e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-30269
PIXELWORKS, INC.
(Exact name of registrant as specified in its charter)
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OREGON
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91-1761992 |
(State or other jurisdiction of incorporation)
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(I.R.S. Employer Identification No.) |
8100 SW Nyberg Road
Tualatin, Oregon 97062
(503) 454-1750
(Address, including zip code, and telephone number, including
area code, of registrants principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the last 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Number of shares of Common Stock outstanding as of October 31, 2005: 47,087,600
PIXELWORKS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
PIXELWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
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September 30, |
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December 31, |
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2005 |
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2004 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
54,054 |
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$ |
32,585 |
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Short-term marketable securities |
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75,025 |
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160,213 |
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Accounts receivable, net |
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27,420 |
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14,605 |
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Inventories, net |
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27,809 |
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18,575 |
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Prepaid expenses and other current assets |
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14,126 |
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4,856 |
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Total current assets |
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198,434 |
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230,834 |
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Long-term marketable securities |
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18,297 |
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79,483 |
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Property and equipment, net |
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14,806 |
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12,444 |
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Other assets, net |
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16,843 |
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8,101 |
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Debt issuance costs, net |
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3,958 |
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4,483 |
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Deferred tax assets, net |
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13,081 |
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4,868 |
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Acquired intangible assets, net |
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39,627 |
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2,520 |
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Goodwill |
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134,022 |
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80,836 |
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Total assets |
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$ |
439,068 |
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$ |
423,569 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
8,852 |
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$ |
5,946 |
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Accrued liabilities and current portion of long-term liabilities |
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23,570 |
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12,842 |
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Income taxes payable |
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2,393 |
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Total current liabilities |
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32,422 |
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21,181 |
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Long-term liabilities, net of current portion |
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3,372 |
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365 |
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Long-term debt |
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150,000 |
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150,000 |
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Total liabilities |
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185,794 |
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171,546 |
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Commitments and contingencies |
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Shareholders equity: |
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Preferred stock |
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Common stock |
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316,148 |
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304,996 |
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Shares exchangeable into common stock |
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5,500 |
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6,144 |
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Accumulated other comprehensive income (loss) |
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(957 |
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531 |
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Deferred stock-based compensation |
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(1,133 |
) |
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(60 |
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Accumulated deficit |
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(66,284 |
) |
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(59,588 |
) |
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Total shareholders equity |
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253,274 |
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252,023 |
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Total liabilities and shareholders equity |
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$ |
439,068 |
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$ |
423,569 |
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See accompanying notes to condensed consolidated financial statements.
3
PIXELWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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Revenue, net |
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$ |
46,794 |
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$ |
43,970 |
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$ |
128,370 |
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$ |
137,749 |
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Cost of revenue (1) |
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32,147 |
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22,260 |
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80,603 |
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69,620 |
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Gross profit |
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14,647 |
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21,710 |
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47,767 |
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68,129 |
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Operating expenses: |
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Research and development (2) |
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15,573 |
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8,454 |
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36,586 |
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24,111 |
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Selling, general and administrative (3) |
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8,202 |
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5,864 |
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22,170 |
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17,394 |
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Stock-based compensation and amortization
of purchased intangible assets |
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1,042 |
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208 |
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1,564 |
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706 |
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Total operating expenses |
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24,817 |
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14,526 |
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60,320 |
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42,211 |
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Income (loss) from operations |
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(10,170 |
) |
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7,184 |
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(12,553 |
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25,918 |
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Interest income |
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1,031 |
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1,474 |
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4,439 |
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2,238 |
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Interest expense |
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(657 |
) |
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(657 |
) |
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(1,974 |
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(952 |
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Realized loss on sale of marketable securities |
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(779 |
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Amortization of debt issuance costs |
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(177 |
) |
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(179 |
) |
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(532 |
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(294 |
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Interest and other income, net |
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197 |
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638 |
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1,154 |
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992 |
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Income (loss) before income taxes |
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(9,973 |
) |
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7,822 |
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(11,399 |
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26,910 |
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Provision for (recovery of) income taxes |
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(4,716 |
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2,373 |
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(4,703 |
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9,149 |
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Net income (loss) |
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$ |
(5,257 |
) |
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$ |
5,449 |
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$ |
(6,696 |
) |
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$ |
17,761 |
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Net income (loss) per share: |
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Basic |
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$ |
(0.11 |
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$ |
0.12 |
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$ |
(0.14 |
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$ |
0.38 |
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Diluted |
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$ |
(0.11 |
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$ |
0.11 |
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$ |
(0.14 |
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$ |
0.36 |
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Weighted average shares outstanding: |
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Basic |
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47,520 |
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46,827 |
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47,218 |
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46,596 |
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Diluted |
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47,520 |
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53,961 |
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47,218 |
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51,185 |
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(1) Includes amortization of: |
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Acquired inventory mark-up |
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$ |
3,244 |
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$ |
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$ |
3,329 |
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$ |
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Acquired developed technology |
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1,972 |
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132 |
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2,543 |
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|
396 |
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Acquired backlog |
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581 |
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600 |
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Stock-based compensation |
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36 |
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47 |
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(2) Excludes stock-based compensation of: |
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424 |
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70 |
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|
584 |
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223 |
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(3) Excludes stock-based compensation of: |
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166 |
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17 |
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230 |
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119 |
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See accompanying notes to condensed consolidated financial statements.
