Item 1. BUSINESS
Overview
We are a leading designer, developer and marketer of
semiconductors and software for the advanced display industry. We develop
products that integrate a microprocessor, memory and image processing circuits
that function as a computer on a single chip, or system-on-a-chip.
We began developing our products for the most
technically demanding advanced display devices; multimedia projectors,
multimedia flat panel monitors, and high-definition televisions. In January
2001, we completed the acquisition of Panstera, Inc., which is developing a
broad line of mixed signal integrated circuits (“ICs”) that provide a family of
products for mass-market, XGA-resolution LCD monitors. We are also developing products for emerging
markets including electronic devices designed to access and display Web
content. In January 2002 we completed the acquisition of nDSP Corporation, a
developer and marketer of digital signal processing ICs that enhance video
quality in a wide variety of display products for the consumer television
market.
Our product line of semiconductors and feature-rich
software help our customers simplify their product design, reduce time to
market, lower development costs and increase product performance. Our solutions
enable our customers to use a common design environment across multiple
products.
We have announced that our semiconductors are used in
products marketed by Compaq, Dell, Hitachi, InFocus Corporation,
NEC-Mitsubishi, Samsung, SANYO, Seiko Epson, Sharp, Sony and ViewSonic.
Industry Background
In order to take full advantage of the large amounts
of visual information, users are demanding more sophisticated display devices
capable of showing text, graphics and full motion video simultaneously. These
products include flat panel monitors, high definition televisions, or HDTVs,
and multimedia projectors. Independent research firms are projecting significant
growth for these devices over the next several years. The following data have
been gathered from published sources that were not specifically prepared or
approved for use in this report.
• DisplaySearch estimates that the
market for flat panel monitors will increase from 6.1 million units in 2000 to
86 million units in 2005, a compound annual growth rate of 70%.
• DisplaySearch
estimates that the market for flat panel televisions including LCD TVs and
plasma displays will increase from 1.1 million units in 2001 to 11.8 million
units in 2005, a compound annual growth rate of 81%.
• Stanford Resources estimates that
the market for Digital Television will increase from 2.4 million units in 2000
to 11.8 million units in 2005, a compound annual growth rate of 38%.
• Pacific
Media Associates estimates that the market for multimedia projectors will
increase from 1.2 million units in 2000 to 2.9 million units in 2004, a
compound annual growth rate of 25%.
Today, the convergence of
television and computer applications is creating new development opportunities
for products that integrate the ability to display full motion video and
support interactive capabilities such as browsing the Web while watching
television. This convergence makes the interpretation
and display of information more complex. While significant growth is forecasted for display devices, the
increasing need to rapidly process large amounts of information delivered in a
multitude of broadcast and Web transmission formats could constrain this
growth. This bottleneck limits access to the full visual potential of content.
Developing the technology to cost effectively meet the
breadth and complexity of new display devices poses several technical
challenges. First, the signals delivering content to these devices include
analog, digital and video information that has been encoded using a combination
of standard and non-standard industry formats. This information must be
translated and optimized at very high speeds to match the functionality and
display characteristics of different display devices. Second, these new devices
require visual information to be displayed in a wide variety of sizes and
formats. Each signal, whether analog or digital, must be manipulated to
properly display the appropriate image in the correct format on the device.
Third, all of these differing signals and formats need to be processed without
compromising the visual quality of the information displayed.
The rapid development of high-resolution display
technologies has created another challenge. The quality of a display device
largely depends on its resolution.
Resolution is defined by the number of picture elements, or pixels, that
can be displayed. Pixels on a display are arranged in a matrix made up of a
series of rows and columns. With higher resolution, more information can be
displayed resulting in a crisper and cleaner image. In order to meet end users’
expectations for higher quality images, new display technologies are frequently
introduced with higher resolutions. Today’s mainstream computer monitors use an
Extended Graphics Array, or XGA, display consisting of a matrix of 1,024 by 768
pixels. Higher computer resolution formats are emerging such as Super Extended
Graphics Array, or SXGA, with 1,280 by 1,024 pixels, and Ultra Extended
Graphics Array, or UXGA, with 1,600 by 1,200 pixels. In addition, 18 high
definition television formats have been created to support HDTV video content.
The industry is seeking to address some of this
complexity and to accelerate the acceptance of flat panel displays through the
development of new standards such as the Digital Visual Interface, or DVI,
specification, a digital standard for attaching a flat panel monitor to a
computer. However, even with development of these standards, today’s technology
is reaching its physical limit of transmitting and receiving image data. New
standards are required to increase the available transmission capacity, or
bandwidth. Without new standards, the
adoption of advanced high-resolution, high-performance display products may be
impeded.
Furthermore, the traditional design approach of
creating “hard-wired” solutions for specific technical challenges results in
single-purpose semiconductors that are difficult to re-configure for new
products. The resulting fixed functionality combined with the lengthy design
cycles for new products has made it difficult for developers to quickly design
high-performance, flexible, multi-featured, and affordable new display
products.
Products
Our products include semiconductors, software and
software development tools that enable our customers to quickly integrate our
system-on-a-chip semiconductors into their end products. Designs using our
products are portable across different product lines and models that are
segmented into four distinct categories:
SignalProcessors: Integrated,
mixed-signal processing interface electronics that can be combined with the
full line of Pixelworks image processing ICs to improve image quality, save
space and lower system cost. These
products include analog and digital receivers, video decoders and video
deinterlacers.
DisplayProcessors: Integrated
display controllers from Pixelworks combine image scaling and features with
variations of analog interfaces, digital interfaces and LCD panel timing
controllers.
ImageProcessors: The
high-performance line of display controllers using Pixelworks’ innovative
architecture based on an integrated x86 microprocessor, on-chip memory and
software. ImageProcessor ICs can be
used across different sizes and resolutions of LCD monitors, multimedia
projectors and advanced televisions.
MediaProcessors: MediaProcessor
technology from Pixelworks combines system-on-a-chip hardware, a powerful
microprocessor, and software designed for a new class of consumer electronics
including televisions, monitors and multimedia projectors capable of combining
video, computer graphics and Web content.
Many of our display controller semiconductors include the following
features:
• Intelligent Image Processing-interprets
and resizes incoming image signals to match the resolution and aspect ratio, or
the relation of the width to the height of the specific display used in the
product
• Adaptive Image Optimization-identifies the
incoming computer or video signals and adjusts the display to produce the best
possible image
• Advanced Video Support-recognizes and
optimizes incoming video signals, including HDTV, for a wide variety of display
resolutions
• Software Compatibility-allows customers to
rapidly create products across product lines and categories using a common set
of software tools
Other features of display controllers include:
• Support for a range of resolutions-the
ability to handle a full range of resolution standards from 640 by 480 pixels
to 2,048 by 1,536 pixels.
• Picture-in-Picture-the ability to overlay
and view one image source simultaneously with another image source in a
resizable and movable window
• Keystone Correction-a feature designed for
projectors that allows users to adjust the image electronically to compensate
for optical distortions in a projected image so it appears square.
• Fail-Safe-a patent-pending feature that
ensures users can always see their computer desktop even when the graphics
signals driving the monitor are set at resolutions or refresh rates beyond the
monitor’s capabilities.
Our Software
We provide a complete software development environment
that helps customers reduce their time to market by providing an embedded
operating system, computer programming code and tools necessary to customize
display devices. Our Software Development Kit enables product differentiation
through rapid customization of features, performance, and device “look and
feel” with fast time to market and reduced development costs. Our software
provides a consistent development platform that is portable across product
lines and product categories.
The Software Development Kit includes:
• An operating system, computer
programming code and programming tools;
• Software that provides
automatic image optimization that is compatible with a wide range of analog,
digital, and video formats;
• Application programming
interfaces that allow the customer to interact with our software and hardware
functionality at a high level;
• Support for a wide range of
hardware devices; and
• Windows-based utilities:
• GUIBuilder-allows the customer to build
graphical on-screen user interfaces
• Display Configurator-allows the customer
to configure timing for particular display panels
• FlashUpgrader-allows
the customer to download software into memory for use by our system-on- a-chip semiconductors
• PW Debug-gives
the customer the capability for interactive debugging of the system over a
serial interface
Future Product Development
We plan to develop new system-on-a-chip semiconductors
that address customer demand and are logical extensions of our design
architecture. Higher levels of integration include adding analog to digital
converters, video decoders and DVI compliant digital receivers. These higher
levels of integration will further reduce the number of components on circuit
boards and help to lower overall system costs.
Technology
Our core competency in semiconductor design involves
an innovative methodology for developing complex system-on-a-chip designs. Our
designs are based on self-contained modules that can be reassembled and reused
in new product development programs. We extensively simulate and test our
designs using the best available simulation and synthesis tools and internally
developed proprietary validation tools.
Integrated Semiconductor Technology
On-chip
integration of Microprocessor, Memory and Digital Signal Processor. Our ImageProcessor and
MediaProcessor semiconductors are a complete, integrated display controller on
a single chip, which includes automatic image optimization, automatic image
resizing and an onboard microprocessor. This single chip replaces all of the
individual components of the traditional display controller.
The technical specifications of many of our
system-on-a-chip semiconductors include an embedded microprocessor and
peripherals, and a high performance digital signal processing, or DSP, core.
Our proprietary memory system architecture enables up to 33.2 gigabits per
second of bandwidth, and our DSP enables processing of image resolutions as
high as Quad Extended Graphics Array, or 2,048 by 1,536 pixels, which requires
more than 5 gigabits per second of transmission capacity. By integrating the
microprocessor and peripherals, memory, and DSP our products provide a complete
solution to the core electronics of a display device.
Broad
Interface Flexibility. Our display controllers work with
analog or digital signals, ranging from low resolution computer graphics to the
latest high-definition television formats.
With the acquisition of Panstera, Inc., we strengthened our mixed signal
design capabilities and are expanding our product offerings to include many of
the key ICs for advanced display devices.
Complete
Software Development Environment. We provide an embedded
operating system, source code, and software tools necessary to customize
display devices. Our software development
environment
includes a proprietary WindowsÒbased
user interface creation tool, GUI Builder, which enables customers to create
finished products with a distinct “look and feel.” The GUI Builder also allows
our customers to easily create multiple differentiated products from the same
platform. In addition to controlling the user interface our software forms the
heart of the real-time system at the core of any modern display product. Our
software provides a consistent development platform that is portable across
product lines and product categories. For example, a customer that develops a
projector product using our software can easily port that software for use in a
monitor. This benefits the customer by dramatically reducing time to market and
providing a unique “look and feel” that delivers a consistent customer
experience across an entire product portfolio.
Intelligent Image Processing Technology
Our technology supports multi-standard analog and
digital video, including digital television or DTV, HDTV, National Television
Standards Committee, or NTSC, and other international video standards. Our
intelligent image processing products simplify the use and development of
display devices. Features of our technology include the following:
Image
Scaling and Shaping. Our image processing technology
incorporates a proprietary programmable image scaler capable of resizing images
to fit a wide variety of aspect ratios, which is the ratio of width to height
of display screens, and resolutions. With our scaler, images can be adapted to
aspect ratios ranging from traditional 4:3 aspect ratios of conventional
computer monitors and televisions to the 16:9 format used in wide screen HDTVs.
In addition, content designed for a specific resolution can be intelligently
stretched or reduced in real time to fit a new resolution for a specific
display without degrading the image. For example low-resolution images are
processed by intelligently adding information, so that when the new image is
displayed, it looks smooth without jagged image areas. High-resolution content
can be displayed on lower resolution displays by intelligently removing
information without degrading image quality.
Our technology allows the shape of an image to be
changed in multiple dimensions. This is useful in compensating for optical
distortions in products including front projection systems and rear projection
televisions. For example, standard resolution videotapes designed for
conventional television display can be resized and formatted for display on a
high-resolution wide-screen flat panel television without degrading the image.
