||||
Preferred stock, $.001 par value; 50,000,000 shares authorized, 1 share
issued and outstanding at December 31, 2005 and 2004 |
— | — | ||||||
Common stock, $.001 par value; 250,000,000 shares authorized,
47,168,311 and 46,287,752 shares issued and outstanding at
December 31, 2005 and 2004, respectively |
316,257 | 304,996 | ||||||
Shares exchangeable into common stock; 1,731,099 shares issued,
574,467 and 649,453 outstanding at December 31, 2005
and 2004, respectively |
5,434 | 6,144 | ||||||
Accumulated other comprehensive income (loss) |
(3,503 | ) | 531 | |||||
Deferred stock-based compensation |
(773 | ) | (60 | ) | ||||
Accumulated deficit |
(102,198 | ) | (59,588 | ) | ||||
Total shareholders’ equity |
215,217 | 252,023 | ||||||
Total liabilities and shareholders’ equity |
$ | 421,556 | $ | 423,569 | ||||
See accompanying notes to consolidated financial statements.
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PIXELWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Revenue, net |
$ | 171,704 | $ | 176,211 | $ | 140,921 | ||||||
Cost of revenue (1) |
108,748 | 90,991 | 78,674 | |||||||||
Gross profit |
62,956 | 85,220 | 62,247 | |||||||||
Operating expenses: |
||||||||||||
Research and development (2) |
51,814 | 32,969 | 29,580 | |||||||||
Selling, general and administrative (3) |
30,616 | 23,736 | 20,797 | |||||||||
Restructuring |
1,162 | — | 5,049 | |||||||||
Amortization of acquired intangible assets |
1,084 | 486 | 486 | |||||||||
Merger-related expenses |
— | — | 8,949 | |||||||||
Total operating expenses |
84,676 | 57,191 | 64,861 | |||||||||
Income (loss) from operations |
(21,720 | ) | 28,029 | (2,614 | ) | |||||||
Interest income |
5,658 | 3,823 | 1,188 | |||||||||
Interest expense |
(2,637 | ) | (1,609 | ) | (11 | ) | ||||||
Realized loss on sale of marketable securities |
(779 | ) | — | — | ||||||||
Amortization of debt issuance costs |
(710 | ) | (472 | ) | — | |||||||
Interest and other income, net |
1,532 | 1,742 | 1,177 | |||||||||
Income (loss) before income taxes |
(20,188 | ) | 29,771 | (1,437 | ) | |||||||
Provision for (recovery of) income taxes |
22,422 | 7,990 | (907 | ) | ||||||||
Net income (loss) |
$ | (42,610 | ) | $ | 21,781 | $ | (530 | ) | ||||
Net income (loss) per share: |
||||||||||||
Basic |
$ | (0.90 | ) | $ | 0.47 | $ | (0.01 | ) | ||||
Diluted |
$ | (0.90 | ) | $ | 0.45 | $ | (0.01 | ) | ||||
Weighted average shares outstanding: |
||||||||||||
Basic |
47,337 | 46,673 | 45,337 | |||||||||
Diluted |
47,337 | 52,062 | 45,337 | |||||||||
(1) Includes amortization of: |
Acquired inventory mark-up |
$ | 5,217 | $ | — | $ | — | ||||||
Acquired developed technology |
4,515 | 529 | 529 | |||||||||
Acquired backlog |
600 | — | — | |||||||||
Stock-based compensation |
60 | — | 8 | |||||||||
(2) Includes stock-based compensation of: |
758 | 222 | 1,368 | |||||||||
(3) Includes stock-based compensation of: |
307 | 131 | 1,676 |
See accompanying notes to consolidated financial statements.
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PIXELWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income (loss) |
$ | (42,610 | ) | $ | 21,781 | $ | (530 | ) | ||||
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
||||||||||||
Deferred income tax expense (benefit) |
13,636 | (1,101 | ) | (1,168 | ) | |||||||
Depreciation and amortization |
13,469 | 8,160 | 6,119 | |||||||||
Amortization of acquired intangible assets |
6,199 | 1,015 | 1,015 | |||||||||
Income tax benefit from stock options |
1,421 | 4,485 | — | |||||||||
Stock-based compensation |
1,125 | 353 | 3,082 | |||||||||
Realized loss on sale of marketable securities |
779 | — | — | |||||||||
Amortization of debt issuance costs |
710 | 472 | — | |||||||||
Deferred rent |
250 | 95 | — | |||||||||
Loss on asset disposals |
180 | 381 | 3,927 | |||||||||
Lease incentives |
95 | 124 | — | |||||||||
Amortization of deferred tax charge |
55 | 55 | 55 | |||||||||
Lease costs related to restructuring |
— | — | 188 | |||||||||
Changes in operating assets and liabilities, net of effects of acquisition: |
||||||||||||
Accounts receivable, net |
(858 | ) | (6,137 | ) | 1,953 | |||||||
Inventories, net |
2,806 | (8,097 | ) | (3,690 | ) | |||||||
Prepaid expenses and other current and long-term assets |
(2,340 | ) | (43 | ) | (548 | ) | ||||||
Accounts payable |
(554 | ) | 1,677 | (754 | ) | |||||||
Accrued current and long-term liabilities |
(943 | ) | 2,072 | 1,495 | ||||||||
Income taxes payable |
7,114 | 2,393 | (115 | ) | ||||||||
Net cash provided by operating activities |
534 | 27,685 | 11,029 | |||||||||
Cash flows from investing activities: |
||||||||||||
Proceeds from sales and maturities of available-for-sale marketable securities |
263,375 | — | — | |||||||||
Proceeds from sales and maturities of held-to-maturity marketable securities |
54,928 | 114,083 | 135,628 | |||||||||
Purchases of available-for-sale marketable securities |
(124,108 | ) | — | — | ||||||||
Purchases of held-to-maturities marketable securities |
(36,345 | ) | (259,042 | ) | (135,844 | ) | ||||||
Acquisition of Equator Technologies, Inc., net of cash acquired |
(104,736 | ) | — | — | ||||||||
Payments on equipment and other asset financing |
(9,825 | ) | (5,106 | ) | (199 | ) | ||||||
Purchases of property and equipment |
(7,915 | ) | (8,471 | ) | (4,385 | ) | ||||||
Purchases of other assets and investments |
(1,929 | ) | (3,221 | ) | (10,253 | ) | ||||||
Proceeds from sale of assets |
61 | 12 | — | |||||||||
Net cash provided by (used in) investing activities |
33,506 | (161,745 | ) | (15,053 | ) | |||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuance of long-term debt |
— | 145,500 | — | |||||||||
Proceeds from issuances of common stock |
1,986 | 5,110 | 2,937 | |||||||||
Debt issuance costs |
(7 | ) | (455 | ) | — | |||||||
Net cash provided by financing activities |
1,979 | 150,155 | 2,937 | |||||||||
Net increase (decrease) in cash and cash equivalents |
36,019 | 16,095 | (1,087 | ) | ||||||||
Cash and cash equivalents, beginning of year |
32,585 | 16,490 | 17,577 | |||||||||
Cash and cash equivalents, end of year |
$ | 68,604 | $ | 32,585 | $ | 16,490 | ||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Cash paid during the year for: |
||||||||||||
Interest |
$ | 2,638 | $ | 1,293 | $ | 11 | ||||||
Income taxes |
1,691 | 530 | 920 | |||||||||
Supplemental disclosure of non-cash investing and financing activities: |
||||||||||||
Acquisitions of property and equipment and other assets under extended payment terms |
$ | 28,820 | $ | 8,450 | $ | — | ||||||
Value of options assumed in the acquisition of Equator Technologies, Inc. |
8,336 | — | — | |||||||||
Transfer of cost-based investment to available-for-sale marketable security |
— | 10,000 | — | |||||||||
Debt issuance costs withheld from proceeds |
— | 4,500 | — | |||||||||
Release and cancellation of shares held in escrow |
— | 541 | — | |||||||||
See accompanying notes to consolidated financial statements.
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PIXELWORKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share data)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share data)
| Accumulated | ||||||||||||||||||||||||||||||||||||
| Other | Deferred | Total | ||||||||||||||||||||||||||||||||||
| Common Stock | Exchangeable Shares | Comprehensive | Comprehensive | Stock-based | Accumulated | Shareholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Income (Loss) | Income (Loss) | Compensation | Deficit | Equity | ||||||||||||||||||||||||||||
Balance at December 31, 2002 |
43,967,585 | $ | 287,566 | 1,108,969 | $ | 10,491 | $ | — | $ | (2,402 | ) | $ | (80,839 | ) | $ | 214,816 | ||||||||||||||||||||
Stock issued under stock option and stock purchase plans |
870,969 | 2,937 | — | — | — | — | — | 2,937 | ||||||||||||||||||||||||||||
Stock-based compensation expense due to option
modifications and grant to non-employee |
— | 1,903 | — | — | — | — | — | 1,903 | ||||||||||||||||||||||||||||
Reversal of deferred stock-based compensation due
to terminations |
— | (774 | ) | — | — | — | 774 | — | — | |||||||||||||||||||||||||||
Amortization of deferred stock-based compensation |
— | — | — | — | — | 1,179 | — | 1,179 | ||||||||||||||||||||||||||||
Conversion of exchangeable shares to common stock |
275,108 | 2,603 | (275,108 | ) | (2,603 | ) | — | — | — | — | ||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | (530 | ) | (530 | ) | ||||||||||||||||||||||||||
Balance at December 31, 2003 |
45,113,662 | 294,235 | 833,861 | 7,888 | — | (449 | ) | (81,369 | ) | 220,305 | ||||||||||||||||||||||||||
Stock issued under stock option and stock purchase
plans and tax benefits associated therewith |
1,021,761 | 9,595 | — | — | — | — | — | 9,595 | ||||||||||||||||||||||||||||
Stock-based compensation expense due to option
modification |
— | 65 | — | — | — | — | — | 65 | ||||||||||||||||||||||||||||
Reversal of deferred stock-based compensation due
to terminations |
— | (101 | ) | — | — | — | 101 | — | — | |||||||||||||||||||||||||||
Amortization of deferred stock-based compensation |
— | — | — | — | — | 288 | — | 288 | ||||||||||||||||||||||||||||
Conversion of exchangeable shares to common stock |
184,205 | 1,743 | (184,205 | ) | (1,743 | ) | — | — | — | — | ||||||||||||||||||||||||||
Reversal of exchangeable shares due to termination |
— | — | (203 | ) | (1 | ) | — | — | — | (1 | ) | |||||||||||||||||||||||||
Release and cancellation of shares held in escrow |
(31,876 | ) | (541 | ) | — | — | — | — | — | (541 | ) | |||||||||||||||||||||||||
Net income |
— | — | — | — | — | $ | 21,781 | — | 21,781 | 21,781 | ||||||||||||||||||||||||||
Unrealized gain on available-for-sale securities, net of tax of $239 |
— | — | — | — | 531 | 531 | — | — | 531 | |||||||||||||||||||||||||||
Comprehensive income |
$ | 22,312 | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2004 |
46,287,752 | 304,996 | 649,453 | 6,144 | 531 | (60 | ) | (59,588 | ) | 252,023 | ||||||||||||||||||||||||||
Stock issued under stock option and stock purchase
plans and tax benefits associated therewith |
805,573 | 2,595 | — | — | — | — | — | 2,595 | ||||||||||||||||||||||||||||
Fair value of options assumed in Equator Technologies, Inc.
acquisition and deferred stock-based compensation
associated therewith |
— | 8,336 | — | — | — | (2,218 | ) | — | 6,118 | |||||||||||||||||||||||||||
Reversal of deferred stock-based compensation due
to terminations |
— | (380 | ) | — | — | — | 380 | — | — | |||||||||||||||||||||||||||
Amortization of deferred stock-based compensation |
— | — | — | — | — | 1,125 | — | 1,125 | ||||||||||||||||||||||||||||
Conversion of exchangeable shares to common stock |
74,986 | 710 | (74,986 | ) | (710 | ) | — | — | — | — | ||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | $ | (42,610 | ) | — | (42,610 | ) | (42,610 | ) | |||||||||||||||||||||||
Unrealized loss on available-for-sale securities, net of tax of $0 |
— | — | — | — | (4,034 | ) | (4,034 | ) | — | — | (4,034 | ) | ||||||||||||||||||||||||
Comprehensive loss |
$ | (46,644 | ) | |||||||||||||||||||||||||||||||||
Balance at December 31, 2005 |
47,168,311 | $ | 316,257 | 574,467 | $ | 5,434 | $ | (3,503 | ) | $ | (773 | ) | $ | (102,198 | ) | $ | 215,217 | |||||||||||||||||||
See accompanying notes to consolidated financial statements.