4
PIXELWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Nine Months Ended |
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September 30, |
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2005 |
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2004 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
(6,696 |
) |
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$ |
17,761 |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities: |
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Depreciation and amortization |
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9,852 |
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|
5,515 |
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Amortization of purchased intangible assets |
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|
3,893 |
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|
760 |
|
Stock-based compensation |
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|
861 |
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|
342 |
|
Realized loss on sale of marketable securities |
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|
779 |
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Tax benefit from stock options |
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|
592 |
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|
5,579 |
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Amortization of debt issuance costs |
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|
532 |
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|
294 |
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Deferred rent |
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|
368 |
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|
67 |
|
Deferred income tax benefit |
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(363 |
) |
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(3,276 |
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Loss on asset disposals |
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161 |
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|
390 |
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Amortization of deferred tax charge |
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41 |
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41 |
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Changes in operating assets and liabilities, net of effects of acquisition: |
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Accounts receivable, net |
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(8,351 |
) |
|
|
(9,434 |
) |
Inventories, net |
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|
1,574 |
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|
(10,773 |
) |
Prepaid expenses and other current and long-term assets |
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|
(6,058 |
) |
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|
(186 |
) |
Accounts payable |
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|
1,091 |
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|
3,316 |
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Accrued current and long-term liabilities and income taxes payable |
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(3,333 |
) |
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|
6,696 |
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Net cash provided by (used in) operating activities |
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(5,057 |
) |
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|
17,092 |
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Cash flows from investing activities: |
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Proceeds from sales and maturities of marketable securities |
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283,974 |
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|
54,851 |
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Purchases of marketable securities |
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(139,867 |
) |
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|
(183,207 |
) |
Acquisition of Equator Technologies, Inc., net of cash acquired |
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(107,229 |
) |
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Purchases of property and equipment |
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(6,421 |
) |
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|
(5,657 |
) |
Purchases of other assets |
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(1,929 |
) |
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|
(3,031 |
) |
Payments on equipment and other asset financing |
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(4,015 |
) |
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|
(3,156 |
) |
Proceeds from sale of assets |
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|
61 |
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|
3 |
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Net cash provided by (used in) investing activities |
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|
24,574 |
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|
(140,197 |
) |
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Cash flows from financing activities: |
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Proceeds from the issuance of common stock |
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|
1,864 |
|
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|
4,966 |
|
Proceeds from the issuance of long-term debt |
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|
|
|
145,500 |
|
Debt issuance costs |
|
|
(7 |
) |
|
|
(429 |
) |
Lease incentives |
|
|
95 |
|
|
|
124 |
|
|
|
|
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|
Net cash provided by financing activities |
|
|
1,952 |
|
|
|
150,161 |
|
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Net increase in cash and cash equivalents |
|
|
21,469 |
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|
|
27,056 |
|
Cash and cash equivalents, beginning of period |
|
|
32,585 |
|
|
|
16,490 |
|
|
|
|
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|
Cash and cash equivalents, end of period |
|
$ |
54,054 |
|
|
$ |
43,546 |
|
|
|
|
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|
|
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|
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Supplemental disclosure of cash flow information: |
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Cash paid during the period for: |
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|
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|
|
|
|
Interest |
|
$ |
1,318 |
|
|
$ |
2 |
|
Income taxes |
|
|
1,690 |
|
|
|
230 |
|
|
|
|
|
|
|
|
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|
Supplemental disclosure of non-cash investing and financing activities: |
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Acquisitions of property and equipment and other assets under extended payment terms |
|
$ |
12,564 |
|
|
$ |
6,936 |
|
Value of options issued in connection with acquisition of Equator Technologies, Inc. |
|
|
8,336 |
|
|
|
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|
Transfer of cost-based investment to available-for-sale marketable security |
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|
10,000 |
|
Release and cancellation of common shares held in escrow |
|
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|
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|
541 |
|
Debt issuance costs withheld from proceeds |
|
|
|
|
|
|
4,500 |
|
See accompanying notes to condensed consolidated financial statements.