This capability is increasingly important as HDTV becomes more prevalent. HDTV
content can be delivered in as many as 18 different combinations of resolutions
and 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 a signal and configure
the system to produce the best possible image. Our adaptive image optimization
technology automatically adjusts incoming signals to achieve the highest
possible image quality. The display adjusts itself when it is turned on and
continuously adjusts with every change of the incoming signals to display an
optimal image.
Advanced
Video Processing.
Flat panel displays are progressive scan devices. Images are built and
displayed sequentially one row or line at time. Typically, video signals are
interlaced or built using every other row. First the odd rows are displayed and
then the image is updated with the even rows. Our image processing technology
converts the incoming interlaced video signals for display on flat panels by
doubling the incoming signals to match the progressive scan capabilities of
flat panel displays. This is an especially difficult challenge. Simply merging the odd and even fields
results in very jagged image edges. Our intelligent approach uses a
sophisticated video digital signal processing technique to display 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 unique approach any
color can be addressed independently
and adjusted without impacting other colors. Our customers can use our
color compensation technology to compensate for non-uniform color in a specific
display and to provide consistent color performance across multiple products
using different display technologies. It can also be used to compensate for
color variations in display components provided by different vendors.
Our non-linear color
compensation technology allows precise color matching and may enable products
that can precisely represent the color of the original source. The applications
of this technology include graphic design where colors on a display using an
ImageProcessor semiconductor can be accurately matched to a print output.
Another application is for improving end-user satisfaction when using Internet
e-commerce shopping sites by enabling exact color representation of products to
be shown on a display.
Fully Customizable On-Screen Display
Our technology couples an integrated on-screen display
controller with a unique Windows-based application that allows customers who
are designing ImageProcessor semiconductors into their display products to
quickly develop and implement their own unique user interfaces that can
incorporate graphics and colorful icons in start-up displays and menus.
Customizable Feature Support for Specific Device
Functionality
This allows developers to
add unique features for specific devices.
Customizable features currently include:
• Picture-in-picture
for products in the consumer multimedia, high-end desktop monitors and business
presentation markets;
• Fail-Safe
ensures that users can always see their computer desktop even when the graphic
signals driving the monitor are not compatible. The Fail-Safe mode continues to display an image, allowing users
to easily restore the correct graphic settings using their operating system
software. The Pixelworks Fail-Safe
feature is designed to minimize user frustration while reducing support
requirements and monitor costs.
• Image shaping for
keystone correction in business presentation products; and
• Digital zoom to
enlarge images electronically.
Mixed Analog and Digital Signal Support
Our display controller semiconductors can support as
many as four different sources of computer and video content to be displayed on
a single device through integrated and add-on analog and digital receivers and
connectors. Analog computer graphics, digital graphics supporting the DVI
standard and video through a variety of sources that can be captured, decoded
and optimized.
SmartPanels - Specialized
integration of display controller electronics and LCD modules
“SmartPanels” are an emerging manufacturing trend in advanced display
products. SmartPanels integrate all
electronics directly onto the LCD display module in order to streamline monitor
product development by reducing the number of circuit boards used, lowering
assembly costs and minimizing the manufacturing challenges caused by sourcing
and integrating an array of individual components from different vendors.
SmartPanels cut development time by delivering pre-tested, regulatory approved
hardware and software to LCD monitor manufacturers.
Pixelworks has been developing a suite of technologies optimized for
SmartPanel applications including integrated electronics combining interface
electronics, a display controller, a programmable LCD timing controller with
advanced electronic interference reduction and backlight inverter control.
Customers, Sales and Marketing
We have achieved design wins with global leaders in
the business computing and consumer electronics markets. We have announced
products in production with Compaq, Dell, Hitachi, InFocus, NEC-Mitsubishi,
Samsung, SANYO, Seiko Epson, Sharp, Sony and ViewSonic.
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 which complements their
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 system-on-a-chip semiconductors.
Our global distribution channel is multi-tiered and
involves:
• Manufacturers
Representatives-Independent sales agents who represent us in local markets and
provide pre- and post-sales support and do not carry inventory
• Distributors-Resellers
in local markets who provide pre- and post-sales support and stock our
ImageProcessor semiconductors in direct relation to specific manufacturing
customer orders
• Integrators-OEM
customers who build display devices based on specifications provided by branded
manufacturers
• Branded
Manufacturers-Globally recognized manufacturers who develop display device
specifications, manufacture, market and distribute display devices either
directly or through resellers to end-users
In Japan, our products are sold through our
distributor; Tokyo Electron Device which represented 51.9%, 58.9% and 54.9% of
our total revenue for the years ended December 31, 2001, 2000 and 1999,
respectively. Sales through Tokyo Electron Device to our customer Seiko Epson
represented 11.5%, 16.6% and 23.3% of our total revenue for the years ended
December 31, 2001, 2000 and 1999, respectively. In Mainland China and Taiwan,
we sell through a combination of a network of distributors and direct sales. We
support our European and Korean customers through direct sales supported by
manufacturer representatives. We sell our products to and support our U.S.
customers directly.
Our sales and marketing team included 66 employees as
of December 31, 2001. The sales and marketing team includes the architecture
support team of 40 application engineers who provide technical expertise and
assistance to manufacturing customers on final product development. We have
sales, marketing and support offices in Mainland China, Japan, Korea and
Taiwan.
Research and Development
At our inception, our internal research and
development efforts were focused on the development of our PW364 ImageProcessor
semiconductor for the high-end multimedia projection and flat panel monitor
markets. In 1998, our development efforts for the PW264 ImageProcessor
semiconductor were focused on extending our technology into new markets. In
1999, our development efforts for the PW164
ImageProcessor semiconductor product series were focused on developing
highly efficient designs while maintaining product performance and features.
We are now pursuing higher levels of integration of
new features in order to extend our system-on-a-chip semiconductors into new
market segments. These higher levels of integration will further reduce
components on circuit boards and help to lower final systems costs for our
customers. Future development efforts include system-on-a-chip technologies
required for Internet appliance and advanced video applications.
In addition to our 40 applications engineers, on
December 31, 2001, we had 81 engineers, technologists and scientists who are
organized into the following functional groups: Integrated Circuit Design,
Software 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, inclusive of amortization of stock
compensation, were $24.2 million, $11.1 million and $5.0 million in 2001, 2000
and 1999, respectively.
Manufacturing
Our products require advanced semiconductor processes
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
products. We have IC foundry relationships with Infineon, Taiwan Semiconductor
Manufacturing Corporation, or TSMC, Toshiba and United Microelectronics Corp,
or UMC. This approach allows us to concentrate our resources on product design
and development where we believe we have greater competitive advantages.
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-a-chip technology. We currently hold
one U.S. patent. In 2001, we filed 16
patent applications. As of March 2002,
we have 19 patent applications pending with the U.S. Patent and Trademark
Office, which relate generally to improvements in the visual display of digital
image data including, but not limited to, improvements in image scaling and
automatic image optimization and to the Digital Visual Interface standard. 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 principle 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 chips 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 scaler
components. Some of these include Genesis Microchip, Macronix, MRT Inc.,
Philips, Silicon Image, SmartASIC, STMicroelectronics, and Trumpeon.
Potential competitors may include diversified
semiconductor manufacturers including Broadcom Corporation, National
Semiconductor and Texas Instruments. In addition, start-up companies may seek
to compete in our markets.
Employees
As of December 31, 2001, we had a total of 176
employees-81 in engineering, 66 in sales and marketing, of which 40 are
application engineers and 26 are sales and marketing staff, 11 in operations
and 18 in finance and administration. Of these employees, 157 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. The Company’s future success will depend in
large part upon its ability to continue to attract, retain, and motivate highly
skilled and qualified personnel.
Item 2.
Item 2. PROPERTIES
We lease 51,775 feet in two buildings located in
Tualatin, Oregon, which house our corporate headquarters, and includes
engineering, operations, sales and marketing and administrative
facilities. We have leased these spaces
through various dates ranging from September 2003 through February 2006. In connection with our acquisitions of
Panstera, Inc. in January 2001 and nDSP Corp. in January 2002, we have added
approximately 9,000 square feet in San Jose, California and 14,000 in Campbell,
California, respectively. These leased
facilities house research and development.
The leases expire at various dates through May 2006. We rent additional
space in various other countries for the purposes of sales and customer
support.
Item 3.
Item 3. LEGAL PROCEEDINGS
On December 7, 2001, a former employee filed a
complaint in the Circuit Court of the State of Oregon, Washington County,
claiming violations of various state and federal employment and discrimination
laws. The complaint seeks at least $7
million in economic, non-economic and liquidated damages. The plaintiff asserts several statutory
claims, which may require payment of the prevailing party’s attorney’s
fees. Although we believe we have
meritorious defenses to all claims, it is impossible at this state to evaluate the
likelihood of an unfavorable outcome or to provide an estimate of the amount or
range of potential loss, if any.
We are involved in other litigation from time to time
that is routine in nature and incidental to the outcome of our business. We believe that the outcome of any such
litigation would not have a material adverse effect on our financial condition,
cash flows, or results of operations.
Item
4.
Item
4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
No matters were submitted to a vote of the Company’s
security holders during the fourth quarter of the fiscal year ended December
31, 2001.
PART II
Item
5.
Item
5. MARKET FOR THE REGISTRANT’S COMMON
EQUITY AND RELATED SHAREHOLDER MATTERS
On May 19, 2000 the Company completed its Initial
Public Offering (“IPO”) selling 5,750,000 shares of Common Stock at $10.00 per
share. In June of 2000 the Company sold
an additional 862,500 shares of Common Stock pursuant to the terms of the
over-allotment agreement related to the IPO.
The Company’s 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 closing sales prices for the Common
Stock, as reported by the Nasdaq National market.
As of March 19, 2002, there were approximately 360
shareholders of record, and the last per share sales price of the Common Stock
on that date was $13.
The Company has not declared any cash dividends in the
past two fiscal years. The Company
expects to retain any earnings to finance the expansion and development of its
business and has no plans to declare cash dividends. The payment of dividends is within the discretion of the
Company’s Board of Directors and will depend on the earnings, capital
requirements and operating and financial condition of the Company, among other
factors.
Item 6.
Item 6. SELECTED FINANCIAL DATA
(1) Results of operations are for the period from January 16, 1997
(date of inception) to December 31, 1997
Item
7.
Item
7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
We design, develop and market system-on-a-chip
integrated circuits (“ICs”) and software for the advanced display industry. Our
technology translates and optimizes video, computer graphics, and visual Web
information for display on a wide variety of electronic devices. We have
announced products in production with Compaq, Dell, Hitachi, InFocus
Corporation, NEC-Mitsubishi, Samsung, SANYO, Seiko Epson, Sharp, Sony and
ViewSonic.
On May 19, 2000 we sold 5,750,000 shares of Common
Stock at $10.00 per share in an Initial Public Offering (“IPO”). In June 2000,
we sold a further 862,500 shares of Common Stock under the terms of the over
allotment agreement relating to that Initial Public Offering. The net proceeds,
amounting to
approximately $60.5 million are currently invested in various
marketable securities and may be used for general corporate purposes.
On
January 30, 2001 we invested $7.5 million in Jaldi Semiconductor
Corporation (“Jaldi”), a privately held fabless semiconductor start-up
developing application specific reconfigurable Digital Signal Processing
(“DSP”) technology, in exchange for a minority interest in Jaldi. We have an option to purchase the remaining
interest in Jaldi for 1.85 million shares of Pixelworks Common Stock. Under its agreement with Pixelworks, Jaldi
is subject to one specific development milestone consisting of the JD1
Integrated Circuit shipping to a customer, in its production implementation
while meeting agreed upon cost, performance and technical specifications. Upon obtainment of the milestone by Jaldi,
Pixelworks must either exercise the option within 30 days thereafter or pay
Jaldi $10,000,000. We intend to acquire
the remaining interest upon Jaldi’s successful completion of this milestone.