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PIXELWORKS, INC.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
NOTE 1. BASIS OF PRESENTATION
Nature of Business
Pixelworks, Inc. (“Pixelworks” or the “Company”) is a leading designer, developer and marketer of
semiconductors and software for the advanced display industry, including advanced televisions,
multimedia projectors, digital streaming media devices and liquid crystal display panels. Our
system-on-chip and discrete semiconductors provide the ‘intelligence’ for these new types of
displays and devices by processing and optimizing video and computer graphic signals to produce
high-quality images.
Consolidated Financial Statements
Our consolidated financial statements include the accounts of Pixelworks and its wholly-owned
subsidiaries. Intercompany accounts and transactions have been eliminated. All foreign
subsidiaries use the US dollar as the functional currency, and as a result, transaction gains and
losses are included in the statement of operations. Transaction gains (losses) were $258, $77 and
($153) for the years ended December 31, 2005, 2004 and 2003, respectively.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted
accounting principles (“GAAP”) requires us to make estimates and judgments that affect amounts
reported in the financial statements and accompanying notes. Our significant estimates and
judgments include those related to product returns, warranty obligations, bad debts, inventory
valuation, property and equipment, intangible assets, income taxes, litigation and other
contingencies. The actual results experienced could differ materially from our estimates.
Reclassifications
Certain reclassifications have been made to the 2004 and 2003 financial statements to conform to
the 2005 presentation, including the reclassification of stock-based compensation to research and
development expense and selling, general and administrative expense and the reclassification of
tooling depreciation from research and development expense to cost of revenue. The
reclassification of tooling depreciation to cost of revenue decreased gross profit by $1,336 and
$1,146 for the years ended December 31, 2004 and 2003, respectively, from previously reported
amounts. Additionally, facilities and information technology expenses have been allocated between
cost of revenue, research and development expense and selling, general and administrative expense
based on employee headcount.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
We consider all highly liquid investments with original maturities of three months or less at the
date of purchase to be cash equivalents. Cash equivalents totaled $62,221 and $29,867 at December
31, 2005 and 2004, respectively.
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Marketable Securities
Our investments in marketable securities are classified as trading, held-to-maturity or
available-for-sale in accordance with Statement of Financial Accounting Standards No. (“SFAS”) 115,
Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”). Available-for-sale
securities are stated at fair value based on quoted market prices with unrealized holding gains or
losses, net of tax, recorded in accumulated other comprehensive income, a component of
shareholders’ equity. Held-to-maturity securities are stated at amortized cost. Short-term
marketable debt securities have remaining maturities of twelve months or less at December 31, 2005
and 2004, and long-term marketable debt securities have remaining maturities of greater than twelve
months.
We periodically evaluate whether declines in fair values of our investments below their cost are
other-than-temporary. This evaluation consists of qualitative and quantitative factors regarding
the severity and duration of the unrealized loss, as well as our ability and intent to hold the
investment until a forecasted recovery occurs.
The cost of securities sold is based on the specific identification method.
Accounts Receivable
Accounts receivable are recorded at invoiced amount and do not bear interest when recorded or
accrue interest when past due. We do not have any off balance sheet exposure risk related to
customers.
We maintain an allowance for doubtful accounts for estimated losses that may result from the
inability of our customers to make required payments. The balance is determined based on our
historical write-off experience and the age of outstanding receivables at each reporting date. The
determination to write off specific accounts receivable balances is made based on likelihood of
collection and past due status. Past due status is based on invoice date and terms specific to
each customer.
Inventories
Inventories consist of finished goods and work-in-process, and are stated at the lower of standard
cost (which approximates actual cost on a first-in, first-out basis) or market (net realizable
value), net of a reserve for slow moving and obsolete items.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on a straight-line basis
over the estimated useful life of the assets as follows:
Software
|
Lesser of 3 years or contractual license term | |
Equipment, furniture and fixtures
|
2 years | |
Tooling
|
2 years | |
Leasehold improvements
|
Lessor of lease term or estimated useful life |
Reviews for impairment of property and equipment are performed whenever events or circumstances
indicate that the carrying amount of assets may not be recoverable, or that the useful life of
assets is shorter than originally estimated. Impairment is assessed in accordance with SFAS 144,
Accounting for the Impairment or Disposal of Long-lived Assets (“SFAS 144”), by comparing the
projected undiscounted net cash flows associated with the assets over their remaining useful lives
against their respective carrying amounts. Impairment, if any, is based on the excess of the
carrying amount over the fair value of the assets.
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The cost of property and equipment repairs and maintenance is expensed as incurred.
Acquired Intangible Assets
At December 31, 2005, acquired intangible assets consist of developed technology, customer
relationships and trademark assets. At December 31, 2004, acquired intangible assets consisted of
developed technology and assembled workforce assets. Intangible assets are amortized on a
straight-line basis over their estimated useful lives as follows:
Developed technology
|
5-7 years | |
Customer relationships
|
3 years | |
Trademark
|
1 year | |
Assembled workforce
|
3 years |
Intangible assets are reviewed regularly to determine whether events or circumstances indicate that
the carrying amount of the assets may not be recoverable, or that the useful life of an asset is
shorter than originally estimated. If such events or circumstances did exist, the assets would be
assessed for recoverability in accordance with SFAS 144. To date, we have not recognized any
impairment charges against acquired intangible assets.
Licensed Technology
We have capitalized licensed technology assets in other long-term assets. These assets are stated
at cost and are amortized on a straight-line basis over the term of the license or the estimated
life of the asset, if the license is not contractually limited, which is generally three to five
years. These assets are assessed for impairment in accordance with SFAS 144 whenever events or
circumstances indicate that their carrying amount may not be recoverable, or that their useful
lives may be shorter than originally estimated.
Goodwill
Goodwill represents the excess cost over the fair value of net assets acquired in business
combinations. Goodwill is not amortized and is instead tested annually for impairment and more
frequently if events and circumstances indicate that it may be impaired. The impairment tests are
performed in accordance with SFAS 142, Goodwill and Other Intangible Assets. Accordingly, an
impairment loss is recognized to the extent that the carrying amount of goodwill exceeds its
implied fair value. This determination is made at the reporting unit level. We have assigned all
goodwill to a single, enterprise-level reporting unit. The impairment test consists of two steps.
First, we determine the fair value of the reporting unit. The fair value is then compared to its
carrying amount. Second, if the carrying amount of the reporting unit exceeds its fair value, an
impairment loss is recognized for any excess of the carrying amount of the reporting unit’s
goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit in a manner similar to a purchase
price allocation in accordance with SFAS 141, Business Combinations. The residual fair value after
this allocation is the implied fair value of the reporting unit goodwill. We perform our annual
goodwill impairment test in the first quarter of each year. We did not record any goodwill
impairment charges in 2005, 2004 or 2003. We performed our 2006 annual impairment test on January
1, 2006 and determined no impairment existed. Due to the fact that the market value of our
reporting unit is approaching book value, it is at least reasonably possible that we will have an
impairment in the near term and, therefore, we may be required to perform the impairment test at
additional times during the year.
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Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition.
Accordingly, we recognize revenue from product sales to customers and distributors upon shipment
provided that:
| • | an authorized purchase order has been received; |
| • | title and risk of loss have transferred; |
| • | the sales price is fixed or determinable; and |
| • | collectibility of the receivable is reasonably assured. |
There are no customer acceptance provisions associated with our products, and except for
replacement of defective products under our warranty program discussed below, we have no obligation
to accept product returns from end customers. However, we have accepted returns on a case-by-case
basis as customer accommodations in the past. As a result, we provide for estimated reductions to
gross profit for these sales returns in our reserve for sales returns and allowances. At the end
of each reporting period, we estimate the reserve based on historical experience and knowledge of
any applicable events or transactions. The reserve is included in accrued liabilities in our
consolidated balance sheet.
A portion of our sales are made to distributors under agreements that grant the distributor limited
stock rotation rights and price protection on in-stock inventory. The stock rotation rights allow
these distributors to exchange a limited amount of their in-stock inventory for other Pixelworks
product. We analyze historical stock rotations at the end of each reporting period. To date,
returns under the stock rotation provisions have been nominal. As a result, we have not recorded a
reserve for stock rotations.
Under the price protection provisions, we grant distributors credit if they purchased product for a
specific customer and we subsequently lower the price to the customer such that the distributor can
no longer earn its negotiated margin on in-stock inventory. At the end of each reporting period,
we estimate a reserve for price protection credits based on historical experience and knowledge of
any applicable events or transactions. The reserve for price protection is in included in our
reserve for sales returns and allowances, which is included in accrued liabilities in our
consolidated balance sheet.
Warranty Program
We warrant that our products will be free from defects in material and workmanship for a period of
twelve months from delivery. Warranty repairs are guaranteed for the remainder of the original
warranty period. Our warranty is limited to repairing or replacing products, or refunding the
purchase price. At the end of each reporting period we estimate a reserve for warranty returns
based on historical experience and knowledge of any applicable events or transactions. The reserve
for warranty returns is included in accrued liabilities in our consolidated balance sheet.
Stock-Based Compensation
We have a 1997 Stock Incentive Plan and a 2001 Nonqualified Stock Option Plan under which
employees, officers and directors may be granted stock options to purchase shares of the Company’s
common stock. We also have a 2000 Employee Stock Purchase Plan under which eligible employees may
purchase shares of Pixelworks’ common stock at 85% of fair market value at specific, pre-determined
dates.
As permitted by SFAS 123, Accounting for Stock-Based Compensation (“SFAS 123”), and SFAS 148,
Accounting for Stock-Based Compensation — Transition and Disclosure, an Amendment of FASB Statement
No. 123, we continue to apply the intrinsic value based method of accounting for stock compensation
described in APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). As such,
stock-based compensation cost is measured as the excess, if any, of the quoted market price of
Pixelworks’ stock
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at the grant, or other measurement, date over the amount that an option holder must pay to acquire
the stock.
Deferred stock-based compensation is being amortized on an accelerated basis over the vesting
period, generally four years, consistent with the methodology described in FASB Interpretation No.
28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.
Amortization of deferred stock-based compensation was $1,125, $288, and $1,179 for the years ended
December 31, 2005, 2004 and 2003, respectively. If employees are terminated, any deferred
stock-based compensation related to unvested stock options is reversed. Reversal of deferred
stock-based compensation was $380, $101 and $774 for the years ended December 31, 2005, 2004 and
2003, respectively.