5
PIXELWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
Nature of Business
Pixelworks, Inc. (Pixelworks or the Company) is a leading designer, developer and marketer of
semiconductors and software for use in electronic display devices and equipment for encoding and decoding streaming digital video. Our system-on-chip semiconductors provide the
intelligence for these types of applications by processing and optimizing video and computer graphic
signals to produce high quality images.
Condensed Consolidated Financial Statements
These condensed consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with U.S. generally
accepted accounting principles (GAAP) have been condensed or omitted pursuant to such
regulations, although we believe that the disclosures provided are adequate to prevent the
information presented from being misleading.
The financial information included herein for the three and nine months ended September 30, 2005
and 2004 is unaudited; however, such information reflects all adjustments, consisting only of
normal recurring adjustments, that are, in the opinion of management, necessary for a fair
presentation of the consolidated financial position, consolidated results of operations and consolidated cash flows of the Company for
these interim periods. The financial information as of December 31, 2004 is derived from our
audited consolidated financial statements and notes thereto for the fiscal year ended December 31,
2004, included in Item 8 of our Annual Report on Form 10-K, and should be read in conjunction with
such consolidated financial statements.
The results of operations for the three and nine months ended September 30, 2005 are not
necessarily indicative of the results expected for the entire fiscal year ending December 31, 2005.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make
estimates and judgments that affect the amounts reported in the financial statements and
accompanying notes. Our significant estimates and judgments include those related to product
returns, warranty obligations, bad debts, inventory valuation, property and equipment, intangible
assets and income taxes. The actual results experienced by the Company could differ materially
from our estimates.
Reclassifications
Certain reclassifications have been made to the 2004 condensed consolidated financial statements to
conform to the 2005 presentation, including the reclassification of investments in auction rate
securities from cash and cash equivalents to available-for-sale short-term marketable securities
and the reclassification of tooling depreciation from research and development expense to cost of
revenue. Additionally, facilities and information technology expenses have been allocated between
selling, general and administrative expense, research and development expense and cost of revenue
based on employee headcount.
6
NOTE 2: STOCK PLANS
We have a 1997 Stock Incentive Plan and a 2001 Nonqualified Stock Option Plan under which
employees, officers and directors may be granted stock options to purchase shares of the Companys
common stock. We also have a 2000 Employee Stock Purchase Plan under which eligible employees may
purchase shares of Pixelworks common stock at 85% of fair market value at specific, pre-determined
dates.
As permitted by Statement of Financial Accounting Standards No. (SFAS) 123, Accounting for
Stock-Based Compensation (SFAS 123), and SFAS 148, Accounting for Stock-Based Compensation
Transition and Disclosure, an Amendment of FASB Statement No. 123, we continue to apply the
intrinsic value based method of accounting for stock compensation described in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (Opinion 25). As such,
stock-based compensation cost is measured as the excess, if any, of the quoted market price of
Pixelworks stock on the grant, or other measurement date, over the amount that an option holder
must pay to acquire the stock.