Also on January 30, 2001 we completed the
acquisition of all of the outstanding capital stock and stock options of
Panstera, Inc. (“Panstera”), a privately held fabless semiconductor company
located in San Jose, California, in exchange for 4.5 million shares of
Pixelworks Common Stock. The
acquisition was recorded as a purchase transaction. The Company recorded a $32.4 million charge for in-process
research and development (“IPR&D”) related to the Panstera
acquisition. Panstera is a fabless
semiconductor company that is developing a broad line of mixed signal ICs that
provide an end-to-end family of products for mass market, XGA resolution LCD
monitors. At the time of the acquisition,
Panstera did not have any products that had reached technological
feasibility. Panstera had four main
product groups under development at the acquisition date, each contributing
from 11% to 41% to the total IPR&D value.
The projects included the development of digital and analog receivers as
well as digital processor ICs. The
projects ranged from 50% to 85% complete.
All projects had expected completion dates within one year and an
estimated aggregate cost to complete of $3.2 million. Currently, one of the product groups has
been completed while three remain in development.
On January 14, 2002, we acquired all of the
outstanding shares of nDSP, Inc. in exchange for approximately 1,200,000 shares
of Pixelworks stock. A privately held
fabless semiconductor company, nDSP is an emerging provider of video processing
ICs designed to enhance the picture quality of mainstream consumer televisions,
flat panel displays, and multimedia projectors. The transaction will be accounted for by the purchase method of
accounting, and accordingly, the results of operations of nDSP, Inc. will be
included in the Company’s financial statements beginning on the date of
acquisition. Pixelworks expects to
record a one-time charge in the quarter ending March 31, 2002 for purchased
in-process research and development expenses related to the acquisition.
We sell our products worldwide through a direct sales
force and indirectly through distributors and manufacturers representatives.
Distributors have been established in Japan, Taiwan and China. Manufacturers
representatives support European and Korean sales. In addition to our Tualatin,
Oregon corporate headquarters, we have facilities in California, Japan,
Mainland China, Taiwan and Korea.
We recognize revenue from product sales upon shipment.
Pixelworks complies with the revenue recognition guidance summarized in Staff
Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements. Reserves for sales returns and allowances are recorded at the
time of shipment.
Historically, significant portions of our product
revenue have been from a relatively small number of customers and distributors.
Our top five customers accounted for 42.9%, 51.7% and 62.3% for the years ended
December 31, 2001, 2000 and 1999, respectively.
Significant portions of our products are sold
overseas. Sales outside the U.S. accounted for 91.4%, 95.5% and 92.8% of total
revenue for the years ended December 31, 2001, 2000 and 1999, respectively. Our
end customers, branded manufacturers and integrators, incorporate our products
into systems that are sold worldwide. All revenue to date has been denominated
in U.S. dollars.
Critical
Accounting Policies and Estimates
The preparation of consolidated financial statements
in conformity with accounting principles generally accepted in the United
States (“GAAP”) requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
On an on-going basis, the Company evaluates its estimates, including those
related to product returns, bad debts, inventories, investments, prepaid
expenses, intangible assets, income taxes, warranty obligations and
contingencies and litigation and other contingencies. Pixelworks bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Pixelworks believes the following critical accounting
policies affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements. The Company records
estimated reductions to revenue for customer returns based on historical
experience. If actual customer returns
increase as a result of future product introductions the Company may be
required to recognize additional reductions to revenue. The Company maintains
allowances for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. If the financial
condition of Pixelworks’ customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. Pixelworks provides for the estimated cost of product warranties at
the time revenue is recognized. While Pixelworks engages in extensive product quality
programs and processes, including actively monitoring and evaluating the
quality of its suppliers, Pixelworks’ estimated warranty liability is affected
by product failure rates and material usage and service delivery costs incurred
in correcting a product failure. Should actual product failure rates, material
usage or service delivery costs differ from Pixelworks’ estimates, revisions to
the estimated warranty liability would be required. Pixelworks writes down its
inventory for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required. The Company holds a minority equity
interest in a company having operations or technology in areas within its
strategic focus. The Company may record an investment impairment charge if it
believes the investment has experienced a decline in value that is other than
temporary. Future adverse changes in market conditions or poor operating
results of underlying investments could result in losses or an inability to
recover the carrying value of the investments that may not be reflected in an
investment’s current carrying value, thereby possibly requiring an impairment
charge in the future. Pixelworks records a valuation allowance to reduce its
deferred tax assets to the amount that is more likely than not to be realized.
Should Pixelworks determine that it would not be able to realize all or part of
its 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.
Results
of Operations
The following table sets forth certain financial data
for the Company for the periods indicated as a percentage of revenue.
Amount excludes
amortization of deferred stock
compensation of:
(1) Cost of
revenue
0.0
%
0.1
%
0.1
%
(2) Research and
development
6.8
%
1.6
%
1.8
%
(3) Selling,
general and administrative
2.5
%
2.5
%
2.5
%
Year
Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenue. Revenue increased $38.2
million from $52.6 million for the year ended December 31, 2000 to $90.8
million for the year ended December 31, 2001.
The increase in revenue resulted from increased shipments of PW111,
PW112, PW164, PW165, PW171, and PW365 ImageProcessor ICs. All of these products, with the exception of
the PW164, were products that were newly introduced and not shipping in the
year ended December 31, 2000. The increase
in revenue was partially offset by decreased shipments of PW264 and PW364
ImageProcessor ICs.
Gross profit. Gross profit margin
was 48.8% of total revenue for the year ended December 31, 2001 compared to
40.3% of total revenue for the year ended December 31, 2000, inclusive of
$40,000 and $70,000 of amortization of deferred stock compensation,
respectively. The improvement in gross
profit margin resulted primarily from the introduction of new products with higher
average gross profit margins, and fixed costs being spread over higher
revenues. Approximately 29% of revenue
for the year ended December 31, 2001 was from newly introduced products that
were not shipping in the year ended December 31, 2000.
Research and development. Research
and development expense, inclusive of amortization of deferred stock
compensation, was $24.2 million or 26.7% of total revenue for the year ended
December 31, 2001 compared to $11.1 million, or 21.0% of total revenue for the
year ended December 31, 2000. The increase of $13.1
million resulted primarily from a $5.3 million increase in amortization
of deferred stock compensation and a $3.5 million increase in compensation
expenses related to an increase in personnel of 37 employees, primarily as a
result of the Panstera acquisition.
Upon completion of the acquisition in January 2001, the Company recorded
deferred stock compensation expense related to the unvested portion of the stock
option grants to employees that were assumed by Pixelworks. The balance of the increase was primarily
the result of a $2.0 million increase in expenses related to engineering
consulting services and development services for products in development and a
$1.5 million increase in depreciation and amortization.
Selling, general and administrative.
Selling, general and administrative expense, including amortization of deferred
stock compensation, was $18.6 million, or 20.5% of total revenue for the year
ended December 31, 2001 as compared to $11.0 million, or 21.0% of total revenue
for the year ended December 31, 2000.
Most of the $7.6 million increase resulted from a $2.6 million increase
in compensation expenses related to an increase in personnel of 27
employees. Amortization of deferred stock
compensation increased $940,000 primarily as a result of the acquisition of
Panstera. Additionally, rent increased
$559,000 due to an increase in building space to support higher headcounts,
depreciation and amortization increased $472,000 due to additional purchases of
long-term assets, outside services increased $379,000 primarily for legal and
accounting services, and sales commissions increased $410,000 due to higher
revenue. The balance of the increase consisted primarily of a $391,000 increase
in insurance and $410,000 increase in travel related to customer visits to
support products in development.
Amortization of goodwill and assembled workforce. Expenses for the amortization of goodwill
and assembled workforce were $16.0 million for the year ended December 31,
2001. At the time of the acquisition of
Panstera in January 2001, the Company recorded $84.2 million of
goodwill, which is being amortized over sixty months, and $1.8 million of
assembled workforce, which is being amortized over thirty-six months. The Company began amortizing these assets in
February 2001. As a result of the
adoption of SFAS 142, the Company does not expect to incur any additional expenses
for the amortization of goodwill and assembled workforce beyond December 31, 2001.
In-process research and development expense. The Company recorded a one-time charge of
$32.4 million in the first quarter of 2001 to write off the in-process research
and development that resulted from the acquisition of Panstera, Inc. The value
assigned to IPR&D related to research projects for which technological
feasibility had not been established.
The value was determined by estimating the net cash flows from the sale
of products from 2001 through 2005 resulting from the completion of such projects,
and discounting the net cash flows back to their present value.
Amortization of deferred stock compensation.
Stock compensation expense was $8.5 million for the year ended December 31,
2001, an increase of $6.3 million from $2.2 million for the year ended December
31, 2000. The increase in stock compensation expense resulted from the unvested
portion of stock option grants to employees.
As a result of the acquisition of Panstera, the Company recorded $13.4
million in deferred stock compensation, which is being amortized on an
accelerated method over the vesting period of the assumed options. Amortization of the December 31, 2001
balance of $5.7 million in deferred stock compensation is estimated to be $3.8
million, $1.6 million and $308,000 for the years ending December 31, 2002,
2003, and 2004, respectively.
Interest and other income and expense, net.
Interest and other income and expense, net consists of interest income and
other non-operating income and expenses.
Interest and other income and expense, net was unchanged from $4.4
million for the year ended December 31, 2000 to $4.4 million for the year ended
December 31, 2001. Although the Company
maintained higher average cash balances for the year ended December 31, 2001,
the yields on invested cash in the current year were lower than those for the
year ended December 31, 2000.
Provision for income taxes. The Company recorded no net provision for
income tax expense during the year ended December 31, 2001. As a result of the acquisition of Panstera
the Company added $1.2 million in deferred tax assets, related to Panstera’s
net operating loss carry forward which, when realized will be offset against
goodwill. As of December 31, 2001 we
had approximately $5.6 million of net operating loss carryforwards to offset
against future taxable income the benefit of which when utilized will go to
equity and goodwill. The carryforwards
expire on various dates through 2021, if not used. Utilization of a portion of net operating losses is subject to an
annual limitation due to the ownership change provisions of the Internal
Revenue Code of 1986 and similar state provisions.
Year
Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenue. Revenue increased $39.8
million from $12.8 million for the year ended December 31, 1999 to $52.6
million for the year ended December 31, 2000. The increase in revenue resulted
primarily from increased shipments of PW164, PW264 and PW364 ImageProcessor
ICs, which accounted for 97.8% of the total revenue for the year ended December
31, 2000. Sales of the PW164, PW264 and
PW364 ImageProcessor ICs increased $20.5 million, $10.2 million and $9.1
million, respectively, from the year ended December 31, 1999 to year ended
December 31, 2000.
Gross profit. Gross profit margin
was 40.3% of total revenue for the year ended December 31, 2000 compared to
34.6% of total revenue for the year ended December 31, 1999, inclusive of
$70,000 and $7,000 of amortization of deferred stock compensation
respectively. The improvement in gross
profit margin resulted primarily from higher gross profit margins on the PW264
and PW364 ImageProcessor IC s as a result of lower product costs on those products
as well as from higher volume shipment of the PW164 ImageProcessor IC, which
had higher gross profit margins than the PW364 and PW264 ImageProcessor ICs.
Research and development. Research
and development expense, inclusive of amortization of deferred stock
compensation, was $11.1 million or 21.0% of total revenue for the year ended
December 31, 2000 compared to $5.0 million, or 39.3% of total revenue for the
year ended December 31, 1999. The increase of $6.1 million resulted primarily
from a $2.2 million increase in compensation expenses primarily related to an
increase in personnel of 16 employees, a $1.7 million increase in expenses
related to engineering consulting services and development services for
products in development, and a $792,000 increase in depreciation and
amortization.
Selling, general and administrative.
Selling, general and administrative expense, inclusive of amortization of
deferred stock compensation, was $11.0 million, or 21.0% of total revenue for
the year ended December 31, 2000 as compared to $4.7 million, or 36.6% of total
revenue for the year ended December 31, 1999.