During the fourth quarter of 2003, we accelerated the vesting of outstanding stock option awards
for employees whose employment was terminated as a result of our restructuring. (See note 9.) We
recognized an additional $1,873 of stock-based compensation expense as a result of the
modifications.
Entities electing to continue to apply APB 25 must make prominent pro-forma disclosures of net
income and earnings per share as if the fair value based method of accounting for stock-based
compensation prescribed by SFAS 123 had been applied. Had we accounted for our stock-based
compensation plans in accordance with SFAS 123, our net income (loss) would approximate the
pro-forma amounts below:
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Net income (loss) as reported |
$ | (42,610 | ) | $ | 21,781 | $ | (530 | ) | ||||
Add: Stock-based compensation included in reported
net income (loss), net of related tax effects |
1,125 | 258 | 1,862 | |||||||||
Deduct: Stock-based compensation determined under
the fair value based method, net of related tax effects |
(14,913 | ) | (11,750 | ) | (10,659 | ) | ||||||
Pro-forma net income (loss) |
$ | (56,398 | ) | $ | 10,289 | $ | (9,327 | ) | ||||
Reported net income (loss) per share: |
||||||||||||
Basic |
$ | (0.90 | ) | $ | 0.47 | $ | (0.01 | ) | ||||
Diluted |
$ | (0.90 | ) | $ | 0.45 | $ | (0.01 | ) | ||||
Pro-forma net income (loss) per share: |
||||||||||||
Basic |
$ | (1.19 | ) | $ | 0.22 | $ | (0.21 | ) | ||||
Diluted |
$ | (1.19 | ) | $ | 0.21 | $ | (0.21 | ) | ||||
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The fair value of stock-based compensation costs reflected in the above pro-forma amounts were
determined using the Black-Scholes option pricing model and the following weighted average
assumptions:
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Stock Option Plans: |
||||||||||||
Risk free interest rate |
3.95 | % | 3.88 | % | 2.90 | % | ||||||
Expected dividend yield |
0 | % | 0 | % | 0 | % | ||||||
Expected life (in years) |
4.7 | 6.1 | 5.5 | |||||||||
Volatility |
90 | % | 100 | % | 109 | % | ||||||
Employee Stock Purchase Plan: |
||||||||||||
Risk free interest rate |
3.13 | % | 1.87 | % | 1.83 | % | ||||||
Expected dividend yield |
0 | % | 0 | % | 0 | % | ||||||
Expected life (in years) |
0.5 | 1.3 | 1.2 | |||||||||
Volatility |
68 | % | 103 | % | 104 | % | ||||||
Under the Black-Scholes option pricing model the weighted average fair value of options granted
during 2005, 2004 and 2003 was approximately $5.91, $11.32 and $6.16, respectively.
We account for equity instruments issued to non-employees in accordance with the provisions of SFAS
123 and Emerging Issues Task Force (“EITF”) Issue No. 96-18, Accounting for Equity Instruments that
are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services.
During 2003, we issued a stock option to purchase 2,500 shares of Pixelworks stock to a
consultant in exchange for past services provided. The fair value of the award was calculated
using the Black-Scholes option pricing model and was expensed on the date of grant. The total
value of the award of $30 is included in selling, general and administrative expense for the year
ended December 31, 2003. There were no other equity instruments issued to non-employees during the
periods presented.
In December 2004, SFAS 123 (Revised), Share Based Payment (“SFAS 123R”), was issued. SFAS 123R
replaced SFAS 123 and no longer allows public companies to apply the intrinsic value based method
of accounting for stock compensation described in APB 25. Under SFAS 123R, public entities must
measure the cost of employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award and recognize the cost over the period during which an
employee is required to provide service in exchange for the award (usually the vesting period).
SFAS 123R also requires the recognition of compensation expense for the fair value of any unvested
stock option awards outstanding at the date of adoption over the remaining vesting period. We will
adopt SFAS 123R beginning January 1, 2006. We believe stock-based compensation will be $2,700 to
$3,300 for the first quarter of 2006 and we expect the adoption of 123R to continue to have an
adverse effect on our consolidated statements of operations and earnings per share in all future
periods.
Research and Development
Amounts paid for research and development activities are charged to expense as incurred.
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Income Taxes
We account for income taxes under the asset and liability method. This approach requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between financial statement carrying amounts and tax bases of assets and
liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years, in which, those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date. We establish a valuation
allowance in accordance with SFAS 109, Accounting for Income Taxes (“SFAS 109”), to reduce deferred
tax assets to the amount expected “more likely than not” to be realized in future tax returns.
Tax contingency reserves are recorded to address potential exposures involving tax positions we
have taken that could be challenged by taxing authorities. These potential exposures result from
the varying applications of statutes, rules, regulations and interpretations. Our tax contingency
reserves contain assumptions based on past experiences and judgments about potential actions by
taxing jurisdictions. The ultimate resolution of these matters may be greater or less than the
amount that we have accrued.
Accumulated Other Comprehensive Income
SFAS 130, Reporting Comprehensive Income, establishes standards for the reporting of comprehensive
income and its components. Unrealized holding gain (loss), net of tax, related to our
available-for-sale investments was ($4,034) and $531 for the years ended December 31, 2005 and
2004, and was the only component of accumulated other comprehensive income (loss). There were no
components of comprehensive income (loss) for the year ended December 31, 2003.
Leases
We lease office space and office equipment. We classify our leases as operating or capital in
accordance with the criteria of SFAS 13, Accounting for Leases. Certain of our operating leases
for office space contain provisions under which monthly rent escalates over time, and certain
operating leases for office space contain provisions under which, we are reimbursed for leasehold
improvements. When leases contain escalating rent clauses, we straight-line rent expense over the
term of the lease. When leases provide allowances for leasehold improvements, we capitalize the
leasehold improvement assets and amortize them on a straight-line basis over the lesser of the
lease term or the estimated useful life of the asset, and reduce rent expense on a straight-line
basis over the term of the lease by the amount of the asset capitalized.
Fair Value of Financial Instruments
The fair value of our monetary assets and liabilities, including cash and cash equivalents,
marketable securities, accounts receivable and accounts payable, approximates the carrying value
due to the short-term nature of these instruments. The fair value of our long-term debt was
$100,575 as of December 31, 2005, as compared to its carrying value of $150,000. The fair value of
long-term debt was based on the quoted market price of the debt.
Risks and Uncertainties
Concentration of Suppliers
We do not own or operate a semiconductor fabrication facility and do not have the resources to
manufacture our products internally. We rely on four third-party foundries to produce all of our
products and we do not have any long-term agreements with any of these suppliers. In light of these
dependencies,
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it is reasonably possible that failure to perform by one of these suppliers could
have a severe impact on our results of operations.
Risk of Technological Change
The markets in which we compete, or seek to compete, are subject to rapid technological change,
frequent new product introductions, changing customer requirements for new products and features
and evolving industry standards. The introduction of new technologies and the emergence of new
industry standards could render our products less desirable or obsolete, which could harm our
business.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist of cash
equivalents, short- and long-term marketable securities and accounts receivable. We limit our
exposure to credit risk associated with cash equivalent and marketable security balances by placing
our funds in various high-quality securities and limiting concentrations of issuers and maturity
dates. We limit our exposure to credit risk associated with accounts receivable by carefully
evaluating creditworthiness before offering terms to customers.
NOTE 3. BALANCE SHEET COMPONENTS
Marketable Securities
At December 31, 2004, we classified all of our marketable securities as held-to-maturity, with the
exception of auction rate securities and our investment in Semiconductor Manufacturing
International Corporation (“SMIC”), a Chinese wafer foundry, which we classified as
available-for-sale. On March 31, 2005, we determined that we no longer had the intent to hold any
of our securities to maturity based on the potential for future acquisitions, and we reclassified
all of our held-to-maturity securities to available-for-sale. The amortized cost of the securities
transferred was $159,632 on the transfer date, and the unrealized loss on the securities
transferred was $920 on the transfer date. At December 31, 2005, we classified all of our
marketable securities as available-for-sale.
Short-term marketable securities consist of the following:
| Amortized | Unrealized | Fair | ||||||||||
| Cost | Loss | Value | ||||||||||
December 31, 2005 |
||||||||||||
Available-for-sale: |
||||||||||||
Auction rate securities |
$ | 27,800 | $ | — | $ | 27,800 | ||||||
US government agencies |
14,814 | (103 | ) | 14,711 | ||||||||
Corporate debentures |
4,171 | (9 | ) | 4,162 | ||||||||
Municipal bonds |
4,301 | (5 | ) | 4,296 | ||||||||
Commercial paper |
5,761 | (7 | ) | 5,754 | ||||||||
Foreign government bonds |
3,188 | (23 | ) | 3,165 | ||||||||
| $ | 60,035 | $ | (147 | ) | $ | 59,888 | ||||||
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| Amortized | Unrealized | Fair | ||||||||||
| Cost | Loss | Value | ||||||||||
December 31, 2004 |
||||||||||||
Available-for-sale: |
||||||||||||
Auction rate securities |
$ | 77,150 | $ | — | $ | 77,150 | ||||||
Held-to-maturity: |
||||||||||||
US government agencies |
68,068 | (15 | ) | 68,053 | ||||||||
Municipal bonds |
8,265 | (21 | ) | 8,244 | ||||||||
Commercial paper |
5,493 | (2 | ) | 5,491 | ||||||||
Foreign government bonds |
1,237 | (10 | ) | 1,227 | ||||||||
| $ | 83,063 | $ | (48 | ) | $ | 83,015 | ||||||
Long-term marketable securities consist of the following:
| Amortized | Unrealized | Fair | ||||||||||
| Cost | Gain (Loss) | Value | ||||||||||
December 31, 2005 |
||||||||||||
Available-for-sale: |
||||||||||||
Investment in SMIC |
$ | 10,000 | $ | (3,240 | ) | $ | 6,760 | |||||
US government agencies |
7,872 | (69 | ) | 7,803 | ||||||||
Municipal bonds |
1,030 | (4 | ) | 1,026 | ||||||||
Foreign government bonds |
990 | (30 | ) | 960 | ||||||||
Corporate debentures |
609 | (13 | ) | 596 | ||||||||
| $ | 20,501 | $ | (3,356 | ) | $ | 17,145 | ||||||
December 31, 2004 |
||||||||||||
Available-for-sale: |
||||||||||||
Investment in SMIC |
$ | 10,000 | $ | 531 | $ | 10,531 | ||||||
Held-to-maturity: |
||||||||||||
US government agencies |
52,117 | (61 | ) | 52,056 | ||||||||
US treasury bonds |
12,390 | 29 | 12,419 | |||||||||
Foreign government bonds |
2,484 | (34 | ) | 2,450 | ||||||||
Municipal bonds |
1,340 | (4 | ) | 1,336 | ||||||||
Corporate debentures |
621 | 2 | 623 | |||||||||
| $ | 68,952 | $ | (68 | ) | $ | 68,884 | ||||||
At December 31, 2005, we determined that gross unrealized losses on our marketable securities were
temporary based on the duration of the unrealized losses.
During the year ended December 31, 2005, we had sales of marketable securities prior to maturity of
$102,576, which is included in proceeds from the sales or maturities of available-for-sale
marketable securities in the consolidated statement of cash flows. We did not have any sales of
marketable securities prior to maturity during the years ended December 31, 2004 or 2003.
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Maturities of long-term marketable securities range from one to three years at December 31, 2005.