Entities electing to continue to apply Opinion 25 must make prominent pro-forma disclosure of net
income and earnings per share as if the fair value based method prescribed by SFAS 123 had been
applied. Had we accounted for our stock-based compensation plans in accordance with SFAS 123, our
net income (loss) would have approximated the pro-forma amounts below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net income (loss) as reported |
|
$ |
(5,257 |
) |
|
$ |
5,449 |
|
|
$ |
(6,696 |
) |
|
$ |
17,761 |
|
Add: Stock-based compensation included in reported
net income (loss), net of related tax effects |
|
|
330 |
|
|
|
61 |
|
|
|
505 |
|
|
|
226 |
|
Deduct: Stock-based compensation determined under
the fair value based method, net of related tax effects |
|
|
(2,572 |
) |
|
|
(3,165 |
) |
|
|
(7,271 |
) |
|
|
(7,682 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro-forma net income (loss) |
|
$ |
(7,499 |
) |
|
$ |
2,345 |
|
|
$ |
(13,462 |
) |
|
$ |
10,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.11 |
) |
|
$ |
0.12 |
|
|
$ |
(0.14 |
) |
|
$ |
0.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro-forma |
|
$ |
(0.16 |
) |
|
$ |
0.05 |
|
|
$ |
(0.29 |
) |
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.11 |
) |
|
$ |
0.11 |
|
|
$ |
(0.14 |
) |
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro-forma |
|
$ |
(0.16 |
) |
|
$ |
0.05 |
|
|
$ |
(0.29 |
) |
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of stock-based compensation costs reflected in the above pro-forma amounts were
determined using the Black-Scholes option pricing model and the following weighted average
assumptions:
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Stock Option Plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate |
|
|
4.04 |
% |
|
|
3.74 |
% |
|
|
4.02 |
% |
|
|
3.92 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Expected life (in years) |
|
|
6.3 |
|
|
|
6.1 |
|
|
|
6.5 |
|
|
|
6.1 |
|
Volatility |
|
|
93 |
% |
|
|
99 |
% |
|
|
94 |
% |
|
|
101 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate |
|
|
2.92 |
% |
|
|
1.87 |
% |
|
|
2.43 |
% |
|
|
1.87 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Expected life (in years) |
|
|
0.7 |
|
|
|
1.3 |
|
|
|
0.7 |
|
|
|
1.3 |
|
Volatility |
|
|
73 |
% |
|
|
102 |
% |
|
|
84 |
% |
|
|
103 |
% |
The effects of applying SFAS 123 in this pro-forma disclosure are not indicative of future
amounts and additional awards are anticipated in future periods.
NOTE 3: BALANCE SHEET COMPONENTS
Marketable Securities
At December 31, 2004, we classified all marketable securities as held-to-maturity in accordance
with SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, with the exception
of auction rate securities and our investment in Semiconductor Manufacturing International
Corporation (SMIC), which we classified as available-for-sale.
On March 31, 2005, we determined that we no longer had the intent to hold any of our securities to
maturity based on the potential for future acquisitions, and we reclassified all of our
held-to-maturity securities to available-for-sale. The amortized cost of the securities
transferred from held-to-maturity to available-for-sale was $159,632 on the March 31, 2005 transfer
date.
Short-term marketable securities were classified as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Available-for-sale |
|
$ |
75,025 |
|
|
$ |
77,150 |
|
Held-to-maturity |
|
|
|
|
|
|
83,063 |
|
|
|
|
|
|
|
|
Short-term marketable securities |
|
$ |
75,025 |
|
|
$ |
160,213 |
|
|
|
|
|
|
|
|
Long-term marketable securities were classified as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Available-for-sale |
|
$ |
18,297 |
|
|
$ |
10,531 |
|
Held-to-maturity |
|
|
|
|
|
|
68,952 |
|
|
|
|
|
|
|
|
Long-term marketable securities |
|
$ |
18,297 |
|
|
$ |
79,483 |
|
|
|
|
|
|
|
|
Unrealized holding losses on short-term available-for-sale marketable securities, net of tax,
were $72 at September 30, 2005. Unrealized holding losses on long-term available-for-sale
marketable securities, net
of tax, were $885 at September 30, 2005. These unrealized holding losses are recorded in
accumulated other comprehensive income, a component of shareholders equity, at September 30, 2005.
8
There were no unrealized holding gains or losses on available-for-sale auction rate securities at
December 31, 2004, and the unrealized holding gain on our investment in SMIC at December 31, 2004,
net of tax, was $531. This unrealized holding gain was recorded in accumulated other comprehensive
income at December 31, 2004.
Gross unrealized holding losses on short-term held-to-maturity marketable securities were $48 at
December 31, 2004, and gross unrealized losses on long-term held-to-maturity marketable securities
were $68 at December 31, 2004.