Most of the $6.3 million increase resulted from a $2.9 million increase
in compensation expenses related to an increase in personnel of 23 employees,
$1.0 million in amortization of deferred compensation and $601,000 increase in
sales commissions due to higher revenue. The balance of the increase consisted
primarily of a $266,000 increase in insurance, $328,000 increase in rent due to
an increase in building space, and $342,000 increase in travel as a result of
an increase in the number of customer visits and investor relations activities.
Patent settlement expense. The Company recorded a one-time charge in
February 2000 related to the settlement of a patent dispute. Under the terms of the settlement agreement,
the Company entered into a perpetual license agreement with InFocus Systems,
Inc. for the use of its technology specified in two patents held by InFocus in
exchange for $2.4 million in cash and 156,863 shares of the Company’s
Series D preferred stock, valued at $12.75 per share. An additional $753,000 of the patent
settlement expense was recorded based on the difference between the estimated
fair value of the underlying common stock and the Series D conversion price of
$8.50 per share. Pixelworks received a
release of any claims InFocus may have against Pixelworks relating to these
patents.
Amortization of deferred stock compensation.
Stock compensation expense was $2.2 million for the year ended December 31,
2000, an increase of $1.7 million from $565,000 for the year ended December 31,
1999. The increase in stock compensation expense is the result of the issuance
of additional stock options granted to employees during the period through May
19, 2000 at a discount from the fair value of the
common stock on the date of grant. All stock options granted subsequent
to May 19, 2000 had an exercise price equal to the quoted market value of the
underlying security at the time of grant and did not result in additional
unearned stock compensation. At
December 31, 2000, the amount of employee unearned compensation was $2.2
million. The deferred balance will be amortized on an accelerated method as
employees provide services over the vesting period of the options.
Interest and other income and expense, net.
Interest and other income and expense, net consists of interest income and
other non-operating income and expense.
Interest and other income and expense, net increased $4.0 million from
$409,000 for the year ended December 31, 1999 to $4.4 million for the year
ended December 31, 2000. This increase
was related to a $4.0 million increase in interest income from higher average
cash balances as a result of proceeds from the issuance of preferred stock in
February 2000 and the initial public offering in May 2000.
Provision for income taxes. The Company recorded no provision for income
tax expense during the year ended December 31, 2000 due to the loss
incurred. We are in a deferred tax
asset position, which has been fully reserved.
We will continue to provide a valuation allowance for our deferred tax
assets until it becomes more likely than not, in our assessment, that our
deferred tax assets will be realized.
Liquidity
and Capital Resources
As of December 31, 2001, the Company had cash and cash equivalents of
$53.3 million and working capital of $98.8 million as compared to cash and cash
equivalents of $49.7 million and working capital of $100.4 million as of
December 31, 2000. Principal sources of
cash during the year ended December 31, 2001 were proceeds from the maturities
of marketable securities, net of purchases of marketable securities, of
$6.1 million, cash generated by operating activities of $10.4 million
and proceeds from the issuance of stock under the Company’s employee stock
purchase plan and stock option plans of $1.7 million. Principal uses of
cash during the year ended December 31, 2001 were the investment in Jaldi
Semiconductor of $7.5 million, and property and equipment expenditures and
purchases of other assets of $7.1 million.
Principal sources of cash during the year ended December 31, 2000 were
net proceeds from the IPO of approximately $60.5 million in May 2000, net
proceeds of $26.5 million from the issuance of preferred stock in February
2000, and $12.4 million generated by operating activities during the year ended
December 31, 2000. Principal uses of
cash during the year ended December 31, 2000 were property and equipment expenditures
and purchases of other assets of $6.8 million, debt payments of $1.8 million,
and the purchase of marketable securities of $57.1 million.
Prepaid Expenses and Other Current Assets. Prepaid expenses and other current assets
increased $2.3 million from December 31, 2000 to December 31, 2001. This increase was primarily due to an
increase in prepaid insurance, prepaid royalties and prepaid annual software
maintenance fees.
Long-Term Marketable Securities and Other Assets. Long-term marketable securities consisting
of federal agency bonds with 2 years remaining to maturity were
$7.5 million at December 31, 2001.
The Company invested proceeds from the maturity of short-term marketable
securities into long-term marketable securities in 2001 to take advantage of
the more favorable interest rates.
Other assets increased $8.8 million from December 31, 2000 to
December 31, 2001. The increase was
primarily the result of a $7.5 million investment in Jaldi Semiconductor
Corporation on January 31, 2001.
As of December 31, 2001, principal commitments consisted of obligations
outstanding under operating leases.
These commitments include leases for approximately 46,000 square feet in
two facilities located in Tualatin, Oregon, expiring through 2006 and two facilities
in San Jose, CA for approximately 8,958 total square feet. The total annual estimated costs for these
commitments are $1.2 million, $1.1 million, $572,000, $352,000 and $59,000 for
the years ending December 31, 2002, 2003, 2004, 2005 and 2006,
respectively. In connection with the
nDSP in January 2002, the Company has assumed leases for approximately 14,320
square feet in a facility in Campbell, California. The lease agreements expire at various date through May 2006. Annual lease costs will be approximately
$506,000, $513,000, $529,000,
$545,000 and $230,000 for the years ending December 31, 2002 through
2006, respectively. In March 2002 the
Company leased an additional 6,018 square feet in one of its Tualatin
facilities. The lease, which expires in
17 months, has a total cost of $194,000.
Although the Company has no other material commitments, we anticipate a
substantial increase in our capital expenditures consistent with anticipated growth
in our operations, infrastructure and personnel. In the future we may also
require a larger inventory of products in order to support anticipated growth
in our business.
Upon Jaldi’s successful completion of specific development milestones,
the Company has an option to purchase the remaining interest in Jaldi for
1.85 million shares of Pixelworks stock, or will incur a breakup fee of
$10,000,000 if the option is not exercised if required.
The Company believes that its existing cash and cash equivalents and
funds generated from operations will be sufficient to fund its operations 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.
Recent
Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
133, Accounting
for Derivative Instruments and Hedging Activities. SFAS No.
133, as amended, establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as
other hedging activities. Because we currently hold no derivative financial
instruments and do not currently engage in hedging activities, adoption of
SFAS No. 133 did not have any impact on our financial condition or results
of operations for the year ended December 31, 2001.
In July 2001, FASB issued SFAS Nos. 141 and 142 (“FAS 141 and
142”), Business
Combinations and Goodwill and Other Intangible Assets. FAS 141 replaces APB 16 and eliminates
pooling-of interests accounting prospectively.
It also provides guidance on purchase accounting related to the
recognition of intangible assets and accounting for negative goodwill. FAS 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach. Under FAS 142, goodwill will be tested
annually and whenever events or circumstances occur indicating that goodwill
might be impaired. FAS 141 and 142
are effective for all business combinations initiated after June 30, 2001.
Companies are required to adopt FAS 142 for fiscal years beginning after
December 15, 2001. The Company
will adopt FAS 142 on January 1, 2002.
FAS 141 will require, upon adoption of FAS 142, that the
Company evaluate its existing intangible assets and goodwill that were acquired
in a prior purchase business combination, and to make any necessary
reclassifications in order to conform with the new criteria in FAS 141 for
recognition apart from goodwill. Upon
adoption of FAS 142, the Company will be required to reassess the useful lives
and residual values of all intangible assets acquired, and make any necessary
amortization period adjustments by the end of the first interim period after
adoption. In addition, to the extent an
intangible asset is identified as having an indefinite useful life, the Company
will be required to test the intangible asset for impairment in accordance with
the provisions of FAS 142 within the first interim period. Any impairment loss will be measured as of
the date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.
In connection with FAS 142’s transitional goodwill impairment
evaluation, the Company will be required to perform an assessment of whether
there is an indication that goodwill is impaired as of the date of
adoption. To accomplish this, the
Company must identify its reporting units and determine the carrying value of
each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then
have up to nine months from the date of adoption to determine the fair value of
each reporting unit and compare it to the reporting unit’s carrying amount. To the extent a reporting unit’s carrying
amount exceeds its fair value, an indication exists that the reporting unit’s
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the
second step, the Company must compare the implied fair value of the reporting
unit’s goodwill, determined by allocating the reporting unit’s fair value to
all of it assets and
liabilities in a manner similar to a purchase price allocation in
accordance with FAS 141, to its carrying amount, both of which would be
measured as of the date of adoption.
This second step is required to be completed as soon as possible, but no
later than the end of the year of adoption.
Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company’s statement of
operations. As of the date of adoption,
the Company expects to have unamortized goodwill in the amount of
$67.9 million and unamortized identifiable intangible assets in the amount
of $1.3 million, which will be subject to the transition provisions of
FAS 141 and 142. Amortization
expense related to goodwill was $15.4 million for the year ended December
31, 2001. Because of the extensive
effort needed to comply with adopting FAS 141 and 142, it is not
practicable to reasonably estimate the impact of adopting these Statements on
the Company’s financial statements at the date of this report, including
whether it will be required to recognize any transitional impairment losses as
the cumulative effect of a change in accounting principle.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations,
which addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 143 is required to be adopted for fiscal years
beginning after June 15, 2002. The Company has not yet determined what effect
this statement will have on its financial statements.
Also in August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes FASB
Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
This new statement also supersedes certain aspects of APB 30 (“APB 30”), Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, with regard to
reporting the effects of a disposal of a segment of a business and will require
expected future operating losses from discontinued operations to be reported in
discontinued operations in the period incurred
(rather than as of the measurement date
as presently required by APB
30). In addition, more dispositions may qualify for discontinued operations
treatment. The provisions of this
statement are required to be applied for fiscal years beginning after December
15, 2001 and interim periods within those fiscal years. The Company has not yet determined what
effect this statement will have on its financial statements.
Forward-looking
Statements
The statements in this Annual Report on Form 10-K relative to the
future constitute “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are based on
current expectations, estimates and projections about the company’s business.
These statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict including those
below under the caption “Risk Factors.”
The forward-looking statements contained in this Form 10-K speak only as
of the date on which they are made, and the company does not undertake any
obligation to update any forward-looking statement to reflect events or
circumstances after the date of this filing.
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.
RISKS RELATED TO OUR OPERATIONS
We have incurred net losses since our
inception, and we may not achieve or sustain annual profitability.
We incurred net losses of approximately $42.6 million,
$567,000 and $4.9 million 2001, 2000 and 1999, respectively. In the future
we expect our research and development and selling, general and administrative
expenses to increase. Given expected
increases in operating expense, we must increase revenues and gross profit to
become profitable. 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
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 are likely to vary
significantly in the future based on a number of factors related to our
industry and the markets for our products, some of which are not in our control
and any of which may cause the price of our common stock to fluctuate. These
factors include:
• demand for flat
panel monitors, advanced television displays, multimedia projectors and
Internet appliances;
• demand for our
products and the timing of orders for our products;
• the deferral of
customer orders in anticipation of our new products or product enhancements 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;
• 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 personal computer, display
and semiconductor markets.
These factors are difficult 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.
Our highly integrated products and
high-speed mixed signal products are difficult to manufacture without defects
and the existence of defects in the manufactured products 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 our products are more highly integrated than many
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 either 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 IC’s in certain customer system applications
that required us to institute additional IC level testing. As a result of these
field failures we have incurred additional costs due to customers returning
potentially affected products and have been required to resell products from
third parties in order to meet certain customer commitments. Additionally,
customers have experienced delays in receiving product shipments from us that
resulted in the loss of revenue and profits.
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 devices 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.
Because of the complex nature of our
semiconductor designs and the associated manufacturing process and the rapid
evolution of our customers’ product design 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, 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. Since commencing our operations, we have experienced
increased development time and delays in introducing new products. We will not
always succeed in developing new products or product enhancements nor do so in
a timely manner. With the acquisitions of Panstera and nDSP, we 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 that were formerly done in one location.