Accounts Receivable, Net
Accounts receivable, net consists of the following:
| December 31, | ||||||||
| 2005 | 2004 | |||||||
Accounts receivable, gross |
$ | 20,139 | $ | 14,817 | ||||
Allowance for doubtful accounts |
(212 | ) | (212 | ) | ||||
Accounts receivable, net |
$ | 19,927 | $ | 14,605 | ||||
Bad debt expense was $0 for each of the years ended December 31, 2005, 2004 and 2003.
Inventories, Net
Inventories, net consists of the following:
| December 31, | ||||||||
| 2005 | 2004 | |||||||
Finished goods |
$ | 20,623 | $ | 11,648 | ||||
Work-in-process |
7,350 | 8,516 | ||||||
| 27,973 | 20,164 | |||||||
Reserve for slow moving and obsolete items |
(1,396 | ) | (1,589 | ) | ||||
Inventories, net |
$ | 26,577 | $ | 18,575 | ||||
The following is a summary of the change in our reserve for slow moving and obsolete items:
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Balance at beginning of year |
$ | 1,589 | $ | 1,942 | $ | 1,377 | ||||||
Usage: |
||||||||||||
Inventory scrapped |
(730 | ) | (521 | ) | (318 | ) | ||||||
Inventory utilized |
(795 | ) | (735 | ) | — | |||||||
Subtotal usage |
(1,525 | ) | (1,256 | ) | (318 | ) | ||||||
Provision |
1,332 | 903 | 883 | |||||||||
Balance at end of year |
$ | 1,396 | $ | 1,589 | $ | 1,942 | ||||||
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Property and Equipment, Net
Property and equipment, net consists of the following:
| December 31, | ||||||||
| 2005 | 2004 | |||||||
Software |
$ | 36,948 | $ | 16,385 | ||||
Equipment, furniture and fixtures |
15,924 | 11,681 | ||||||
Tooling |
5,000 | 4,349 | ||||||
Leasehold improvements |
2,674 | 1,778 | ||||||
| 60,546 | 34,193 | |||||||
Accumulated depreciation and amortization |
(31,517 | ) | (21,749 | ) | ||||
Property and equipment, net |
$ | 29,029 | $ | 12,444 | ||||
Software amortization was $5,781, $3,160 and $2,136 for the years ended December 31, 2005, 2004 and
2003, respectively. Depreciation and amortization expense for equipment, furniture, fixtures,
tooling and leasehold improvements was $4,687, $3,479 and $3,083 for the years ended December 31,
2005, 2004 and 2003.
Other Assets, Net
Other assets, net consists primarily of licensed technology as of December 31, 2005 and 2004.
Acquired Intangible Assets, Net
Acquired intangible assets, net consists of the following:
| December 31, | ||||||||
| 2005 | 2004 | |||||||
Gross carrying amount: |
||||||||
Developed technology |
$ | 40,500 | $ | 3,700 | ||||
Customer relationships |
3,400 | — | ||||||
Assembled workforce |
1,577 | 1,577 | ||||||
Backlog and trademark |
800 | — | ||||||
| 46,277 | 5,277 | |||||||
Accumulated amortization: |
||||||||
Developed technology |
(6,057 | ) | (1,543 | ) | ||||
Customer relationships |
(614 | ) | — | |||||
Assembled workforce |
(1,577 | ) | (1,214 | ) | ||||
Backlog and trademark |
(708 | ) | — | |||||
| (8,956 | ) | (2,757 | ) | |||||
Acquired intangible assets, net |
$ | 37,321 | $ | 2,520 | ||||
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Amortization expense was $6,199, $1,015 and $1,015 for the years ended December 31, 2005, 2004, and
2003. Estimated future amortization expense is as follows:
Year ending December 31:
2006 |
$ | 9,114 | ||
2007 |
9,022 | |||
2008 |
8,408 | |||
2009 |
7,404 | |||
2010 |
3,373 | |||
| $ | 37,321 | |||
Goodwill
Goodwill increased during 2005 due to our acquisition of Equator Technologies, Inc. (“Equator”),
offset by the release of valuation allowance established against deferred tax assets acquired from
nDSP in 2002 and Panstera in 2001, and certain tax benefits related to stock options. Goodwill
decreased during 2004 due to the release of valuation allowance established against deferred tax
assets acquired from nDSP in 2002 and Panstera in 2001, and to the release and cancellation of
shares held in escrow from the nDSP acquisition.
Accrued Liabilities and Current Portion of Long-Term Liabilities
Accrued liabilities and current portion of long-term liabilities consist of the following:
| December 31, | ||||||||
| 2005 | 2004 | |||||||
Current portion of accrued liabilities for asset purchases |
$ | 11,940 | $ | 3,185 | ||||
Accrued payroll and related liabilities |
5,294 | 4,586 | ||||||
Accrued manufacturing liabilities |
3,612 | 477 | ||||||
Accrued commissions and royalties |
1,232 | 719 | ||||||
Reserve for warranty returns |
577 | 419 | ||||||
Accrued interest payable |
335 | 335 | ||||||
Reserve for sales returns and allowances |
237 | 524 | ||||||
Other |
3,042 | 2,597 | ||||||
| $ | 26,269 | $ | 12,842 | |||||
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During 2005 and 2004, we acquired software and licensed technology assets under purchase
agreements that provide extended payment terms. The payment periods vary, but generally extend
over a period of one month to two years. We are obligated to make all payments accrued, and there
are no contingencies attached to any of the agreements. At December 31, 2005 and 2004, the
non-current portion of these obligations is $12,712 and $172, respectively, and is included in
long-term liabilities, net of current portion, in the consolidated balance sheets. Future payments
due under these obligations are as follows:
Year ending December 31: |
||||
2006 |
$ | 11,940 | ||
2007 |
7,337 | |||
2008 |
5,375 | |||
| $ | 24,652 | |||
The following is a summary of the change in our reserve for sales returns and allowances:
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Balance at beginning of year |
$ | 524 | $ | 202 | $ | 588 | ||||||
Provision |
52 | 977 | 1,654 | |||||||||
Charge offs |
(339 | ) | (655 | ) | (2,040 | ) | ||||||
Balance at end of year |
$ | 237 | $ | 524 | $ | 202 | ||||||
The following is a summary of the change in our reserve for warranty returns:
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Balance at beginning of year |
$ | 419 | $ | 569 | $ | 769 | ||||||
Provision |
813 | 241 | 18 | |||||||||
Charge offs |
(655 | ) | (391 | ) | (218 | ) | ||||||
Balance at end of year |
$ | 577 | $ | 419 | $ | 569 | ||||||
Long-Term Debt and Debt Issuance Costs
On May 18, 2004, we issued $125,000 of convertible subordinated debentures (“the debentures”) due
2024 in a private offering pursuant to Rule 144A under the Securities Act of 1933 (“Securities
Act”) and outside of the United States in accordance with Regulation S under the Securities Act.
On June 4, 2004, we issued an additional $25,000 of debentures pursuant to the exercise of an
option granted to the initial purchasers. The debentures have been registered with the SEC for
resale under the Securities Act.
The debentures bear interest at a rate of 1.75% per annum and interest is payable on May 15 and
November 15 of each year. The debentures are convertible under certain circumstances into our
common stock at a conversion rate of 41.0627 shares of common stock per $1 principal amount of
debentures for a total of 6,159,405 shares. This is equivalent to a conversion price of
approximately $24.35 per share. The debentures are convertible if (a) our stock trades above 130%
of the conversion price for 20 out of 30 consecutive trading days during any calendar quarter, (b)
the debentures trade at an amount less than or equal to 98% of the if-converted value of the notes
for five consecutive trading days, (c) a call for redemption occurs, or (d) in the event of certain
other specified corporate transactions. We may redeem
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some or all of the debentures for cash on or
after May 15, 2011 at a price equal to 100% of the principal amount of the debentures plus accrued
and unpaid interest. The holders of the debentures have the right to
require us to purchase all or a portion of their debentures on May 15, 2011, May 15, 2014 and May
15, 2019 at a price equal to 100% of the principal amount plus accrued and unpaid interest.
The debentures are unsecured obligations and are subordinated in right of payment to all our
existing and future senior debt, and are effectively subordinated to all existing and future debt
of our subsidiaries. At December 31, 2005, we had no senior debt outstanding and our subsidiaries
had approximately $7,314 of liabilities to which the debentures were effectively subordinated.
The debentures meet the definition of conventional convertible debt in EITF Issue No. 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s
Own Stock. We have evaluated each of the put, call and conversion features of the debentures and
concluded that none of these features constitute embedded derivatives under the accounting rules
that must be bifurcated from the host contract and accounted for as derivatives in accordance with
SFAS 133, Accounting for Derivative Instruments and Hedging Activities.
The fees associated with the issuance of the convertible debentures included $4,500 withheld from
the proceeds and $462 paid in cash. These debt issuance costs have been capitalized and are
included in long-term assets in the consolidated balance sheets. The debt issuance costs are being
amortized over 7 years.
NOTE 4. EARNINGS PER SHARE
We calculate earnings per share in accordance with SFAS 128, Earnings per Share. Basic earnings
per share amounts are computed based on the weighted average number of common shares outstanding,
and includes exchangeable shares. These exchangeable shares, which were issued on September 6,
2002 by Jaldi, our Canadian subsidiary, to its shareholders in connection with the Jaldi asset
acquisition, have characteristics essentially equivalent to Pixelworks’ common stock.
Diluted weighted average shares outstanding includes the increased number of common shares that
would be outstanding assuming the exercise of certain outstanding stock options and the vesting of
certain restricted stock, when such exercise or vesting would have the effect of reducing earnings
per share. In the fourth quarter of 2004, we adopted EITF Issue No. 04-8, The Effect of
Contingently Convertible Debt on Diluted Earnings per Share. As a result, diluted weighted average
shares outstanding also includes the increased number of common shares that would be outstanding
assuming the conversion of our convertible subordinated debentures, using the if-converted method,
when such conversion would have the effect of reducing earnings per share.
The following schedule reconciles basic and diluted weighted average shares outstanding for the
periods presented:
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Basic weighted average shares outstanding |
47,337,122 | 46,672,766 | 45,336,670 | |||||||||
Incremental shares related to: |
||||||||||||
Conversion of debentures |
— | 3,772,495 | — | |||||||||
Stock options |
— | 1,604,200 | — | |||||||||
Restricted stock subject to vesting |
— | 12,397 | — | |||||||||
Diluted weighted average shares outstanding |
47,337,122 | 52,061,858 | 45,336,670 | |||||||||
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Due to our net loss position for the years ended December 31, 2005 and 2003, the following weighted
average shares were excluded from diluted weighted average shares outstanding, as their effect
would have been anti-dilutive:
| Year Ended December 31, | ||||||||
| 2005 | 2003 | |||||||
Weighted average shares related to: |
||||||||
Stock options |
8,990,140 | 6,393,851 | ||||||
Conversion of debentures |
6,159,405 | — | ||||||
Restricted stock subject to vesting |
— | 99,001 | ||||||
| 15,149,545 | 6,492,852 | |||||||
Weighted average outstanding stock options of 2,262,702 have been excluded from the computation of
diluted net income per share for the year ended December 31, 2004 because the options’
exercise prices were greater than the average market value of Pixelworks’ common stock, which has
the effect of making these potential shares anti-dilutive.