Accounts Receivable, Net
Accounts receivable are recorded at invoiced amount and do not bear interest when recorded or
accrue interest when past due. We do not have any off balance sheet exposure risk related to
customers. Accounts receivable are stated net of an allowance for doubtful accounts, which is
maintained for estimated losses that may result from the inability of our customers to make
required payments. Accounts receivable, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Accounts receivable, gross |
|
$ |
27,632 |
|
|
$ |
14,817 |
|
Less allowance for doubtful accounts |
|
|
(212 |
) |
|
|
(212 |
) |
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
27,420 |
|
|
$ |
14,605 |
|
|
|
|
|
|
|
|
Inventories, Net
Inventories consist of finished goods and work-in-process, and are stated at the lower of standard
cost (which approximates actual cost on a first-in, first-out basis) or market (net realizable
value), net of a reserve for slow moving and obsolete items. Inventories, net consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Finished goods |
|
$ |
21,240 |
|
|
$ |
11,648 |
|
Work-in-process |
|
|
8,420 |
|
|
|
8,516 |
|
|
|
|
|
|
|
|
|
|
|
29,660 |
|
|
|
20,164 |
|
Less reserve for slow moving and obsolete items |
|
|
(1,851 |
) |
|
|
(1,589 |
) |
|
|
|
|
|
|
|
Inventories, net |
|
$ |
27,809 |
|
|
$ |
18,575 |
|
|
|
|
|
|
|
|
9
The following is a summary of the change in our reserve for slow moving and obsolete items:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
Balance at beginning of period |
|
$ |
1,589 |
|
|
$ |
1,942 |
|
Usage: |
|
|
|
|
|
|
|
|
Inventory scrapped |
|
|
(119 |
) |
|
|
(442 |
) |
Inventory utilized |
|
|
(418 |
) |
|
|
(679 |
) |
|
|
|
|
|
|
|
Subtotal usage |
|
|
(537 |
) |
|
|
(1,121 |
) |
Provision |
|
|
799 |
|
|
|
559 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
1,851 |
|
|
$ |
1,380 |
|
|
|
|
|
|
|
|
While we do not currently expect to be able to sell or otherwise use the reserved inventory we
have on hand at September 30, 2005 based upon our forecast and backlog, it is possible that a
customer will decide in the future to purchase a portion of the reserved inventory. It is not
currently possible to predict if or when this will happen, or how much we may sell.
Property and Equipment, Net
Property and equipment, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Gross carrying amount of assets |
|
$ |
43,693 |
|
|
$ |
34,193 |
|
Less accumulated depreciation and amortization |
|
|
(28,887 |
) |
|
|
(21,749 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
14,806 |
|
|
$ |
12,444 |
|
|
|
|
|
|
|
|
Acquired Intangible Assets, Net
Acquired intangible assets, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Gross carrying amount of assets |
|
$ |
46,277 |
|
|
$ |
5,277 |
|
Less accumulated amortization |
|
|
(6,650 |
) |
|
|
(2,757 |
) |
|
|
|
|
|
|
|
Acquired intangible assets, net |
|
$ |
39,627 |
|
|
$ |
2,520 |
|
|
|
|
|
|
|
|
10
Accrued Liabilities and Current Portion of Long-Term Liabilities
Accrued liabilities and current portion of long-term liabilities consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Accrued payroll and related liabilities |
|
$ |
4,815 |
|
|
$ |
4,586 |
|
Current portion of accrued liabilities for asset financing |
|
|
9,148 |
|
|
|
3,185 |
|
Accrued manufacturing liabilities |
|
|
2,938 |
|
|
|
477 |
|
Accrued commissions and royalties |
|
|
1,452 |
|
|
|
719 |
|
Current portion of deferred lease liability |
|
|
526 |
|
|
|
128 |
|
Reserve for warranty returns |
|
|
519 |
|
|
|
419 |
|
Reserve for sales returns and allowances |
|
|
272 |
|
|
|
524 |
|
Accrued interest payable |
|
|
992 |
|
|
|
335 |
|
Other |
|
|
2,908 |
|
|
|
2,469 |
|
|
|
|
|
|
|
|
Accrued liabilities and current portion of long-term liabilities |
|
$ |
23,570 |
|
|
$ |
12,842 |
|
|
|
|
|
|
|
|
The following is a summary of the change in our reserve for sales returns and allowances:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
Balance at beginning of period |
|
$ |
524 |
|
|
$ |
202 |
|
Provision |
|
|
48 |
|
|
|
601 |
|
Charge offs |
|
|
(300 |
) |
|
|
(532 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
272 |
|
|
$ |
271 |
|
|
|
|
|
|
|
|
The following is a summary of the change in our reserve for warranty returns:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
Balance at beginning of period |
|
$ |
419 |
|
|
$ |
569 |
|
Provision |
|
|
534 |
|
|
|
145 |
|
Charge offs |
|
|
(434 |
) |
|
|
(257 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
519 |
|
|
$ |
457 |
|
|
|
|
|
|
|
|
Long-Term Debt
On May 18, 2004, we issued $125,000 of convertible subordinated debentures (the debentures) due
2024 in a private offering pursuant to Rule 144A under the Securities Act of 1933 and outside of
the United States in accordance with Regulation S under the Securities Act. On June 4, 2004, we
issued an additional $25,000 of debentures pursuant to the exercise of an option granted to the
initial purchasers.