Many of the Panstera designs involve the development
of new high-speed analog circuits that are difficult to simulate and 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:
•
accurate prediction of customer requirements and evolving industry standards,
including 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.
A significant amount of our revenue
comes from a few customers and distributors and 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 60.5% and 64.0% of total revenue for
the years ending December 31, 2001 and 2000, respectively. During the years ending December 31, 2001
and 2000, sales to Tokyo Electron Device Limited, our distributor in Japan, represented
51.9% and 58.9%, respectively, of our total revenue. During 2001 and 2000 sales
through Tokyo Electron Device to our customer Seiko Epson Corporation
represented approximately 11.5% and 16.6%, respectively, of our total
revenue. Sales to our top five
customers accounted for approximately 42.9%, 51.7% and 62.3% for the years
ended December 31, 2001, 2000 and 1999 respectively. As a result of this
customer and distributor 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
distributors that sell our products to display manufacturers and their
suppliers.
The concentration of our accounts
receivable with a limited number of distributors exposes us to increased credit
risk and could seriously harm our operating results and cash flows.
At December 31, 2001, accounts receivable from Tokyo Electron
Device represented 35.9% of our total accounts receivable. The failure of this
distributor to pay these accounts receivable would result in a significant
expense that would seriously harm our operating results and would reduce our
cash flows.
International sales account for a
significant portion of our revenue, and if we do not successfully address the
risks associated with our international operations, our revenue could decrease.
Sales outside of the U.S. accounted for 91.4%, 95.5% and 92.8% of our
total revenue in 2001, 2000 and 1999, respectively. Most of our customers are
concentrated in Japan, Korea and Taiwan, with aggregate sales from those three
countries accounting for 82.1% and 88.0% of our total revenue during the year
ended December 31, 2001 and 2000, respectively. We anticipate that sales outside the U.S. will continue to
account for a substantial portion of our revenues in future periods. In
addition, customers who incorporate our products into their products sell them
outside of the U.S., thereby exposing us indirectly to foreign risks. In
addition, all of our products are manufactured outside of the U.S. We are,
therefore, subject to many international risks, including:
•
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 Asian financial crisis that
occurred in 1998 which caused a devaluation in the currencies of Japan, Taiwan
and Korea resulting in an increased cost of procuring our semiconductors;
• potentially adverse tax
consequences such as license fee revenue taxes imposed in Japan;
•
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 Taiwan and Korea;
•
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 of the display processor industry and our display processor products;
•
changes in the regulatory environment in Japan, Korea and Taiwan that may
significantly impact purchases of our products by our customers; and
•
difficulties in collecting accounts receivable.
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 reduces our ability to forecast sales and
increases the complexity of our business. Since our distributors are an
intermediary between us and the companies using our products, we must rely on
our distributors to accurately report inventory levels and production
forecasts. This arrangement requires us to manage a more complex supply chain
and monitor the financial condition and credit worthiness of our distributors
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 manufactures for our products exposes us to shortages
based on capacity allocation, 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 electrical 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 in the future. We do not
have a long-term supply contract with any of our contract manufacturers and
they are not obligated to supply us with products for any specific period, 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 long before we have 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
canceled, expected revenues will 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, or suffer declines
in our gross margin.
We recently assumed more
responsibility for the manufacturing of our products that, if not implemented
successfully, could result in increased costs or a reduction or loss of
revenue.
We recently assumed greater responsibility for the process for our
next-generation of products by subcontracting separately for the production of
wafers and for their assembly and testing. We are building some 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
have recently become subject to increased risks arising from wafer
manufacturing yields and associated with coordination of the manufacturing,
assembly and testing process. While the percentage of our revenue coming from
products recently introduced using this process has been relatively small
to-date, we expect that revenues using a COT process will become significant in
the future. Failure to effectively implement this approach to manufacturing
properly would reduce our revenues and harm our gross margin and results of
operations.
We are dependent on our foundries to
implement complex semiconductor technologies, which could adversely affect our
operations if those technologies are not available, 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.
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.
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 six months, and the
estimated time for us to adapt a product’s design to a particular contract
manufacturer’s processes 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.
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 could seriously harm our business. Particularly, 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. In particular, the loss of the services of
Allen Alley, our President, Chief Executive Officer and Chairman; Michael West,
our Vice President and Chief Technology Officer; or Robert Greenberg, our
Senior Vice President, could materially and adversely affect us. We are
currently planning to hire a significant number of additional employees this
year and in future periods, and 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, which 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 we or our
customers overestimate demand, we may purchase products which we may not be
able to sell. As a result, we would have excess inventory, which would increase
our losses. Conversely, if we or our customers underestimate demand or if
sufficient manufacturing capacity is unavailable, we would forego revenue
opportunities, lose market share and damage our customer relationships.
Development arrangements may cause us
to incur substantial operating expenses without the guarantee of any associated
revenue or far in advance of revenue.
We have development arrangements with customers and other parties such
as Intel Corporation that consume large amounts of engineering resources far in
advance of product revenue. Our work under these arrangements is technically
challenging and may require deliverables on an accelerated basis. These
arrangements place 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. For example, during 2000 we developed reference
designs supporting next generation flat panel monitors at the request of a key
monitor customer. After approximately six months of concentrated development
effort, the program to market these monitors was cancelled by the customer and
resulted in no revenue.
In addition, allocating significant resources to these arrangements may
detract from or delay the completion of other important development projects.
Any of these development agreements 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 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 six months or more. It can take an additional six months before a
customer commences volume shipments of systems that incorporate our products.
However, even when we achieve a design win, the customer may never ship systems
incorporating our products. Because of our relatively limited history in
selling our products, we cannot assure you that the time required for the
testing, evaluation and design of our products by our customers would not
exceed six 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 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 companies that used our products experienced delays in the
availability of key components from other suppliers, which, in turn, threatened
a delay in demand for the products that we supplied to them.
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, all 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 available 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 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. Recent examples of changing industry standards
include the introduction of high-definition television, or HDTV, new digital
receivers and 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. Our current products are developed using Visual C, a popular
software development language. However, 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 us and our customers, 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. They 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.
The concentration of our manufactures
and customers in the same geographic region increases our risk that a natural
disaster, labor strike or political unrest could disrupt our operations.
Our current manufacturers and most of our customers are located in
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. In September 1999, a current manufacturer’s facilities
were affected by a significant earthquake in Taiwan. As a consequence of this
earthquake, this manufacturer suffered power outages and disruption that
impaired its production capacity. Earthquakes, fire, flooding 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 foundry partners’ assembly
capacity. Any disruption resulting from extraordinary events could cause
significant delays in shipments of our solutions until we are able to shift our
manufacturing or assembling 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.
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 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 the InFocus patents. As a result,
we recorded a one-time charge of $4.1 million 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 license may not be available on
reasonable terms or at all;
• 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 ability to increase our earnings.
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 display processor 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
one patent and have nineteen patent applications pending with the U.S. Patent
and Trademark Office 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. 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. Competitors in both the United States and foreign
countries, many of which 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.
Any acquisition or equity investment
we make could disrupt our business and severely harm our financial condition.
We intend to continue to consider investments in or acquisitions of
complementary businesses, products or technologies. For example, in January 2001
we completed the acquisition of Panstera, Inc. in exchange for
4.5 million shares of Pixelworks Common Stock. We also made a strategic
investment in Jaldi Semiconductor Corporation in January 2001 for
$7.5 million with the intent to acquire the remainder of the company for
1.85 million shares of Pixelworks Common Stock contingent upon the
satisfactory completion of certain milestones by Jaldi Semiconductor
Corporation. In January 2002, we acquired all of the outstanding shares of nDSP
Delaware, Inc. (“nDSP”) for 1.2 million shares of Pixelworks common stock. The acquisitions of Panstera and nDSP and
the investment in Jaldi contain a very high level of risk primarily because the
investments were made based on in-process technological development that may
not be completed, or if completed, may not be commercially viable. If this were
the case, our financial results would likely be very negatively affected.
These and any future acquisitions and investments could result in:
• issuance of stock that dilutes
current stockholders’ percentage ownership;
• incurrence of debt;
• assumption of liabilities;
• amortization expenses related to
other intangible assets;
• impairment of goodwill; or
• large and immediate write-offs.
Our operation of any acquired business will also involve numerous
risks, including:
• problems combining the purchased
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.
We may not be able to successfully integrate businesses, products,
technologies or personnel that we might acquire in the future and any failure
to do so could disrupt our business and seriously harm our financial condition.
Goodwill represents a significant
portion of the Company’s total assets.
As of December 31, 2001, goodwill amounted to $67.9 million, or
approximately 33%, of the Company’s total assets. Effective January 1, 2002
with the adoption of new accounting standards the Company will be 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 results of operations.
Failure to manage our expansion
effectively could adversely affect our ability to increase our business and
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 domestically and
internationally and have increased our headcount substantially. We grew from 72
employees on January 1, 2000, to 176 employees on December 31, 2001. Since that time we have added 46 employees,
bringing our head count to 222 as of March 1, 2002. Of the new employees 41 were added as a result of the acquisition
of nDSP, including 25 employees located in the People’s Republic of China. We are currently planning to
hire additional employees in the second half of this year. 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 manage our
employee base, 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 will
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 business would be seriously harmed.
RISKS
RELATED TO OUR INDUSTRY
Failure of consumer demand for flat
panel displays and other display technologies to increase could impede our
growth.
Our product development strategies anticipate that consumer demand for
flat panel displays and other emerging display products will increase in the
future. The success of our products is dependent on increased demand for these
products, which are at early stages of development. The potential size of the
flat panel display market 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 for many of our products to grow, advanced flat panel
displays must be widely available and affordable to consumers. In the past, the
supply of advanced flat panel displays has been cyclical. We expect this
pattern to continue. Under-capacity in the advanced flat panel 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
advanced flat panel displays. In addition, advance flat panel display prices
may remain high because of limited supply, and consumer demand may not grow if
the supply of advanced flat panel displays does not increase.
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 display processing 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.
We compete with a range of specialized and diversified electronic and
semiconductor companies that offer display processors. In particular, we
compete against Genesis Microchip, Inc., Macronix International
Co., Ltd., Sage, Inc., Silicon Image, Inc.,
SmartASIC, Inc., STMicroelectronics NV, and other companies. Potential
competitors may include diversified semiconductor manufacturers including
Broadcom Corporation, National Semiconductor Corp., Philips, Texas
Instruments, Inc. and other diversified
semiconductor companies. We also compete in some instances against
in-house processing solutions designed by our customers. 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 faster 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 display processors and become our competitors. In addition,
start-up companies may seek to compete in our markets. 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 market for Internet enabled
display products may not evolve rapidly enough to support expanded market
acceptance of our products and industry standards in this market continue to
evolve.
If the emerging market for Internet enabled display products does not develop or does not evolve fast
enough to support rapid market acceptance of our products, our business,
financial condition and results of operations will be materially and adversely
affected. The Internet enabled display products market includes netTVs, screenphones, e-mail terminals, Web
terminals and tablets. Our success will depend on our ability to achieve design
wins with customers developing new products and enhanced products for the
Internet enabled display products market and their ability to successfully
introduce and promote these products. There can be no assurance that the
Internet enabled display products market will develop to the extent or in the
timeframes necessary to support expansion of our business. We anticipate that
Internet enabled display products products will be generally based on industry
standards, which are continually evolving. The emergence of new industry
standards could render our products or our customers products unmarketable or
obsolete and we may incur substantial unanticipated costs to comply with any
new standards. Moreover, our past sales have resulted, to a significant extent,
from our ability to anticipate changes in technology and industry standards and
to develop and introduce new and enhanced products addressing changes within
our industry. Our continued ability to adapt to industry changes and to
anticipate future standards, and the rate of adoption and acceptance of those
standards, will be a significant factor in maintaining or improving our
competitive position and our prospects for growth. There can be no assurance
that we will be able to anticipate the evolving standards in the semiconductor
industry and, in particular, the applications in the Internet enabled display
products market, or that we will be able to successfully develop and introduce
new products into this market.