Net loss used in the calculation of basic net loss per share was the same as net loss used in
calculating diluted net loss per share for the years ended December 31, 2005 and 2003. The
following schedule reconciles net income used in the calculation of basic net income per share to
net income used in the calculation of diluted net income per share for the year ended December 31,
2004:
Net income used in calculating basic net income per share |
$ | 21,781 | ||
Add: Interest expense and amortization of debt issuance costs, net of tax |
1,522 | |||
Net income used in calculating diluted net income per share |
$ | 23,303 | ||
NOTE 5. INCOME TAXES
Domestic and foreign pre-tax income (loss) is as follows:
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Domestic |
$ | (21,482 | ) | $ | 28,891 | $ | (2,166 | ) | ||||
Foreign |
1,294 | 880 | 729 | |||||||||
| $ | (20,188 | ) | $ | 29,771 | $ | (1,437 | ) | |||||
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Income tax expense (benefit) attributable to continuing operations is comprised of the following:
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 73 | $ | 8,391 | $ | 12 | ||||||
State |
260 | 457 | 8 | |||||||||
Foreign |
8,453 | 243 | 241 | |||||||||
Total current |
8,786 | 9,091 | 261 | |||||||||
Deferred: |
||||||||||||
Federal |
11,754 | (161 | ) | (627 | ) | |||||||
State |
1,882 | (940 | ) | (541 | ) | |||||||
Total deferred |
13,636 | (1,101 | ) | (1,168 | ) | |||||||
Income tax expense (benefit) |
$ | 22,422 | $ | 7,990 | $ | (907 | ) | |||||
The significant components of deferred income tax expense (benefit) are as follows:
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Net change in gross deferred tax assets and liabilities |
$ | (57,359 | ) | $ | 3,362 | $ | (3,461 | ) | ||||
Deferred tax assets reducing (increasing): |
||||||||||||
Goodwill |
7,445 | — | — | |||||||||
Deferred charge and other liabilities |
— | — | 601 | |||||||||
Increase (decrease) in the beginning-of-year balance
of the valuation allowance for deferred tax assets |
63,550 | (4,463 | ) | 1,692 | ||||||||
| $ | 13,636 | $ | (1,101 | ) | $ | (1,168 | ) | |||||
A portion of income tax expense (benefit) has been allocated as follows:
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Goodwill |
$ | (8,257 | ) | $ | (1,110 | ) | $ | — | ||||
Shareholders’ equity |
(609 | ) | (4,485 | ) | — | |||||||
Of the $8,257 benefit allocated to goodwill for the year ended December 31, 2005, $812 related to
the income tax benefit of stock options.
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The significant differences between the U.S. federal statutory tax rate and our effective tax rate
for financial statement purposes are as follows:
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Expected income tax rate |
35 | % | 35 | % | 34 | % | ||||||
Increase (decrease) resulting from: |
||||||||||||
Change in valuation allowance |
(192 | ) | (1 | ) | (81 | ) | ||||||
Research and experimentation credit |
21 | (7 | ) | 65 | ||||||||
Increase in deferred tax rates |
13 | — | — | |||||||||
Increase in beginning balance of acquired deferred
tax assets |
11 | — | — | |||||||||
Foreign tax refund |
3 | — | — | |||||||||
Difference between financial and tax reporting for
stock option exercises |
(2 | ) | — | 12 | ||||||||
State income taxes, net of federal tax benefit |
2 | 1 | 8 | |||||||||
Amortization of acquired intellectual property,
assembled workforce and deferred tax charge |
1 | (1 | ) | 19 | ||||||||
Other |
(3 | ) | — | 6 | ||||||||
Actual tax (expense) benefit |
(111 | )% | 27 | % | 63 | % | ||||||
The tax effects of temporary differences and net operating loss carryforwards which give rise
to significant portions of deferred tax assets and deferred tax liabilities are as follows:
| December 31, | ||||||||
| 2005 | 2004 | |||||||
Deferred tax assets: |
||||||||
Net operating loss carryforwards |
$ | 60,439 | $ | 7,867 | ||||
Research and experimentation credit carryforwards |
14,270 | 7,020 | ||||||
Foreign tax credit carryforwards |
7,598 | — | ||||||
Accrued vacation |
599 | 446 | ||||||
Reserves and accrued expenses |
1,456 | 1,283 | ||||||
Deferred compensation |
29 | 35 | ||||||
Depreciation |
1,135 | — | ||||||
Other |
1,151 | 419 | ||||||
Total gross deferred tax assets |
86,677 | 17,070 | ||||||
Deferred tax liabilities: |
||||||||
Amortization |
(13,731 | ) | (919 | ) | ||||
Depreciation |
— | (563 | ) | |||||
Total gross deferred tax liabilities |
(13,731 | ) | (1,482 | ) | ||||
Less valuation allowance |
(72,540 | ) | (8,990 | ) | ||||
Net deferred tax assets |
$ | 406 | $ | 6,598 | ||||
The net deferred tax asset balance of $406 as of December 31, 2005, which is included in other
assets, net in the consolidated balance sheet, is offset by a contingency reserve of $406, which is
included in income taxes payable in the consolidated balance sheet. The current portion of net
deferred tax assets of $1,730 as
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of December 31, 2004 is included in prepaid expenses and other
current assets in the consolidated balance sheet. The long-term portion of net deferred tax assets
of $4,868 as of December 31, 2004 is included in other assets, net in the consolidated balance
sheet.
During the fourth quarter of 2005, we recorded approximately $31,900 of tax expense to place
valuation allowance against essentially all our net deferred tax assets as we could not conclude
that it was more likely than not that we would be able to realize the benefit of these assets.
SFAS 109 requires that a valuation allowance be recorded when it is more likely than not that some
portion of the deferred tax assets will not be realized. We considered future taxable income by
jurisdiction, the scheduled reversal of deferred tax liabilities and tax planning strategies when
making this assessment. The net change in the total valuation allowance for the year ended
December 31, 2005 was an increase of $63,550, of which $38,773 was allocated to the
income statement. $24,777 related to valuation allowance added in
connection with the acquisition of Equator. This amount was added to
the balance sheet to reflect assets acquired that the company did not believe
they could realize the benefit of. The net change in the total valuation allowance for
the years ended December 31, 2004 and 2003 was a decrease and increase of approximately
$4,462 and $1,692 respectively.
Certain tax benefits, when recognized, related to the valuation allowance for deferred tax assets
as of December 31, 2005 will be allocated as a reduction to goodwill in the amount of approximately
$31,298.
As of December 31, 2005, we have federal, state and foreign net operating loss carryforwards of
approximately $146,320, $77,910 and $6,432, respectively, which will expire between the years 2007
and 2025. As of December 31, 2005, we had generated federal, state and foreign tax credit
carryforwards of approximately $13,550, $5,824 and $2,754, respectively, which begin expiring in
2006. Utilization of a portion of the U.S. net operating loss and credit carryforwards is subject
to an annual limitation due to the ownership change provisions of the Internal Revenue Code of 1986
and similar state provisions. An ownership change subject to these provisions occurred with the
acquisitions of nDSP during 2002 and Equator during 2005.
We had undistributed earnings of foreign subsidiaries of approximately $4,582 at December 31, 2005,
for which deferred taxes have not been provided. Such earnings are considered indefinitely
invested outside of the United States. If repatriated, some of these earnings could generate
foreign tax credits that may reduce the federal tax liability associated with any future foreign
dividend.
We have recorded tax reserves to address potential exposures involving positions that could be
challenged by taxing authorities. The tax reserves are reviewed as circumstances warrant and
adjusted as events occur that affect our potential liability for additional taxes. While we
believe we have adequately provided for potential exposures, the ultimate resolution of these
matters may be greater or less than the amount we have accrued.
NOTE 6. COMMITMENTS AND CONTINGENCIES
Royalties
We license technology from third parties and have agreed to pay certain suppliers a per unit
royalty based on either the number of chips sold or manufactured, or the net sales price of the
chips containing the licensed technology. Royalty expense was $3,056, $2,493 and $1,798 for the
years ended December 31, 2005, 2004 and 2003, respectively, which is included in cost of revenue in
the consolidated statements of operations.
401(k) Plan
We have a profit-sharing plan for eligible employees under the provisions of Internal Revenue Code
Section 401(k). Participants may defer a percentage of their annual compensation on a pre-tax
basis, not to exceed the dollar limit that is set by law. A discretionary matching contribution by
the Company is allowed and is equal to a uniform percentage of the amount of salary reduction elected to be
deferred,
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which percentage will be determined each year by the Company. The Company made no
contributions to the 401(k) plan during 2005, 2004 or 2003.
Leases
At December 31, 2005 and 2004, we had no capital leases. At December 31, 2005, future minimum
payments under operating leases are as follows:
Year Ending December 31: |
||||
2006 |
$ | 4,472 | ||
2007 |
3,166 | |||
2008 |
2,806 | |||
2009 |
1,340 | |||
2010 |
1,142 | |||
Thereafter |
2,441 | |||
| $ | 15,367 | |||
Minimum lease payments above are net of sublease rentals of $40 for the year ended December 31,
2006. Rent expense for the years ended December 31, 2005, 2004 and 2003 was $4,381, $2,942 and
$2,817, respectively.
Contract Manufacturers
In the normal course of business, we commit to purchase products from our contract manufacturers to
be delivered within the next 90 days. In certain situations, should we cancel an order, we could
be required to pay cancellation fees. Such obligations could impact our immediate results of
operations but would not materially affect our business.
Indemnifications
Certain of our agreements include limited indemnification provisions for claims from third-parties
relating to our intellectual property. Such indemnification provisions are accounted for in
accordance with Financial Accounting Standards Board Summary of Interpretation No. 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others-an interpretation of FASB Statements No. 5, 57, and 107 and rescission of
FASB Interpretation No.34. The indemnification is limited to the amount paid by the customer. As
of December 31, 2005, we have not incurred any material liabilities arising from these
indemnification obligations, however in the future, such obligations could immediately impact our
results of operations but would not materially affect our business.
Legal Proceedings
We are involved in litigation from time to time that is routine in nature and incidental to our
business. We believe that the outcome of any such current litigation would not have a material
adverse effect on our financial condition, results of operations or cash flows.
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NOTE 7. SHAREHOLDERS’ EQUITY
Preferred Stock
The Company is authorized to issue 50,000,000 shares of preferred stock with a par value of $.001
per share. The Board of Directors is authorized to fix or alter the rights, preferences,
privileges and restrictions granted to, or imposed on, each series of preferred stock.
As of December 31, 2005 and 2004, there is one series of preferred stock designated as the Special
Voting Share Series, of which there is one voting share issued and outstanding. The series was
designated and the share was issued in 2002 in connection with our Jaldi asset acquisition. The
voting share entitles the holders of exchangeable shares (see below) to vote on any matters that
come before the Pixelworks common shareholders.
The holder of the voting share is not entitled to receive dividends. In the event of any
dissolution of the Company, the holder of the voting share is entitled to be paid out of the net
assets of the Company an amount equal to $.001, before any payment is made to the holders of common
stock.
Common Stock
The Company is authorized to issue 250,000,000 shares of common stock with a par value of $.001 per
share. Shareholders of common stock have unlimited voting rights and are entitled to receive the
net assets of the corporation upon dissolution, subject to the rights of the preferred
shareholders.
Exchangeable Shares
In connection with the Jaldi asset acquisition, Jaldi issued 1,731,099 exchangeable shares to its
shareholders. The voting share described above is held in trust for the benefit of the holders of
the exchangeable shares and provides the holders of the exchangeable shares with dividend, voting
and other rights equivalent to those of Pixelworks’ common shareholders. These exchangeable shares
are the economic equivalent of Pixelworks’ common shares, and may be exchanged at any time for
Pixelworks common stock on a one-for-one basis.