11
The debentures bear interest at a rate of 1.75% per annum and interest is payable on May 15 and
November 15 of each year, beginning November 15, 2004. The debentures are convertible, under
certain circumstances, into our common stock at a conversion rate of 41.0627 shares of common stock
per $1,000 principal amount of debentures for a total of 6,159 shares. This is equivalent to a
conversion price of approximately $24.35 per share. The debentures are convertible if (a) during
any calendar quarter, the market price of our common stock exceeds 130% of the conversion price per
share for at least 20 trading days during the period of 30 consecutive trading days ending on the
last trading day of the previous calendar quarter, (b) the trading price of the debentures declines
to less than 98% of the product of the closing sale price of our common stock and the number of
shares issuable upon conversion of $1,000 principal amount of the debentures for five consecutive
trading days, (c) a call for redemption occurs, or (d) in the event of certain other corporate
transactions. We may redeem some or all of the debentures for cash on or after May 15, 2011 at a
price equal to 100% of the principal amount of the debentures plus accrued and unpaid interest.
The holders of the debentures have the right to require us to purchase all or a portion of their
debentures on May 15, 2011, May 15, 2014 and May 15, 2019, at a price equal to 100% of the
principal amount plus accrued and unpaid interest.
We have filed a shelf registration statement with the Securities and Exchange Commission covering
resales of the debentures and the common stock issuable upon conversion of the debentures. The
registration statement was declared effective August 24, 2004. The debentures are unsecured
obligations and are subordinated in right of payment to all our existing and future senior debt.
NOTE 4: COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net income (loss) |
|
$ |
(5,257 |
) |
|
$ |
5,449 |
|
|
$ |
(6,696 |
) |
|
$ |
17,761 |
|
Unrealized loss on available-for-sale
marketable securities, net of tax |
|
|
(1,016 |
) |
|
|
(553 |
) |
|
|
(1,488 |
) |
|
|
(78 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(6,273 |
) |
|
$ |
4,896 |
|
|
$ |
(8,184 |
) |
|
$ |
17,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5: EARNINGS PER SHARE
We calculate earnings per share in accordance with SFAS 128, Earnings per Share. Basic earnings
per share amounts are computed based on the weighted average number of common shares outstanding,
and includes exchangeable shares. These exchangeable shares, which were issued on September 6,
2002 by Jaldi, our Canadian subsidiary, to its shareholders in connection with the Jaldi asset
acquisition, have characteristics essentially equivalent to Pixelworks common stock.
Diluted weighted average shares outstanding includes the increased number of common shares that
would be outstanding assuming the exercise of certain stock options and the vesting of certain
restricted stock, when such exercise or vesting would have the effect of reducing earnings per
share. In the fourth quarter of 2004, we adopted Emerging Issues Task Force Issue No. 04-8, The
Effect of Contingently Convertible Debt on Diluted Earnings per Share. As a result, diluted
weighted average shares outstanding also includes the increased number of common shares that would
be outstanding assuming the conversion of our convertible debentures, using the if-converted
method, when such conversion would have the effect of reducing earnings per share.