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. It has also accelerated erosion of average selling prices per unit.
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.
The anti-takeover provisions of Oregon law and our articles of
incorporation may make a change in control of our business more difficult, even
if a change in control would be beneficial to the shareholders. These
provisions may allow the board of directors to prevent changes in the
management and control of our business. Under Oregon law, our board of
directors may adopt additional anti-takeover measures in the future. One
anti-takeover provision that we have is the ability of our board of directors
to determine the
terms of preferred stock and issue preferred stock without the approval
of the holders of the common stock. At this time, there are no shares of
preferred stock outstanding. However, because the rights and preferences of any
series of preferred stock may be set by the board of directors in its sole
discretion without approval of the holders of the common stock, the rights and
preferences of this preferred stock may be superior to those of the common
stock. Accordingly, the rights of the holders of common stock may be adversely
affected.
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 10,597,445 shares or approximately 25.6% of our
outstanding common stock as of December 31, 2001. 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:
• actual or anticipated
fluctuations in our operating results;
• 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;
• 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 like us have been highly volatile recently. 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.
We may be unable to meet our future
capital requirements, which would limit our ability to grow.
We believe our current cash balances will be sufficient to meet our
capital requirements for the next 12 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.
Item
7(a). QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
Our primary market risk exposure is the impact of
interest rate fluctuations on interest income earned on our investment
portfolio. The risks associated with market, liquidity and principal are
mitigated 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. We currently have no debt instruments
or credit facilities.
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 any of our sales. We incur operating expenses related to
operations of our local offices in Japan, Taiwan, Korea, China and other
countries that are denominated in currencies other than the U.S. dollar. We cannot estimate the effect that an
immediate 10% change in foreign currency exchange rates would have on our
future operating results or cash flows as a direct result of changes in
exchange rates. However, management
believes that the effect of an immediate 10% change in exchange rates would not
have a material impact on our future operating results or cash flows. We do not currently hedge against foreign
currency rate fluctuations.
Item
8.
Item
8. FINANCIAL STATEMENTS AND
SUPPLEMENTAL DATA
The Company’s Financial Statements and the Independent
Auditors Report thereon are presented in the following pages. The Financial Statements filed in
Item 8 are as follows:
Independent Auditors’
Report
Consolidated Balance Sheets
as of December 31, 2001 and 2000
Consolidated
Statements of Operations for the years ended December 31, 2001, 2000 and 1999
Consolidated
Statements of Cash Flows of the years ended December 31, 2001, 2000 and 1999
Consolidated
Statements of Redeemable Convertible Preferred Stock and Shareholders’ Equity
(Deficit) for the years ended December 31, 2001, 2000 and 1999
Notes to
Consolidated Financial Statements
INDEPENDENT
AUDITORS’ REPORT
The Board of Directors and Shareholders
Pixelworks, Inc.:
We have audited the accompanying consolidated balance
sheets of Pixelworks, Inc. as of December 31, 2001 and 2000, and the related
consolidated statements of operations, redeemable convertible preferred stock
and shareholders’ equity (deficit), and cash flows for each of the three years
in the period ended December 31, 2001.
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 auditing
standards generally accepted in the United States of America. 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, such consolidated financial statements
present fairly, in all material respects, the financial position of Pixelworks,
Inc. as of December 31, 2001 and 2000, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States of America.
PIXELWORKS,
INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated
financial statements.
PIXELWORKS,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
The
accompanying notes are an integral part of these consolidated financial
statements.
PIXELWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The
accompanying notes are an integral part of these consolidated financial
statements.
PIXELWORKS, INC.
Consolidated Statements of Redeemable Convertible
Preferred Stock and Shareholders’ Equity (Deficit)
The
accompanying notes are an integral part of these consolidated financial
statements.
PIXELWORKS, INC.
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business
Pixelworks, Inc. (“Pixelworks”) designs and develops complete
system-on-a-chip solutions that enable the visual display of broadband content.
Pixelworks’ technology interprets and optimizes video, computer graphics, and
visual Web information for display on a wide variety of devices.
Basis
of Presentation
The consolidated financial statements include the accounts of
Pixelworks and its wholly owned subsidiary, Pixelworks Japan, LLC. Significant
intercompany accounts and transactions have been eliminated. Accounts
denominated in foreign currencies have been remeasured using the U.S. dollar as
the functional currency. Pixelworks
holds an investment in an unconsolidated entity accounted for by the cost
method.
Critical
Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States (“GAAP”) requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. On an on-going basis, the
Company evaluates its estimates, including those related to product returns,
bad debts, inventories, investments, prepaid expenses, intangible assets,
income taxes, warranty obligations and litigation and other contingencies.
Pixelworks bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Pixelworks believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
consolidated financial statements. The Company records estimated reductions to
revenue for customer returns based on historical experience. If actual customer returns increase as a
result of future product introductions the Company may be required to recognize
additional reductions to revenue. The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of Pixelworks’ customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required. Pixelworks provides for the estimated cost of product warranties at
the time revenue is recognized. While Pixelworks engages in extensive product
quality programs and processes, including actively monitoring and evaluating
the quality of its suppliers, Pixelworks’ estimated warranty liability is
affected by product failure rates and material usage and service delivery costs
incurred in correcting a product failure. Should actual product failure rates,
material usage or service delivery costs differ from Pixelworks’ estimates,
revisions to the estimated warranty liability would be required. Pixelworks
writes down its inventory for estimated obsolescence or unmarketable inventory equal
to the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. If actual
market conditions are less favorable than those projected by management,
additional inventory write-downs may be required. The Company holds a minority
equity interest in a company having operations or technology in areas within
its strategic focus. The Company may record an investment impairment charge if
it believes the investment has experienced a decline in value that is other
than temporary. Future adverse changes in market conditions or poor operating
results of underlying
investments could result in losses or an inability to recover the carrying
value of the investments that may not be reflected in an investment’s current
carrying value, thereby possibly requiring an impairment charge in the future.
Pixelworks records a valuation allowance to reduce its deferred tax assets to
the amount that is more likely than not to be realized. Should Pixelworks
determine that it would not be able to realize all or part of its 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.
Cash
and Cash Equivalents
Pixelworks considers all highly liquid investments having an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents consist primarily of deposits, money market funds and commercial
paper.
Marketable
Securities
The Company accounts for its marketable securities in accordance with
Statement of Financial Accounting Standards No. (“SFAS”) 115, Accounting
for Certain Investments in Debt and Equity Securities. The cost of securities sold is based on the
specific identification method. The
investments in marketable securities have been classified as held to maturity
and, accordingly are reported at amortized cost and consist of:
Accounts
Receivable
Accounts receivable is net of an allowance for doubtful accounts of
$212 as of December 31, 2001 and 2000.
The following table presents a roll forward of the allowance for
doubtful accounts for the indicated periods:
Inventories
Inventories consist of finished goods and work in process and are
stated at the lower of standard cost (approximates actual cost on a first-in,
first-out basis) or market (net realizable value).
Property
and equipment
Property and equipment are stated at cost. The cost of repairs and
maintenance is expensed as incurred.
Depreciation on computer equipment and software, tooling and leasehold
improvements is calculated on a straight-line basis over the estimated useful
lives of the assets, two years for computer equipment and software and the
estimated life of the product for tooling, generally two years. Amortization of
leasehold improvements is recognized over the shorter of the life of the
improvement or the remaining life of the lease.
Goodwill
and Intangible Assets
The Company amortizes costs in excess of fair value of net assets of
businesses acquired (“goodwill”) using the straight-line method over a period
of 5 years. Assembled workforce is
being amortized over 3 years.
Intangible assets consist of intellectual property, primarily technology
license agreements. Intangible assets
are stated at cost and are amortized over the life of the agreement, ranging
from 1 year to 10 years. The Company
reviews the carrying value of intangibles for impairment whenever events and
circumstances indicate that the carrying amount may not be recoverable. Recoverability of these assets is
determined by comparing the forecasted undiscounted net cash flows of the
operation to which the assets relate, to the carrying amount including
associated intangible assets of the operation.
Asset
Impairments
As required by SFAS 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, management reviews
long-lived assets and the related intangible assets for impairment whenever
events or changes in circumstances indicate the carrying amount of the assets
may not be recoverable. Recoverability of these assets is determined by
comparing the forecasted undiscounted net cash flows of the operation to which
the assets relate, to the carrying amount including associated intangible
assets of the operation.
If the operation is determined to be unable to recover the carrying
amount of its assets, then intangible assets are written down first, followed
by the other long-lived assets of the operation, to fair value. Fair value is
determined based on discounted cash flows or appraised values, depending upon
the nature of the assets.
Stock-Based
Compensation
SFAS 123, Accounting for Stock-Based Compensation, defines a fair
value based method of accounting for an employee stock option or similar instrument.
Under the fair value based method, compensation cost is measured at the grant
date based on the value of the award and is recognized over the service period,
which is usually the vesting period. However, SFAS 123 also allows an entity to
continue to measure compensation cost using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25 (“Opinion 25”), Accounting for Stock Issued to
Employees. Under the intrinsic value based method, compensation cost
is the excess, if any, of the quoted market price of the stock at grant date or
other measurement date over the amount an employee must pay to acquire the
stock. Entities electing to remain with the accounting in Opinion 25 must make
pro forma disclosures of net income and, if presented, earnings per share, as
if the fair value based method had been applied. Pixelworks has elected to
continue to apply the prescribed accounting in Opinion 25 and make the required
disclosures under SFAS 123.
Pixelworks accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123 and Emerging Issues Task Force
consensus on 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. There have been no equity instruments issued to
non-employees during the periods presented.
Revenue
Recognition
Pixelworks recognizes revenue for product sales to direct customers and
commissions on third party sales upon shipment of the underlying merchandise.
Revenue from product sales to distributors is recognized upon shipment if the
distributor has a firm sales commitment from an end customer. Pixelworks
complies with the revenue recognition guidance summarized in Staff Accounting
Bulletin No. 101, Revenue Recognition in
Financial Statements. A
reserve for sales returns and allowances is recorded at the time of shipment.
As of December 31, 2001 and 2000, the reserve for sales returns and allowances
was $673 and $546, respectively.
Pixelworks accrues a liability for the estimated future repair and
replacement costs to be incurred under the provisions of Pixelworks’ warranty
agreements. As of December 31, 2001 and 2000, the reserve for warranty repairs
was $978 and $527, respectively. The net change in the reserve for warranty
repairs for the years ended December 31, 2001, 2000 and 1999 was an increase of
approximately $451, $394 and $133,
respectively.
Research
and Development
Research and development are charged to expense as incurred.
Income
Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. 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. A valuation allowance is established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Fair
Value of Financial Instruments
The carrying amount of cash and cash equivalents, short-term
investments, accounts receivable and accounts payable approximate fair value
due to the short-term nature of these instruments.
Comprehensive
Income
SFAS130, Reporting Comprehensive
Income, establishes standards for the reporting of comprehensive
income and its components, but has no impact on the Company’s net earnings or
total shareholders’ equity. To date,
such transactions that are required to be reported in comprehensive income are
not material to the Company’s financial position or results of operations.
Concentration
of Suppliers
Pixelworks does not own or operate a semiconductor fabrication facility
and does not have the resources to manufacture its products internally.
Pixelworks relies on four third party foundries to produce all its products. In
light of these dependencies, it is reasonably possible that failure to perform
by one of these suppliers could have a severe impact on Pixelworks’ growth and
results of operations.
Risk of
Technological Change
The markets in which Pixelworks competes or seeks 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 Pixelworks’ products less
desirable or obsolete which could harm its business.
Concentration
of Credit Risk
Financial instruments which potentially subject Pixelworks to a
concentration of credit risk consist of cash and cash equivalents, short-term
investments and accounts receivable. Pixelworks limits its exposure to credit
risk associated with cash and cash equivalents by placing its cash and cash
equivalents with various high credit quality financial institutions.