Stock Option Plans
Under our 1997 Stock Incentive Plan and 2001 Nonqualified Stock Option Plan (the “option plans”),
20,340,116 and 4,000,000 stock options, respectively, may be granted. Options granted under the
plans must generally be exercised while the individual is an employee and within ten years of the
date of grant. Our new-hire vesting schedule provides that each option becomes exercisable at a
rate of 25% on the first anniversary date of the grant, and 2.08% on the last day of every month
thereafter for a total of thirty-six additional increments. Our merit vesting schedule provides
that options become exercisable monthly for a period of 4 years, with 10% becoming exercisable in
the first year, 20% becoming exercisable in the second year, 30% becoming exercisable in the third
year and 40% becoming exercisable in the fourth year.
In connection with our acquisition of Equator, we assumed the Equator Technologies, Inc. 1996 Stock
Incentive Plan and certain stand-alone Equator stock option plans and issued 1,263,417 options to purchase Pixelworks common stock in exchange for
Equator options outstanding thereunder. During 2005, no additional stock option grants were made
under this plan.
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The following is a summary of stock option activity:
| Weighted | ||||||||
| average | ||||||||
| Number | exercise | |||||||
| of shares | price | |||||||
Options outstanding as of December 31, 2002 |
5,814,694 | $ | 9.74 | |||||
Granted at market |
1,592,099 | 7.52 | ||||||
Exercised |
(650,766 | ) | 2.76 | |||||
Canceled |
(484,288 | ) | 10.20 | |||||
Options outstanding as of December 31, 2003 |
6,271,739 | 9.86 | ||||||
Granted at market |
2,595,005 | 14.03 | ||||||
Exercised |
(809,966 | ) | 4.91 | |||||
Canceled |
(531,643 | ) | 12.82 | |||||
Options outstanding as of December 31, 2004 |
7,525,135 | 11.63 | ||||||
Granted at market |
2,560,030 | 8.48 | ||||||
Exchanged in acquisition |
1,263,417 | 1.26 | ||||||
Exercised |
(608,754 | ) | 1.05 | |||||
Canceled |
(1,576,346 | ) | 11.21 | |||||
Options outstanding as of December 31, 2005 |
9,163,482 | $ | 10.09 | |||||
The following table summarizes information about options outstanding at December 31, 2005:
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Weighted | ||||||||||||||||||||
| Number | average | Weighted | Number | Weighted | ||||||||||||||||
| outstanding at | remaining | average | exercisable at | average | ||||||||||||||||
| Range of | December 31, | contractual | exercise | December 31, | exercise | |||||||||||||||
| Exercise prices | 2005 | life | price | 2005 | price | |||||||||||||||
$ 0.07 — $ 2.43
|
1,036,237 | 6.36 | $ | 0.61 | 932,616 | $ | 0.61 | |||||||||||||
3.98 — 6.58
|
969,173 | 7.90 | 6.09 | 366,785 | 5.85 | |||||||||||||||
6.59 — 7.96
|
1,270,435 | 8.53 | 7.54 | 394,069 | 7.40 | |||||||||||||||
8.00 — 9.15
|
1,018,099 | 7.70 | 8.47 | 459,627 | 8.48 | |||||||||||||||
9.22 — 9.48
|
1,114,228 | 8.88 | 9.33 | 146,997 | 9.29 | |||||||||||||||
9.52 — 11.29
|
975,097 | 7.14 | 10.37 | 701,738 | 10.29 | |||||||||||||||
11.34 — 14.84
|
1,034,560 | 8.07 | 13.72 | 390,513 | 13.33 | |||||||||||||||
14.90 — 16.90
|
1,108,436 | 7.21 | 16.19 | 703,107 | 16.34 | |||||||||||||||
17.05 — 39.00
|
637,217 | 5.74 | 23.70 | 553,043 | 24.53 | |||||||||||||||
$ 0.07 — $39.00
|
9,163,482 | 7.62 | $ | 10.09 | 4,648,495 | $ | 10.41 | |||||||||||||
At December 31, 2004 and 2003, there were 3,159,243 and 2,804,710 options
exercisable with weighted average exercise prices of $11.28 and $9.54, respectively.
As of December 31, 2005, 4,325,219 shares were available for grant under the option plans.
Employee Stock Purchase Plan
At December 31, 2005, a total of 1,700,000 shares of common stock have been reserved for issuance
under the Employee Stock Purchase Plan (“ESPP”). Beginning in 2005, the number of shares available
for issuance under the ESPP increases each year in an amount equal to the lesser of (i) the number
of shares of
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common stock issued pursuant to the ESPP during the immediately preceding fiscal year, (ii) two
percent of the outstanding shares of common stock on the first day of the year for which the
increase is being made or (iii) a lesser amount determined by the Board of Directors. During the
years ended December 31, 2005, 2004 and 2003, the Company issued 196,819, 211,795 and 220,203
shares under the ESPP for proceeds of approximately $1,347, $1,133 and $1,141, respectively. As of
December 31, 2005, there were 851,923 shares available for issuance under this plan.
NOTE 8. SEGMENT INFORMATION
In accordance with SFAS 131, Disclosures about Segments of an Enterprise and Related Information,
we have identified a single operating segment: the design and development of integrated circuits
for use in electronic display devices and equipment for encoding and decoding streaming digital
video. Substantially all of our assets are located in the U.S.
Geographic Information
Revenue by geographic region, attributed to countries based on the domicile of the bill-to
customer, was as follows:
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Japan |
$ | 56,770 | $ | 70,749 | $ | 58,597 | ||||||
Taiwan |
29,752 | 36,766 | 33,843 | |||||||||
China |
23,884 | 30,587 | 17,930 | |||||||||
Europe |
25,861 | 14,342 | 8,302 | |||||||||
Korea |
15,396 | 14,032 | 14,428 | |||||||||
U.S. |
6,324 | 2,265 | 1,928 | |||||||||
Other |
13,717 | 7,470 | 5,893 | |||||||||
| $ | 171,704 | $ | 176,211 | $ | 140,921 | |||||||
Significant Customers
Sales to distributors represented 46%, 69% and 69% of revenue for the years ended December 31,
2005, 2004 and 2003, respectively. The following distributors accounted for 10% or more of
revenue:
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Distributor A |
22 | % | 31 | % | 39 | % | ||||||
Distributor B |
1 | % | 13 | % | 16 | % | ||||||
End customers include customers who purchase directly from the Company, as well as, customers who
purchase the Company’s products indirectly through distributors and manufacturers’ representatives.
Sales to our top five end customers represented 34%, 33% and 35% of revenue for the years ended
December 31, 2005, 2004 and 2003, respectively. For the year ended December 31, 2005, one end
customer represented 10% of revenue. There were no end customers that represented 10% or more of
total revenue for the years ended December 31, 2004 or 2003.
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The following accounts represented 10% or more of gross accounts receivable:
| December 31, | ||||||||
| 2005 | 2004 | |||||||
Account A |
16 | % | 26 | % | ||||
Account B |
14 | % | 9 | % | ||||
Account C |
11 | % | 6 | % | ||||
Account D |
4 | % | 11 | % | ||||
NOTE 9. RESTRUCTURING
In October 2005, we initiated a restructuring plan to improve the effectiveness and timeliness of
our product development efforts in order to reduce our overall development costs. The
restructuring resulted in a reduction-in-force of 36 employees during the fourth quarter of 2005.
These employees were given severance benefits, which were expensed and paid in the fourth quarter
of 2005. The total amount of these benefits was approximately $1,162. As of December 31, 2005, we
had a nominal amount accrued related to this restructuring which was paid in January 2006.
In September 2003, we initiated a restructuring to better position the Company to compete in the
advanced television market. The restructuring included the discontinuation of all research and
development efforts related to two products. As a result of these actions, we determined that
certain tangible and intangible assets related to the discontinued development efforts were
permanently impaired because there were no alternate uses for them. Impaired assets included
tooling, licensed technology and prepaid royalties. The net book value of the impaired assets
totaled $3,927 at the discontinuation date, and this amount was recognized as restructuring expense
in the third quarter of 2003. In addition, we implemented a reduction-in-force of 28 employees in
the fourth quarter of 2003. The terminated employees were granted termination benefits, which were
expensed and paid in the fourth quarter of 2003 on the date of employee communication. The total
amount of these benefits was approximately $916. We also subleased approximately 4,000 square feet
of our California office as a result of the restructuring. We included the present value of the
difference between the future minimum lease payments and the non-cancelable sublease rentals in
restructuring expense during the fourth quarter of 2003. This amount totaled $188. We did not
incur any amounts related to this restructuring in 2004 or 2005, and we did not have any material
amounts accrued related to this restructuring at December 31, 2004, and we had no amounts accrued
related to this restructuring at December 31, 2005.
NOTE 10. ACQUISITION
On June 14, 2005, we acquired 100% of the outstanding shares of Equator Technologies, Inc.
(“Equator”). Equator develops programmable video compression technology with system-on-chip
integrated circuits and software solutions for video entertainment and communications broadband
networks. The acquisition of Equator added programmable technologies to Pixelworks customers in
order to create a new generation of digital televisions, including those that might integrate
Internet Protocol television decoding technology to allow viewing of digital video directly over
the Internet. These factors contributed to establishing the purchase price and supported the
premium paid over the fair value of the tangible and intangible assets acquired. The results of
Equator’s operations are included in our consolidated statement of operations beginning on the date
of acquisition.
The aggregate purchase price for Equator was $118,116, which consisted of cash of $107,854, the
value of 1,263,417 options exchanged of $8,336, plus acquisition costs of $1,926. The estimated
fair value of the options exchanged was calculated using the Black-Scholes option pricing model
with the average closing price of Pixelworks’ common stock for two days prior to the announcement
of the Agreement and Plan of
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Merger, the day of the announcement, and two days following the
announcement ($7.62 per share) and following weighted average assumptions: risk-free interest rate
of 2.55%, an expected dividend yield of 0%, an expected life of 1.2 years, and volatility of 59%.
The purchase price was allocated to the assets and liabilities based on fair values as follows:
Purchase price |
$ | 118,116 | ||||||
Less net assets acquired: |
||||||||
Assets acquired: |
||||||||
Cash |
$ | 5,044 | ||||||
Accounts receivable |
4,464 | |||||||
Inventory |
10,808 | |||||||
Other current assets |
296 | |||||||
Non-current assets |
6,295 | |||||||
Developed technology |
36,800 | |||||||
Other acquired intangible assets |
4,200 | |||||||
Deferred stock compensation |
2,218 | |||||||
Less: |
||||||||
Liabilities assumed |
(9,530 | ) | (60,595 | ) | ||||
Goodwill |
$ | 57,521 | ||||||
In connection with this acquisition, we performed a valuation of acquired intangible assets. We
assigned $36,800 of the purchase price to acquired developed technology with a 5 year estimated
life, $3,400 to customer relationships with a 3 year estimated life, and $800 to backlog and
trademark with estimated lives of 1 year or less. In-process research and development was
considered in our analysis of the Equator intangible assets, however, it was determined
to have no
value.
We also recorded gross deferred tax assets of approximately $49,221, subject to a valuation
allowance of $28,590, and deferred tax liabilities of $17,000 to recognize the book and tax basis
differences of various balance sheet assets and liabilities and corporate tax attributes acquired.
If the valuation allowance is subsequently changed, the amount of the adjustment may affect net
income or goodwill depending on the nature of the adjustment in the period such change is made.
The goodwill resulting from this transaction was assigned to Pixelworks, Inc., our sole reporting
unit and is not deductible for tax purposes.