12
The following schedule reconciles basic and diluted weighted average shares outstanding for the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Basic weighted average shares outstanding |
|
|
47,520 |
|
|
|
46,827 |
|
|
|
47,218 |
|
|
|
46,596 |
|
Incremental shares related to conversion of debentures |
|
|
|
|
|
|
6,159 |
|
|
|
|
|
|
|
2,971 |
|
Incremental shares related to stock options
and restricted stock |
|
|
|
|
|
|
975 |
|
|
|
|
|
|
|
1,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
47,520 |
|
|
|
53,961 |
|
|
|
47,218 |
|
|
|
51,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following schedule reconciles net income (loss) used in the calculation of basic net
income (loss) per share to net income (loss) used in the calculation of diluted net income (loss)
per share for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net income (loss) used in calculating basic net income (loss) per share |
|
$ |
(5,257 |
) |
|
$ |
5,449 |
|
|
$ |
(6,696 |
) |
|
$ |
17,761 |
|
Add: Interest expense and amortization of debt issuance
costs, net of tax |
|
|
|
|
|
|
582 |
|
|
|
|
|
|
|
822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) used in calculating diluted
net income (loss) per share |
|
$ |
(5,257 |
) |
|
$ |
6,031 |
|
|
$ |
(6,696 |
) |
|
$ |
18,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Because of our net loss position for the three and nine months ended September 30, 2005,
incremental shares related to stock options of 1,156 and 907, respectively, are excluded from
diluted weighted average shares outstanding.
For the three and nine months ended September 30, 2005, weighted average shares related to stock
options of 6,858 and 5,811, respectively, were excluded from the calculation of diluted weighted
average shares outstanding because the exercise prices of these options were equal to or greater
than the average market price of Pixelworks common stock during the respective periods, and as a
result, their inclusion would have been anti-dilutive. For the three and nine months ended
September 30, 2004, weighted average shares related to stock options of 3,941 and 2,039,
respectively, were excluded for this reason.
NOTE 6: SEGMENT INFORMATION
In accordance with SFAS 131, Disclosures about Segments of an Enterprise and Related Information,
we have identified a single operating segment: the design and development of integrated circuits
for use in electronic display devices and equipment for encoding and decoding streaming
digital video. Substantially all of our assets are located in the United States.
13
Geographic Information
Revenue by geographic region, attributed to countries based on the domicile of the bill-to
customer, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Japan |
|
$ |
14,327 |
|
|
$ |
22,572 |
|
|
$ |
43,986 |
|
|
$ |
57,275 |
|
Taiwan |
|
|
6,933 |
|
|
|
6,622 |
|
|
|
24,261 |
|
|
|
30,357 |
|
China |
|
|
5,051 |
|
|
|
6,648 |
|
|
|
16,912 |
|
|
|
23,436 |
|
Korea |
|
|
4,147 |
|
|
|
2,960 |
|
|
|
10,975 |
|
|
|
10,078 |
|
Europe |
|
|
5,586 |
|
|
|
2,145 |
|
|
|
19,199 |
|
|
|
8,247 |
|
U.S. |
|
|
4,173 |
|
|
|
489 |
|
|
|
4,972 |
|
|
|
1,684 |
|
Other |
|
|
6,577 |
|
|
|
2,534 |
|
|
|
8,065 |
|
|
|
6,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
46,794 |
|
|
$ |
43,970 |
|
|
$ |
128,370 |
|
|
$ |
137,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Customers
Sales to distributors represented 38% and 70% of total revenue for the three months ended September
30, 2005 and 2004, respectively, and 48% and 71% of total revenue for the nine months ended
September 30, 2005 and 2004, respectively. The following distributors accounted for 10% or more of
total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Distributor A |
|
|
19 |
% |
|
|
40 |
% |
|
|
23 |
% |
|
|
32 |
% |
Distributor B |
|
|
6 |
% |
|
|
10 |
% |
|
|
7 |
% |
|
|
8 |
% |
Distributor C |
|
|
0 |
% |
|
|
10 |
% |
|
|
2 |
% |
|
|
14 |
% |
Effective February 4, 2005, we terminated our distributor relationship with Neoview, located
in Taiwan. We now sell our products directly to Taiwanese customers previously served by Neoview,
as well as through our other Taiwanese distributors.
End customers include customers who purchase directly from us, as well as customers who purchase
our products indirectly through distributors and contract manufacturers. Sales to our top five end
customers represented 34% and 42% of total revenue for the three months ended September 30, 2005
and 2004, respectively, and 34% of total revenue for the nine months ended September 30, 2005 and
2004.
