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Mail Stop 6010
January 3, 2006
Mr. Jeffrey Bouchard
Chief Financial Officer
8100 SW Nyberg Road
Tualatin, OR 97062
Re: Pixelworks, Inc.
Form 10-K for the Year Ended December 31, 2004
Forms 10-Q for the Quarter Ended March 31, 2005, June 30, 2005,
and
September 30, 2005
File No. 000-30269
Dear Mr. Bouchard:
We have reviewed your filing and have the following
comments.
We have limited our review to only your financial statements and
related disclosures and will make no further review of your
documents. Where indicated, we think you should revise your
documents
in future filings in response to these comments. If you disagree,
we
will consider your explanation as to why our comment is
inapplicable
or a revision is unnecessary. Please be as detailed as necessary
in
your explanation. In some of our comments, we may ask you to
provide
us with information so we may better understand your disclosure.
After reviewing this information, we may raise additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
Form 10-K for the Year Ended December 31, 2004
Consolidated Financial Statements, page 43
- -Consolidated Statement of Operations, page 45
1. We note that you have presented your stock-based compensation
as a
separate line item in your consolidated statements of operations.
Please revise future filings to present the amounts of stock-based
compensation within the appropriate functional categories, i.e.,
cost
of revenues, research and development and SG&A, based on the
classification of the related cash compensation paid to the
employees
receiving stock-based compensation. Please refer to SAB Topic
14.F.
Consolidated Statement of Cash Flows, page 46
2. We note you acquired property and equipment and other assets
under
extended payment terms during the year ended December 31, 2004 and
the nine months ended September 30, 2005. Please tell us and
revise
your notes to the financial statements in future filings to
disclose
the nature of these programs and the extended payment terms given
to
you.
Notes to Consolidated Financial Statements, page 48
Note 2. Summary of Significant Accounting Policies, page 48
- -Revenue Recognition, page 50
3. We note that you entered into arrangements to sell your
products
through distributors and that you recognize revenue upon shipment
to
these distributors. Tell us the nature and significant terms of
these
arrangements with distributors, including any post shipment
obligations, acceptance provisions and return provisions such as
your
stock rotation rights program that may exist and how you account
for
such obligations. Also, please tell us how you account for the
price
protection programs that you give to your distributors.
Specifically, please tell us how you meet the fixed and
determinable
fee criteria. Refer to the guidance in SAB 104, SFAS 48, and EITF
01-09.
- -Long Term Debt and Debt Issuance Costs, page 58
4. We note that you have issued $150 million of 1.75% convertible
notes during 2004. We further note from Exhibits 4.1 and 4.2
filed
with your June 30, 2004 Form 10-Q that these notes contain
features
that allow for adjustments to the conversion rate based upon
certain
events. Please tell us if you have determined if these notes meet
the definition of conventional convertible debt in paragraph 4 of
EITF 00-19 and the basis for your conclusion. If you determined
that
your notes are not conventionally convertible, please tell us how
you
have analyzed the conversion feature under paragraphs 12-32 of
EITF
00-19.
5. Further to the above, it appears that these convertible notes
may
contain embedded derivatives such as a put option whereby the
holder
may redeem the notes at certain dates and a call option whereby
the
issuer can redeem the notes. Please explain to us how you
accounted
for these features and the basis for your accounting. Please note
that you should perform a thorough analysis of all the provisions
of
your convertible debt instrument in order to determine whether
there
are any provisions that may be embedded derivatives which should
be
bifurcated and accounted for separately as a derivative pursuant
to
SFAS 133. Please tell us all of the embedded derivatives you
identified during your review of your debt agreement and how you
evaluated each provision. Refer to the guidance in SFAS 133 and
EITF
00-19.
Item 9A. Controls and Procedures, page 68
- -Disclosure Controls and Procedures, page 68
6. We note your statement that your chief executive officer and
your
chief financial officer have determined that your disclosure
controls
and procedures were not adequate. It does not appear that your
certifying officers have reached a conclusion that your disclosure
controls and procedures are not effective. Please revise your
disclosure in future filings to address your officers` conclusions
regarding the effectiveness of your disclosure controls and
procedures.
Form 10-Q for the Quarter Ended September 30, 2005
- -Financial Statements, page 3
Notes to Condensed Consolidated Financial Statements, page 6
Note 9. Acquisitions, page 15
7. We note that the excess of the purchase price over the net
assets
acquired in Equator Technologies, Inc. acquisition resulted in
goodwill of approximately $58 million. Tell us and revise your
future filings to include a discussion of the factors that
contributed to a purchase price that resulted in recognition of a
significant amount of goodwill. Refer to paragraph 51(b) of SFAS
141.
Form 8-K filed on October 25, 2005, July 27, 2005, April 28, 2005
8. We note that you present your non-GAAP measures in the form of
statements of operations. This format may be confusing to
investors
as it also reflects several non-GAAP measures, including non-GAAP
revenue, non-GAAP SG&A and R&D expenses, non-GAAP Stock-based
compensation and amortization of purchased intangible asset, non-
GAAP
income from operations, non-GAAP income before taxes, and non-GAAP
net income, which have not been identified or described to
investors.
In fact, it appears that management does not use all of these non-
GAAP measures but they are shown here as a result of the
presentation
format. Please note that Instruction 2 to Item 2.02 of Form 8-K
requires that when furnishing information under this item you must
provide all the disclosures required by paragraph (e)(1)(i) of
Item
10 of Regulation S-K and FAQ 8 Regarding the Use of Non-GAAP
Financial Measures dated June 13, 2003 for each non-GAAP measure
presented. Specifically, you should provide a reconciliation of
each
non-GAAP measure to the most directly comparable GAAP measure and
explain why you believe each measure provides useful information
to
investors.
* To eliminate investor confusion, please remove the non-GAAP
statements of operations format from future filings and only
disclose
those non-GAAP measures used by management with the appropriate
reconciliations.
* Otherwise, confirm that you will revise your Forms 8-K in future
periods to provide all the disclosures required by Item
10(e)(1)(i)
of Regulation S-K for each non-GAAP measure presented in the
statement, and provide us with a sample of your proposed
disclosure.
We may have further comment.
As appropriate, please respond to these comments within 10
business days or tell us when you will provide us with a response.
Please furnish a letter that keys your responses to our comments
and
provides any requested information. Detailed cover letters
greatly
facilitate our review. Please understand that we may have
additional
comments after reviewing your responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing to be certain that the
filing includes all information required under the Securities
Exchange Act of 1934 and that they have provided all information
investors require for an informed investment decision. Since the
company and its management are in possession of all facts relating
to
a company`s disclosure, they are responsible for the accuracy and
adequacy of the disclosures they have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
You may contact Tara Harkins, Staff Accountant, at (202)
551-
3639 or me at (202) 551-3643 if you have questions regarding these
comments. In this regard, please do not hesitate to contact
Michele
Gohlke, Branch Chief, at (202)551-3327.
Sincerely,
Kevin Vaughn
Reviewing Accountant
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Mr. Jeffrey Bouchard
Pixelworks, Inc.
January 3, 2006
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