In addition to the $107,854 cash consideration included in the purchase price, we paid $2,518 cash
which was placed in escrow to fund an Employee Bonus Plan that was established between the Equator
shareholders and the Equator employees at the date of the acquisition. If certain revenue targets
are achieved by March 31, 2006, the Equator shareholders will receive disbursement of the escrow
funds. The shareholders will, in turn, pay the amounts disbursed to Equator employees as specified
in the Employee Bonus Plan. If targets are not achieved, disbursement of the funds is reduced on a
pro-rata basis and excess funds are returned to Pixelworks. The employees will receive payment of
the amount earned at specified dates in 2006 and 2007, provided they remain employed by Pixelworks
through each payment date. If employees terminate before the payment dates, their bonus amounts
are reallocated to remaining plan participants. The bonus amount earned each quarter is expensed
to research and development expense or selling, general and administrative expense as appropriate
based on each employee’s function. During the year ended December 31, 2005, $800 of the bonus was
earned by employees. At December 31, 2005, the remaining $1,718 of escrow funds is included in
prepaid expenses and other current assets in the consolidated balance sheet.
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The purchase price allocation is substantially complete. Certain elements, such as the filing of
pre-acquisition tax returns, may impact the final purchase price allocation. Although we do not
anticipate significant revisions to the purchase price allocation, material adjustments could
occur.
The following table reflects the unaudited combined results of Pixelworks and Equator as if the
merger had taken place as of the beginning of each year presented. For the year ended December 31,
2004, weighted average shares related to convertible subordinated debentures of 3,772,495, were
excluded from the calculation of diluted weighted average shares outstanding because their
inclusion would have been anti-dilutive.
| Year Ended December 31, | ||||||||
| 2005 | 2004 | |||||||
Net revenue |
$ | 186,670 | $ | 192,041 | ||||
Net income (loss) |
$ | (49,561 | ) | $ | 5,419 | |||
Net income (loss) per share: |
||||||||
Basic |
$ | (1.05 | ) | $ | 0.12 | |||
Diluted |
$ | (1.05 | ) | $ | 0.11 | |||
Weighted average shares outstanding: |
||||||||
Basic |
47,337,122 | 46,672,766 | ||||||
Diluted |
47,337,122 | 49,409,885 | ||||||
The adjustment to mark-up inventory to fair value of $5,270 is not included in cost of revenue in
the pro-forma results of operations as it is not reflective of the ongoing operations of the
combined entities. The pro-forma information does not necessarily reflect the actual results that
would have occurred, nor is it necessarily indicative of future results of operations of the
combined companies.
NOTE 11. GENESIS MICROCHIP TRANSACTION
On March 17, 2003, we announced the execution of a definitive merger agreement with Genesis
Microchip. On August 5, 2003, we entered into an agreement terminating the merger agreement. In
the termination agreement, we agreed to pay a termination fee of $5,500 to Genesis Microchip. The
fee was payable upon execution of the termination agreement, and was recognized as expense in the
third quarter of 2003. Total expenses related to the proposed merger during the year ended
December 31, 2003 were $8,949.
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NOTE 12. QUARTERLY FINANCIAL DATA (UNAUDITED)
| March 31, | June 30, | September 30, | December 31, | |||||||||||||
| 2005 | 2005 | 2005 | 2005 | |||||||||||||
Revenue |
$ | 40,261 | $ | 41,315 | $ | 46,794 | $ | 43,334 | ||||||||
Gross profit |
16,918 | 16,202 | 14,647 | 15,189 | ||||||||||||
Income (loss) from operations |
271 | (2,654 | ) | (10,170 | ) | (9,167 | ) | |||||||||
Income (loss) before taxes |
1,152 | (2,578 | ) | (9,973 | ) | (8,789 | ) | |||||||||
Net income (loss) |
836 | (2,275 | ) | (5,257 | ) | (35,914 | ) | |||||||||
Net income (loss) per share: |
||||||||||||||||
Basic and diluted |
0.02 | (0.05 | ) | (0.11 | ) | (0.75 | ) | |||||||||
| March 31, | June 30, | September 30, | December 31, | |||||||||||||
| 2004 | 2004 | 2004 | 2004 | |||||||||||||
Revenue |
$ | 45,270 | $ | 48,509 | $ | 43,970 | $ | 38,462 | ||||||||
Gross profit |
23,387 | 23,032 | 21,710 | 17,091 | ||||||||||||
Income from operations |
9,924 | 8,810 | 7,184 | 2,111 | ||||||||||||
Income before taxes |
10,159 | 8,929 | 7,822 | 2,861 | ||||||||||||
Net income |
6,553 | 5,759 | 5,449 | 4,020 | ||||||||||||
Net income per share: |
||||||||||||||||
Basic |
0.14 | 0.12 | 0.12 | 0.09 | ||||||||||||
Diluted |
0.14 | 0.12 | 0.11 | 0.08 | ||||||||||||
NOTE 13: SUBSEQUENT EVENT
In February 2006, we purchased $10,000 of our 1.75% convertible subordinated debentures for $6,800
in cash in the open market. As a result of this transaction, we will recognize a gain in other
income of approximately $3,000 in the first quarter of 2006.
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| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
Item 9A. Controls and Procedures.
As of the end of the period covered by this report, we conducted an evaluation under the
supervision and with the participation of our Chief Executive Officer and Chief Financial Officer,
of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of December 31, 2005, our disclosure controls and procedures were effective to
ensure that information required to be disclosed in our periodic reports filed under the Securities
Exchange Act is recorded, processed, summarized and reported within the time periods specified by
the Securities and Exchange Commission’s rules and forms.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining a system of internal control over
financial reporting as defined under Exchange Act Rule13a-15(f). Our internal control over
financial reporting is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. All internal control systems, no matter how
well designed, have inherent limitations.
We conducted an assessment of the effectiveness of our system of internal control over financial
reporting as of December 31, 2005. This assessment was based on criteria established in the
framework Internal Control — Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. We acquired Equator Technologies, Inc. during 2005. We
excluded from our assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2005, Equator’s internal control over financial reporting associated
with total assets of $29,359,092 and revenue of $13,140,682.
Our independent registered public accounting firm, KPMG LLP, has issued an audit report on
management’s assessment of our internal control over financial reporting. Their report appears
below.
Changes to Internal Controls
There were no changes to our internal control over financial reporting during the fourth quarter of
2005 that have materially affected or are reasonably likely to materially affect our internal
control over financial reporting.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Pixelworks, Inc.:
Pixelworks, Inc.:
We have audited management’s assessment, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting, that Pixelworks Inc. and subsidiaries (the “Company”),
maintained effective internal control over financial reporting as of December 31, 2005 based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on management’s
80
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assessment and an opinion on the effectiveness of the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
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, management’s assessment that the Company maintained effective internal control over
financial reporting as of December 31, 2005 is fairly stated, in all material respects, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission(COSO).
The Company acquired Equator, Inc. during 2005, and management excluded from its assessment of the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2005,
Equator Technologies, Inc.’s internal control over financial reporting associated with total assets of
$29,359,092 and total revenues of $13,140,682 included in the consolidated financial statements of
the Company and subsidiaries as of and for the year ended December 31, 2005. Our audit of internal
control over financial reporting of the Company also excluded an evaluation of the internal control
over financial reporting of Equator Technologies, Inc.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Pixelworks, Inc. and subsidiaries as of
December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders’
equity and comprehensive income (loss), and cash flows for each of the years in the three-year
period ended December 31, 2005, and our report dated March 13, 2006 expressed an unqualified opinion
on those consolidated financial statements.
/s/ KPMG LLP
Portland, Oregon
March 13, 2006
March 13, 2006
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Table of Contents
Item 9B. Other Information.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning the Directors of the Company is set forth in the Company’s Proxy Statement
for its 2006 Annual Meeting of Shareholders (the “2006 Proxy Statement”) and is incorporated herein
by reference.
Information concerning the Executive Officers of the Company is set forth in the 2006 Proxy
Statement and is incorporated herein by reference.
Information with respect to Section 16(a) of the Securities Exchange Act is set forth in the 2006
Proxy Statement and is incorporated herein by reference.
Information relating to the audit committee financial expert, the identification of the audit
committee of our board of directors and procedures of security holders to recommend nominees to our
Board of Directors is contained in our 2006 Proxy Statement and is incorporated herein by
reference.
We have adopted a written code of ethics that applies to our CEO, senior financial officers,
financial vice presidents, directors and managers and disclosure committee members. We have also
adopted a written code of business conduct and ethics that applies to all of our employees,
officers and directors. Each code is available on our web site at www.pixelworks.com. Any person
may request a copy of either code by writing to us at the following address:
Pixelworks, Inc.
Investor Relations
8100 SW Nyberg Road
Tualatin, Oregon 97062
Investor Relations
8100 SW Nyberg Road
Tualatin, Oregon 97062
Item 11. Executive Compensation.
Information with respect to executive compensation is included in the 2006 Proxy Statement and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information with respect to security ownership of certain beneficial owners and management is
included in the 2006 Proxy Statement and is incorporated herein by reference.
Information with respect to equity compensation plans is included in the 2006 Proxy Statement and
is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information with respect to certain relationships and related transactions with management is
included in the 2006 Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
Information with respect to principal accounting fees and services is included in the 2006 Proxy
Statement and is incorporated herein by reference.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) 1. Financial Statements
The following financial statements are included in Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2005 and 2004
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the years ended December 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2005 and 2004
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the years ended December 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules
All schedules have been omitted as they are either not required or the information is included
elsewhere herein.
(a) 3. Exhibits
The exhibits are either filed with this report or incorporated by reference into this report.