As of December 31, 2001 and 2000, Pixelworks had accounts receivable
from two distributors representing approximately 53% and 70% of accounts
receivable. Loss or non-performance by these significant customers could
adversely affect Pixelworks financial position or results from operations.
Costs
of Software Developed or Obtained for Internal Use
Internal use software development costs are accounted for in accordance
with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use. Costs incurred in the preliminary
project stage are expensed as incurred and costs incurred in the application
and development stage, which meet the capitalized criteria, are capitalized and
amortized on a straight-line basis over two years, the estimated useful life of
the asset.
Net
loss per share
Pixelworks reports net loss per share in accordance with SFAS 128, Earnings per
Share, and SEC Staff Accounting Bulletin No. 98 (“SAB 98”), which
requires the presentation of both basic and diluted earnings per share. Basic
earnings per share (“EPS”) is computed on the basis of weighted average number
of common shares outstanding. Diluted
EPS is computed on the basis of weighted average common shares outstanding plus
the effect of outstanding stock options and warrants using the “treasury stock”
method, shares of convertible preferred stock on an as converted basis, and
shares of restricted stock, if the potential common shares are not
anti-dilutive.
The following weighted-average potential common shares have been
excluded from the computation of diluted loss per share for the periods
presented because the effect would have been anti-dilutive:
Potential common stock equivalent shares related to stock options
includes 636,706 and 46,548 weighted shares for which the options’ exercise
price was greater than the average market price for the year ended December 31,
2001 and 2000, respectively.
Future
Accounting Pronouncements
In June 2001, the FASB issued SFAS 142, Goodwill and Other Intangible Assets. Under SFAS 142,
goodwill and intangible assets with indefinite lives are no longer amortized
but are reviewed at least annually for impairment. The amortization provisions
of SFAS142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible
assets acquired prior to July 1, 2001, the Company is required to adopt FAS 142
effective January 1, 2002. Application of the non-amortization provisions of
SFAS 142 for goodwill is expected to result in a decrease in amortization
expense of approximately $16.0 million in 2002. At December 31, 2001, Pixelworks had net goodwill and assembled
workforce of approximately $69.2 million. Pursuant to SFAS 142, Pixelworks will
test its goodwill for impairment upon adoption and, if impairment is indicated,
record such impairment as a cumulative effect of an accounting change. The
Company is currently evaluating the effect that the adoption may have on its
consolidated results of operation and financial position.
Reclassifications
Certain amounts from the prior year’s financial statements have been
reclassified to be consistent with the current year presentation.
2. BALANCE SHEET COMPONENTS
Property
and Equipment
Property and equipment consist of the following:
Inventories
Inventories are shown net of a reserve of $412 and $173 as of December
31, 2001 and 2000, respectively. The net change in the reserve for obsolete
inventory for the years ended December 31, 2001, 2000 and 1999 was an increase
of approximately $239, $108 and $65,
respectively. Inventories consist of
the following:
Goodwill
and Assembled Workforce
Accrued
Liabilities
Accrued liabilities consist of the following:
3. SHAREHOLDERS’ EQUITY
Series
D offering and beneficial conversion feature
On February 22, 2000, Pixelworks issued a total of 2,239,212 shares of
Series D preferred stock at $12.75 per share.
The Series D preferred stock was issued with a beneficial conversion
feature totaling $10.7 million measured as the difference between the estimated
fair value of the underlying common stock and the conversion price of $8.50 per
share.
Initial
Public Offering
On May 19, 2000 Pixelworks sold 5,750,000 shares of Common Stock at
$10.00 per share in an Initial Public Offering (“IPO”). In June 2000,
Pixelworks sold a further 862,500 shares of Common Stock under the terms of the
over allotment agreement relating to that Initial Public Offering.
Convertible
Preferred Stock
Upon the completion of Pixelworks IPO in May 2000, all of the then
outstanding convertible preferred shares were automatically converted into
common shares as indicated below.
Warrants
In connection with the Series A redeemable convertible preferred stock
offering, Pixelworks issued warrants, at a nominal value, for the purchase of
up to an aggregate of 1,853,198 shares of Pixelworks’ common stock at an
exercise price of $0.674 per share. The warrants were exercised in 1999.
The fair value of the warrants issued of $71 was determined by applying
the Black-Scholes methodology using the issuance date for Series A redeemable
convertible preferred stock as the measurement date. The per share weighted
average fair market value was $0.06 on the date of grant, with the following
weighted average assumptions: Risk-free interest rate of 6%, expected dividend
yield of -0-%, a two-year term and an expected volatility of 100%.
Note
Receivable for Common Stock
During 1999, 305,937 of stock options were exchanged for 305,937 shares
of common stock subject to vesting in exchange for a note receivable. The note
receivable is due and payable the earlier of 1) August 31, 2008 or 2) upon
termination of the borrower’s employment and bears interest at 6% per year,
payable annually. The note receivable is secured by the shares of common stock
issued thereunder. As of December 31, 2001 and 2000, there were 81,410 and
173,116 shares of unvested common stock, respectively.
Stock
Option Plans
Pixelworks has a 1997 Incentive Stock Option Plan and a 2001
Non-qualified Stock option plan (the “option plans”) under which 6,340,116 and
2,000,000 stock options, respectively, may be granted to employees. Options
granted under the plans must generally be exercised while the individual is an
employee and within ten years of the date of grant. On the standard vesting
schedule, each option shall become exercisable at a rate of 25% on the first
anniversary date of the grant and on the last day of every month thereafter for
a total of thirty-six additional increments unless otherwise specifically
stated at the time of grant. On the alternative vesting schedule, options
become exercisable monthly for a period of four 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. Had Pixelworks accounted for its stock-based compensation plan in
accordance with SFAS 123, Pixelworks’ net loss would approximate the pro forma
disclosure as follows:
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts and additional awards are anticipated in future
years.
The fair value of compensation costs reflected in the above pro forma
amounts were determined using the Black-Scholes option pricing model and the
following weighted average assumptions for grants used in the calculation are
as follows:
Under the Black-Scholes option pricing model the weighted-average fair
value of options granted during 2001, 2000 and 1999 was approximately $18.99,
$15.11 and $2.18, respectively.
The following is a summary of stock option activity:
As of December 31, 2001, 2,327,302 shares were available for grant
under the option plans.
Pixelworks has recorded deferred stock compensation of $18,510 through
December 31, 2001. This deferred stock compensation is based on the difference
between the fair market value of common stock and the exercise price of the
option or stock on the grant date. Deferred stock compensation is being
amortized on an accelerated basis over the vesting period, generally four
years, consistent with the method described in FASB Interpretation No. 28.
Pixelworks recognized compensation expense of $8,461, $2,227 and $565 during
the years ended December 31, 2001, 2000 and 1999, respectively, related to
these grants. Amortization of the December 31, 2001 balance of deferred stock
compensation for the years ending December 31, 2002, 2003 and 2004 would approximate
$3,771, $1,579 and $308, respectively.
Employee
Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (“ESPP”). Under the ESPP employees may purchase shares
of the Company’s common stock at 85% of the fair market value at specific,
predetermined dates. A total of
1,500,000 shares of common stock has been reserved for issuance under the
ESPP. During the year ended December
31, 2001 and 2000 the Company issued 78,218 and 12,375 shares under the ESPP
for proceeds of approximately $757,000 and $105,000, respectively.
4. INCOME TAXES
Components of the provision for income taxes for the years ended
December 31, 2001, 2000 and 1999 is comprised of the following:
The significant differences between the U.S. federal statutory tax rate
and Pixelworks’ effective tax rate for financial statement purposes are as
follows:
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:
During the years ended December 31, 2001, 2000, and 1999 the Company
recognized tax benefits of $2,256, $0, and $0, respectively, related to
differences between financial and tax reporting of stock option transactions
and net operating losses from acquired company. The $2,256 for the year ended December 31, 2001 was credited to
common stock and goodwill, in the amount of $831 and $1,425, respectively.
The Company has established a valuation allowance for certain deferred
tax assets, including net operating loss and tax credit carryforwards. SFAS No.
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. The net change in the total valuation allowance
for the years ended December 31, 2001, 2000 and 1999 was an increase of
approximately $2,603, $2,058 and
$1,914, respectively.
As subsequent tax benefits relating to the valuation allowance for
deferred tax assets as of December 31, 2001 can be recognized the benefits will
be allocated between common stock and goodwill in the amounts of $3,824 and
$3,565, respectively.
As of December 31, 2001, Pixelworks has net operating loss and other
credit carryforwards of approximately $5,598 and $2,865, respectively, which
will expire between 2012-2020.
Utilization of net operating losses and credits are subject to certain
limitations when there is a change of more than 50% in ownership of the
Company. Such changes occurred with the sale of preferred stock in 1998.
Accordingly, the net operating loss and credit carryforwards generated from
periods prior to April 28, 1998 are subject to the limitation.
5. ACQUISITIONS
On January 30, 2001, the Company acquired all of the outstanding
shares of Panstera, Inc. in exchange for approximately 4,500,000 shares of
Pixelworks stock valued as follows:
The transaction was accounted for by the purchase method of accounting,
and accordingly, the results of operations of Panstera, Inc. are included in
the Company’s financial statements beginning on the date of acquisition.
The allocation of purchase price was as follows:
In connection with this acquisition, the Company recorded a one-time
charge of $32.4 million for the write-off of in-process research and
development (“IPR&D”). The value
assigned to IPR&D related to research projects for which technological
feasibility had not been established.
The value was determined by
estimating the net cash flows from the sale of products from 2001
through 2005 resulting from the completion of such projects, and discounting
the net cash flows back to their present value using a risk adjusted rate of
35%. The estimated net cash flows from these products were based on
management’s estimates of related revenues, cost of goods sold, R&D costs,
selling, general and administrative costs and income taxes. The Company then estimated the stage of
completion of the products at the date of the acquisition based on R&D
costs that had been expended as of the date of acquisition as compared to total
R&D costs at completion. The percentages derived from this calculation were
then applied to the net present value of future cash flows to determine the
in-process charge. The nature of the efforts to develop the in-process
technology into commercially viable products principally related to the
completion of all planning, designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced to
meet its design specification, including function, features and technical
performance requirements.
Panstera had four main product groups under development at the
acquisition date, each contributing from 11% to 41% of the total IPR&D
value. The projects included the development of digital and analog receivers as
well as digital processor ICs. The
projects ranged from 50% to 85% complete.
All projects had expected completion dates within one year and an
estimated aggregate cost to complete of $3.2 million.
The following table reflects the unaudited combined results of
Pixelworks, Inc. and Panstera, Inc. as if the merger had taken place at the
beginning of the years ended December 31, 2001 and 2000, respectively. The proforma information includes
adjustments for non-cash charges for amortization of goodwill and assembled
workforce, over 60 months and 36 months, respectively. Both periods exclude a
charge of $32.4 million for in-process research and development expense.
The proforma 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.
On January 30, 2001, the Company made an investment of $7.5 million in exchange for a 19.6%
equity interest in privately-held Jaldi Semiconductor Corporation (“Jaldi”).
The investment is accounted for at cost and included in other assets on the
balance sheet. Pixelworks and Jaldi
entered into an agreement that gives Pixelworks the option to acquire the
remaining interest in Jaldi in exchange for 1.85 million shares of Pixelworks
common stock. Pixelworks may exercise
its option at any time prior to June 30, 2002. The exercise of the option becomes mandatory if Jaldi achieves a
specific development milestone before April 1, 2002, which consists of the
JD1 Integrated Circuit shipping to a customer in its production implementation
while meeting agreed upon cost, performance and technical specifications. Upon obtainment of the milestone by Jaldi,
Pixelworks must either exercise the option within 30 days thereafter or pay
Jaldi $10,000,000. As of the balance
sheet date, Jaldi had not reached its development milestone, however, it is
continuing to make progress towards this milestone. We intend to acquire the remaining interest upon Jaldi’s
successful completion of this milestone.