| Exhibit | ||
| Number | Description | |
2.1
|
Agreement and Plan of Merger dated as of December 13, 2000 among Pixelworks, Inc., Panther Acquisition, Inc., Panstera, Inc. and those certain shareholders of Panstera, Inc. signatories thereto (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on February 13, 2001). | |
2.2
|
Amendment to Agreement and Plan of Merger dated as of January 26, 2001 among Pixelworks Inc., Panther Acquisition, Inc. and Panstera, Inc. (incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed on February 13, 2001). | |
2.3
|
Agreement and Plan of Merger and Reorganization dated as of December 6, 2001 among Pixelworks, Inc., Nighthawk Acquisition Corp. and those certain shareholders of nDSP Delaware, Inc. who are signatories thereto (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on January 29, 2002). | |
2.4
|
Reorganization Agreement among Pixelworks, Inc., Pixelworks Nova Scotia Company, Certain Shareholders of Jaldi Semiconductor Corp. and Jaldi Semiconductor Corp. dated August 2, 2002 (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-3 filed on October 15, 2002). | |
2.5
|
Jaldi Semiconductor, Inc. Exchangeable Share Provisions (incorporated by reference to Exhibit 99.2 to the Company’s Registration Statement on Form S-3 filed on October 15, 2002). |
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| Exhibit | ||
| Number | Description | |
2.6
|
Exchangeable Share Support Agreement among Jaldi Semiconductor Corp., Pixelworks, Inc., Pixelworks Nova Scotia and Jaldi Semiconductor Corp. dated September 6, 2002 (incorporated by reference to Exhibit 99.3 to the Company’s Registration Statement on Form S-3 filed on October 15, 2002). | |
2.7
|
Voting and Exchange Trust Agreement among Jaldi Semiconductor Corp., Pixelworks, Inc., Pixelworks Nova Scotia Company and CIBC Mellon Trust Company, dated September 6, 2002 (incorporated by reference to Exhibit 99.4 to the Company’s Registration Statement on Form S-3 filed on October 15, 2002). | |
2.8
|
Agreement and Plan of Merger, dated as of March 17, 2003 among Pixelworks, Inc., Display Acquisition Corp. and Genesis Microchip Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on March 20, 2003). | |
2.9
|
Agreement and Plan of Merger dated April 28, 2005 among Pixelworks, Inc., Equator Technologies, Inc., Twain Sub, Inc., and Robert C. Fox, Jr., as Shareholders’ Agent (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on May 3, 2005). | |
3.1
|
Sixth Amended and Restated Articles of Incorporation of Pixelworks, Inc., As Amended (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on August 9, 2004). | |
3.2
|
First Restated Bylaws of Pixelworks, Inc. (incorporated by reference to Exhibit 3.3 to the Company’s Registration Statement on Form S-1 declared effective May 19, 2000). | |
4.1
|
Reference is made to Exhibit 3.1 above (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 declared effective May 19, 2000). | |
4.2
|
Third Amended Registration Rights Agreement dated February 22, 2000 (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 declared effective May 19, 2000). | |
4.3
|
Indenture dated May 18, 2004 between Pixelworks, Inc. and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed on August 9, 2004). | |
4.4
|
Form of 1.75% Convertible Subordinated Debentures due 2024 dated May 18, 2004 (incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q filed August 9, 2004). | |
4.5
|
Registration Rights Agreement, dated May 18, 2004 among Pixelworks, Inc., Citigroup Global Markets Inc. and D.A. Davidson & Co. (incorporated by reference to Exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q filed August 9, 2004). | |
4.6
|
Purchase Agreement, dated May 12, 2004 among Pixelworks, Inc. and Citigroup Global Markets Inc. (incorporated by reference to Exhibit 4.4 to the Company’s Quarterly Report on Form 10-Q filed August 9, 2004). | |
10.1
|
Form of Indemnity Agreement between Pixelworks, Inc. and each of its Officers and Directors (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-1 declared effective May 19, 2000). + |
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| Exhibit | ||
| Number | Description | |
10.2
|
Pixelworks, Inc. 1997 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 filed June 21, 2005). + | |
10.3
|
Pixelworks, Inc. 2000 Employee Stock Purchase Plan, As Amended (incorporated by reference to Exhibit 99.2 to the Company’s Registration Statement on Form S-8 filed March 23, 2005). + | |
10.4
|
Pixelworks, Inc. 2001 Nonqualified Stock Option Plan (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 filed on May 31, 2001). + | |
10.5
|
Registration Rights Agreement dated as of December 6, 2001 among Pixelworks, Inc., nDSP Delaware, Inc. and those certain shareholders of nDSP Delaware, Inc. who are signatories thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 29, 2002). | |
10.6
|
Sublease Agreement Dated September 7, 2001 between Epicor Software Corporation and Pixelworks Inc. (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K filed on March 25, 2002). | |
10.7
|
Lease Agreement Dated April 14, 1999 between Southcenter III and IV Investors LLC and Pixelworks, Inc. (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1 declared effective May 19, 2000). | |
10.8
|
VAutomation Incorporated Synthesizable Soft Core Agreement dated November 4, 1997 between VAutomation Incorporated and Pixelworks, Inc. (incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1 declared effective May 19, 2000). | |
10.9
|
Intellectual Property Sublicense Agreement dated March 30, 1999 between VAutomation Incorporated and Pixelworks, Inc. (incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-1 declared effective May 19, 2000). | |
10.10
|
License Agreement dated February 22, 2000 between Pixelworks, Inc. and InFocus Systems, Inc. (incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1 declared effective May 19, 2000). | |
10.11
|
Employment Agreement between Jeffrey B. Bouchard and Pixelworks, Inc. (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 declared effective May 19, 2000). + | |
10.12
|
Shareholders Agreement dated as of January 15, 2001 among Pixelworks, Inc., Panstera, Inc., and those certain shareholders of Panstera, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 13, 2001). | |
10.13
|
Third Amendment to Lease dated March 1, 2002 between Copper Mountain Trust Corporation and Pixelworks, Inc. (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K filed on March 25, 2002). | |
10.14
|
Form of Pixelworks, Inc. Change of Control Severance Agreement dated March 14, 2003 (incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form S-4 filed on April 18, 2003). + | |
10.15
|
Change of Control Severance Agreement dated March 14, 2003 between Jeffrey Bouchard and Pixelworks, Inc. (incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-4 filed on April 18, 2003). + |
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| Exhibit | ||
| Number | Description | |
10.16
|
Change of Control Severance Agreement dated March 14, 2003 between Hans Olsen and Pixelworks, Inc. (incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-4 filed on April 18, 2003). + | |
10.17
|
Fourth Amendment to lease dated June 23, 2003 between Pixelworks, Inc. and Quest Group Trust VI (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2003). | |
10.18
|
Fifth Amendment to lease dated February 18, 2004 between Pixelworks, Inc. and Quest Group Trust VI (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 7, 2004). | |
10.19
|
First Amendment to lease dated February 2004 between Pixelworks, Inc. and Epicor Software Corporation (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on May 7, 2004). | |
10.20
|
First Amendment of Lease between Pixelworks, Inc. and Southcenter III & IV Investors LLC (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 9, 2004). | |
10.21
|
Pixelworks, Inc. 2004 Senior Management Bonus Plan (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K filed on March 15, 2005). + | |
10.22
|
Pixelworks, Inc. 2005 Senior Management Bonus Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 10, 2005). + | |
10.23
|
Equator Technologies, Inc. 1996 Stock Option Plan, as amended (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 filed June 17, 2005). + | |
10.24
|
Stock Option Agreement, dated April 18, 2002, between Equator Technologies, Inc. and Christopher H. Basoglu (incorporated by reference to Exhibit 99.2 to the Company’s Registration Statement on Form S-8 filed June 17, 2005). + | |
10.25
|
Stock Option Agreement, dated April 8, 2003, between Equator Technologies, Inc. and Christopher H. Basoglu (incorporated by reference to Exhibit 99.3 to the Company’s Registration Statement on Form S-8 filed June 17, 2005). + | |
10.26
|
Stock Option Agreement, dated November 11, 2003, between Equator Technologies, Inc. and Christopher H. Basoglu (incorporated by reference to Exhibit 99.4 to the Company’s Registration Statement on Form S-8 filed June 17, 2005). + | |
10.27
|
Stock Option Agreement, dated April 18, 2002, between Equator Technologies, Inc. and Richard E. Christopher (incorporated by reference to Exhibit 99.5 to the Company’s Registration Statement on Form S-8 filed June 17, 2005). + | |
10.28
|
Stock Option Agreement, dated April 8, 2003, between Equator Technologies, Inc. and Richard E. Christopher (incorporated by reference to Exhibit 99.6 to the Company’s Registration Statement on Form S-8 filed June 17, 2005). + | |
10.29
|
Stock Option Agreement, dated November 11, 2003, between Equator Technologies, Inc. and Richard E. Christopher (incorporated by reference to Exhibit 99.7 to the Company’s Registration Statement on Form S-8 filed June 17, 2005). + |
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| Exhibit | ||
| Number | Description | |
10.30
|
Stock Option Agreement, dated September 15, 2004, between Equator Technologies, Inc. and Richard E. Christopher (incorporated by reference to Exhibit 99.8 to the Company’s Registration Statement on Form S-8 filed June 17, 2005). + | |
10.31
|
Stock Option Agreement, dated November 11, 2003, between Equator Technologies, Inc. and Michael Myhre (incorporated by reference to Exhibit 99.9 to the Company’s Registration Statement on Form S-8 filed June 17, 2005). + | |
10.32
|
Stock Option Agreement, dated July 18, 2002, between Equator Technologies, Inc. and Tedford Niday (incorporated by reference to Exhibit 99.10 to the Company’s Registration Statement on Form S-8 filed June 17, 2005). + | |
10.33
|
Stock Option Agreement, dated April 8, 2003, between Equator Technologies, Inc. and Tedford Niday (incorporated by reference to Exhibit 99.11 to the Company’s Registration Statement on Form S-8 filed June 17, 2005). + | |
10.34
|
Stock Option Agreement, dated November 11, 2003, between Equator Technologies, Inc. and Tedford Niday (incorporated by reference to Exhibit 99.12 to the Company’s Registration Statement on Form S-8 filed June 17, 2005). + | |
10.35
|
Stock Option Agreement, dated March 29, 2001, between Equator Technologies, Inc. and John O’Donnell (incorporated by reference to Exhibit 99.13 to the Company’s Registration Statement on Form S-8 filed June 17, 2005). + | |
10.36
|
Stock Option Agreement, dated July 18, 2002, between Equator Technologies, Inc. and John O’Donnell (incorporated by reference to Exhibit 99.14 to the Company’s Registration Statement on Form S-8 filed June 17, 2005). + | |
10.37
|
Stock Option Agreement, dated April 8, 2003, between Equator Technologies, Inc. and John O’Donnell (incorporated by reference to Exhibit 99.15 to the Company’s Registration Statement on Form S-8 filed June 17, 2005). + | |
10.38
|
Stock Option Agreement, dated November 11, 2003, between Equator Technologies, Inc. and John O’Donnell (incorporated by reference to Exhibit 99.16 to the Company’s Registration Statement on Form S-8 filed June 17, 2005). + | |
10.39
|
Office Lease dated April 12, 2001, by and between Equator Technologies, Inc. and Pike Street Delaware, Inc. (incorporated by reference to Exhibit 10.18 to the Company’s Quarterly Report on Form 10-Q filed August 9, 2005). | |
10.40
|
Real Property Lease dated March 21, 2001, by and between Equator Technologies, Inc. and Limar Realty Corp. #30 (incorporated by reference to Exhibit 10.19 to the Company’s Quarterly Report on Form 10-Q filed August 9, 2005). | |
10.41
|
Amendment No. 1 to Office Lease dated July 7, 2005, by and between Equator Technologies, Inc. and 520 Pike Street, Inc. (incorporated by reference to Exhibit 10.20 to the Company’s Quarterly Report on Form 10-Q filed November 7, 2005). | |
10.42
|
Office Lease Agreement by and between CA-The Concourse Limited Partnership and Pixelworks, Inc. |
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| Exhibit | ||
| Number | Description | |
21
|
Subsidiaries of Pixelworks, Inc. | |
23
|
Consent of KPMG LLP. | |
31.1
|
Certification of Chief Executive Officer. | |
31.2
|
Certification of Chief Financial Officer. | |
31.3
|
Certification of Chief Operating Officer. | |
32.1
|
Certification of Chief Executive Officer. | |
32.2
|
Certification of Chief Financial Officer. | |
32.3
|
Certification of Chief Operating Officer. |
| + | Indicates a management contract or compensation arrangement. |
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SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| PIXELWORKS, INC. | ||||
Dated: March 13, 2006
|
By: | /s/ Allen H. Alley
|
||
| Chairman of the Board, President and | ||||
| Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
| Signature | Title | Date | ||
/s/ Allen H. Alley
|
Chairman of the Board, | March 13, 2006 | ||
Allen H. Alley
|
President and | |||
| Chief Executive Officer | ||||
/s/ Michael D. Yonker
|
Vice President, Chief Financial Officer, Treasurer |
March 13, 2006 | ||
| and Secretary | ||||
/s/ Mark Christensen |
Director | March 13, 2006 | ||
/s/ C. Scott Gibson
|
Director | March 13, 2006 | ||
/s/ Frank Gill |
Director | March 13, 2006 | ||
/s/ Bruce Walicek |
Director | March 13, 2006 |
89