6. SEGMENT
INFORMATION
In accordance with SFAS 131, Disclosures about Segments of an Enterprise and
Related Information, Pixelworks has identified a single operating
segment: the design and development of integrated circuits for electronic
display devices.
Significant
Customers
Sales to one distributor represented 52% and 59% of total revenue for
the years ended December 31, 2001 and 2000. Sales to two distributors
represented 55% and 24%, separately, of total revenue for the year ended December
31, 1999. Revenue to one end customer represented 12% of revenue for the year
ended December 31, 2001. No other
customer represented more than 10% of revenue.
Geographic
Information
Revenues are attributed to countries based on the domicile of the
customer. Revenue by geographic region
was as follows:
7. COMMITMENTS
AND CONTINGENCIES
Royalties
During 1999, Pixelworks agreed to pay certain suppliers a per unit
royalty based on a certain number of chips sold. Royalties are paid monthly and
expire through November 6, 2006. Royalties are charged to cost of goods sold in
the statement of operations. Pixelworks has recorded $271, $835 and $383 in
royalty expense for the years ended December 31, 2001, 2000 and 1999,
respectively.
401(k)
Plan
Effective January 1, 1999, Pixelworks implemented 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 Pixelworks is allowed and is equal to a
uniform percentage of the amount of salary reduction elected to be deferred,
which percentage will be determined each year by Pixelworks. Pixelworks made no
contributions to the 401(k) plan during 2001, 2000 or 1999.
Leases
Pixelworks leases office space under various operating leases that
expire at various dates through 2006.
Future minimum payments under the leases are as follows:
Rent expense for the years ended December 31, 2001, 2000 and 1999 was
$1,112, $453 and $243, respectively.
During 1999, Pixelworks entered into a non-cancelable sublease
agreement. The sublease was terminated by the leasee in 2000. Sublease income was $23 and $19 during the
years ended December 31, 2000 and 1999, which was offset against rent expense.
Contract
Manufacturers
In the normal course of business, Pixelworks generally commits to
purchase products from its contract manufacturers to be delivered within the
most recent 90 days covered by forecasts with cancellation fees. In the opinion of management, such
obligations will not significantly affect the Company’s financial position or
results of operations.
Litigation
We are involved in litigation from time to time that is routine in
nature and incidental to the outcome of our business. While management currently believes that the ultimate outcome of
these proceedings, individually and in aggregate, will not have a material
adverse effect on the financial position, results of operations or cash flows
of the Company, litigation is subject to inherent uncertainties. Were an unfavorable ruling to occur, there
exists the possibility of a material adverse impact on the net income of the
period in which the ruling occurs.
8. LICENSE PURCHASE
In February of 2000, Pixelworks entered into a perpetual license
agreement with InFocus Systems, Inc. (“InFocus”) for the use of its proprietary
automatic pixel clock phase and frequency correction technology specified in
two patents held by InFocus in exchange for 156,863 shares of Series D
preferred stock, valued at $12.75 per share, and $2.4 million in cash, payable
in four equal quarterly installments beginning March 31, 2000. In addition,
approximately $753 of the patent settlement expense recorded in connection with
the issuance of Series D Preferred Stock to InFocus was based on the difference
between the estimated fair value of the underlying common stock and the Series
D conversion price of $8.50 per share. Pixelworks also received a release of
any claims InFocus may have against Pixelworks relating to these patents.
9. QUARTERLY FINANCIAL DATA
(Unaudited)
10. SUBSEQUENT EVENTS
On January 14, 2002, the Company acquired all of the outstanding shares
of nDSP, Inc. in exchange for approximately 1,200,000 shares of Pixelworks
stock. The transaction will be accounted
for by the purchase method of accounting, and accordingly, the results of
operations of nDSP, Inc. will be included in the Company’s financial statements
beginning on the date of acquisition.
Pixelworks expects to record a one-time charge in the quarter ending
March 31, 2002 for purchased in-process research and development expenses
related to the acquisition.
Item
9.
Item
9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Item
10.
Item
10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT
Information concerning the directors of the Company is included under
“Election of Directors” in the Company’s definitive Proxy Statement for its
Annual Meeting of Shareholders filed or to be filed not later than 120 days
after the end of the fiscal year covered by this Report (the “2002” Proxy
Statement) and is incorporated herein by reference.
Information with respect to executive officers is included under
“Executive Officers of the Registrant” in the 2002 Proxy Statement and is
incorporated herein by reference.
Information with respect to Section 16(a) of the Securities
Exchange Act is included under “Section 16(a) Beneficial Ownership Reporting
Compliance” in the 2002 Proxy Statement and is incorporated herein by
reference.
Item
11.
Item
11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is included under
“Executive Compensation” in the 2002 Proxy Statement and is incorporated herein
by reference.
Item
12.
Item
12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial
owners and management is included under “Voting Securities and Principal
Shareholders” in the 2002 Proxy Statement and is incorporated herein by
reference.
Item
13.
Item
13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
Information with respect to certain relationships and related
transactions with management is included under “Certain Relationships and
Related Transactions” in the 2002 Proxy Statement and is incorporated herein by
reference.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a)1. Financial Statements:
The following financial statements are included in Item 8:
Independent Auditors’ Report
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Operations for the years ended December 31,
2001, 2000 and 1999
Consolidate Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999
Consolidated Statements of Shareholders’ Equity (Deficit) for the years
ended December 31, 2001, 2000, and 1999
Notes to Consolidated Financial Statements
(a)2.
Financial Statement Schedules:
All schedules have been omitted since they are either not required or
the information is otherwise included.
(a)3.
Exhibits:
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**.
2.2
Amendment to Agreement and Plan of Merger dated as
of January 26, 2001 among Pixelworks Inc., Panther Acquisition, Inc. and
Panstera, Inc.**
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***.
3.1
Sixth Amended and Restated Articles of Incorporation
of Pixelworks, Inc.*
3.2
First Restated Bylaws of Pixelworks, Inc.*
4.1
Reference is made to Exhibit 3.1 above.*
4.2
Third Amended Registration Rights Agreement dated
February 22, 2000.*
10.1
Form of Indemnity Agreement between Pixelworks, Inc.
and each of its Officers and Directors.* +
10.2
Pixelworks, Inc. 1997 Stock Incentive Plan.*
10.3
Registration Rights Agreement dated as of December
6, 2001 among Pixelworks, Inc., Nighthawk Acquisition Corp. and those certain
shareholders of nDSP Delaware, Inc. who are signatories thereto.***
10.4
Sublease Agreement Dated September 7, 2001 between
Epicor Software Corporation and Pixelworks Inc.
10.5
Pixelworks, Inc. 2001 Nonqualified Stock Option
Plan****
10.6
Pixelworks, Inc. 2000 Employee Stock Purchase Plan.*
10.7
Lease Agreement Dated April 14, 1999 between
Southcenter III and IV Investors LLC and Pixelworks, Inc.*
10.8
VAutomation Incorporated Synthesizable Soft Core
Agreement dated November 4, 1997 between VAutomation Incorporated and
Pixelworks, Inc.*
10.9
Intellectual Property Sublicense Agreement dated
March 30, 1999 between VAutomation Incorporated and Pixelworks, Inc.*
10.10
License Agreement dated February 22, 2000 between
Pixelworks, Inc. and InFocus Systems, Inc.*
10.11
Employment Agreement between Jeffrey B. Bouchard and
Pixelworks, Inc.* +
10.12
Shareholders Agreement dated as of January 15, 2001
among Pixelworks, Inc., Panstera, Inc., and those certain shareholders of
Panstera, Inc.**
10.13
Third Amendment to Lease dated March 1, 2002 between
Copper Mountain Trust Corporation and Pixelworks, Inc.
Subsidiaries of Pixelworks, Inc.
Consent of KPMG LLP dated March 22, 2002.
Power of Attorney (included on Signature Page).
*Incorporated by reference to the Company’s Registration Statement on
Form S-1 (Reg. No. 333-31134), declared effective on May 19, 2000.
**Incorporated by reference to the Company’s report on Form 8-K filed
on February 13, 2001.
***Incorporated by reference to the Company’s report on Form 8-K filed
on January 29, 2002.
****Incorporated by reference to the Company’s Registration Statement
on Form S-8 filed on May 31, 2001.
+ Indicates a management contract
or compensation arrangement
(b) Reports
on Form 8-K
During the three month period ended December 31, 2001,
reports on Form 8-K were filed on December 10, 2001 and October 19, 2001.
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.
Dated: March 25, 2002
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, President and
March 25, 2002
Allen H. Alley
Chief Executive Officer
/s/ Jeffrey B. Bouchard
Vice President, Finance
and Chief
March 25, 2002
Jeffrey B. Bouchard
Financial Officer
/s/ Oliver D. Curme
Director
March 25, 2002
Oliver D. Curme
/s/ Frank Gill
Director
March 25, 2002
Frank Gill
/s/ Mark A. Stevens
Director
March 25, 2002
Mark A. Stevens
/s/ Michael D. Yonker
Director
March 25, 2002
Michael D. Yonker
Exhibit
Index
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**.
2.2
Amendment to Agreement and Plan of Merger dated as
of January 26, 2001 among Pixelworks, Inc., Panther Acquisition, Inc. and
Panstera, Inc.**
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***.
3.1
Sixth Amended and Restated Articles of Incorporation
of Pixelworks, Inc.*
3.2
First Restated Bylaws of Pixelworks, Inc.*
4.1
Reference is made to Exhibit 3.1 above.*
4.2
Third Amended Registration Rights Agreement dated
February 22, 2000.*
10.1
Form of Indemnity Agreement between Pixelworks, Inc.
and each of its Officers and Directors.* +
10.2
Pixelworks, Inc. 1997 Stock Incentive Plan.*
10.3
Registration Rights Agreement dated as of December
6, 2001 among Pixelworks Inc., Nighthawk Acquisition Corp. and those certain
shareholders of nDSP Deleware, Inc. who are signatories thereto.***
10.4
Sublease Agreement Dated September 7, 2001 between
Epicor Software Corporation and Pixelworks, Inc.
10.5
Pixelworks, Inc. 2001 Nonqualified Stock Option
Plan****
10.6
Pixelworks, Inc. 2000 Employee Stock Purchase Plan.*
10.7
Lease Agreement Dated April 14, 1999 between
Southcenter III and IV Investors LLC and Pixelworks, Inc.*
10.8
VAutomation Incorporated Synthesizable Soft Core
Agreement dated November 4, 1997 between VAutomation Incorporated and
Pixelworks, Inc.*
10.9
Intellectual Property Sublicense Agreement dated
March 30, 1999 between VAutomation Incorporated and Pixelworks, Inc.*
10.10
License Agreement dated February 22, 2000 between
Pixelworks, Inc. and InFocus Systems, Inc.*
10.11
Employment Agreement between Jeffrey B. Bouchard and
Pixelworks, Inc.* +
10.12
Shareholders Agreement dated as of January 15, 2001
among Pixelworks, Inc., Panstera, Inc., and those certain shareholders of
Panstera, Inc.**
10.13
Third Amendment to Lease dated March 1, 2002 between
Copper Mountain Trust Corporation and Pixelworks, Inc.
Subsidiaries of Pixelworks, Inc.
Consent of KPMG LLP dated March 22, 2002.
Power of Attorney (included on Signature Page).
*Incorporated by reference to the Company’s Registration Statement on
Form S-1 (Reg. No. 333-31134), declared effective on May 19, 2000.
**Incorporated by reference to the Company’s report on Form 8-K filed
on February 13, 2001.
***Incorporated by reference to the Company’s report on Form 8-K filed
on January 29, 2002.
****Incorporated by reference to the Company’s Registration Statement
on Form S-8 filed on May 31, 2001.
+ Indicates a management contract
or compensation arrangement