One end customer represented 12% and 11% of total revenue for the three months ended September 30,
2005 and 2004, respectively. A second end customer represented 6% and 15% of total revenue for the
three months ended September 30, 2005 and 2004, respectively. No end customer accounted for more
than 10% of total revenue for the nine months ended September 30, 2005 and 2004.
The following accounts represented 10% or more of gross accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Account A |
|
|
15 |
% |
|
|
26 |
% |
Account B |
|
|
5 |
% |
|
|
11 |
% |
14
NOTE 7: RISKS AND UNCERTAINTIES
Concentration of Suppliers
We do not own or operate a semiconductor fabrication facility and do not have the resources to
manufacture our products internally. We rely on four third-party foundries to produce all of our
products and we do not have any long-term agreements with any of these suppliers. In light of
these dependencies, it is reasonably possible that failure to perform by one of these suppliers
could have a severe impact on our results of operations.
Risk of Technological Change
The markets in which we compete or seek to compete are subject to rapid technological change,
frequent new product introductions, changing customer requirements for new products and features
and evolving industry standards. The introduction of new technologies and the emergence of new
industry standards could render our products less desirable or obsolete, which could harm our
business.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist of cash
equivalents, short and long-term marketable securities and accounts receivable. We limit our
exposure to credit risk associated with cash equivalent and marketable security balances by placing
our funds in various high quality securities and limiting concentrations of issuers and maturity
dates. We limit our exposure to credit risk associated with accounts receivable by carefully
evaluating creditworthiness before offering terms to customers.
NOTE 8: COMMITMENTS AND CONTINGENCIES
Indemnifications
Certain of our agreements include limited indemnification provisions for claims from third parties
relating to our intellectual property. Such indemnification provisions are accounted for in
accordance with SFAS 5, Accounting for Contingencies. The indemnification is limited to the amount
paid by the customer. As of September 30, 2005, we have not incurred any material liabilities
arising from these indemnification obligations, however in the future, such obligations could
immediately impact our results of operations but would not materially affect our business.
NOTE 9: ACQUISITION
On June 14, 2005, the Company acquired 100% of the outstanding shares of Equator Technologies, Inc.
(Equator). Equator is at the forefront of delivering programmable advanced video compression
technology with system-on-chip integrated circuits and software solutions that unlock broadband
networks for video entertainment and communications. This acquisition will provide programmable
technologies to Pixelworks customers in order to create a new generation of digital televisions,
including those that might integrate Internet Protocol television decoding technology to allow
viewing of digital video directly over the Internet. The results of Equators operations have been
included in our consolidated statement of operations beginning on the date of acquisition.
The aggregate purchase price for Equator was $118,091, which consisted of cash of $107,854, the
value of 1,263 options exchanged of $8,336, plus acquisition costs of $1,901. The estimated fair
value of the options exchanged was calculated using the Black-Scholes option pricing model with the
average closing price of Pixelworks common stock for two days prior to the announcement of the
Agreement and Plan of Merger, the day of the announcement, and two days following the announcement
($7.62 per share) and following weighted average assumptions: risk-free interest rate of 2.55%, an
expected dividend yield of 0%, an expected life of 1.2 years, and volatility of 59%.
15
The purchase price was allocated to the assets and liabilities based on fair values as follows:
|
|
|
|
|
|
|
|
|
Purchase price |
|
|
|
|
|
$ |
118,091 |
|
Less net assets acquired: |
|
|
|
|
|
|
|
|
Assets acquired: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
5,044 |
|
|
|
|
|
Accounts receivable |
|
|
4,464 |
|
|
|
|
|
Inventory |
|
|
10,808 |
|
|
|
|
|
Other current assets |
|
|
296 |
|
|
|
|
|
Non-current assets |
|
|
5,871 |
|
|
|
|
|
Developed technology |
|
|
36,800 |
|
|
|
|
|
Other acquired intangible assets |
|
|
4,200 |
|
|
|
|
|
Deferred stock compensation |
|
|
2,219 |
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
Liabilities assumed |
|
|
(9,423 |
) |
|
|
(60,279 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
$ |
57,812 |
|
|
|
|
|
|
|
|
|
In connection with this acquisition, we performed a valuation of acquired intangible assets. We
assigned $36,800 of the purchase price to acquired developed technology with a five year estimated
life, $3,400 to customer relationships with a three year estimated life, and $800 to backlog and
trademark with estimated lives of one year or less. In-process research and development was
considered in our analysis of the Equator intangible assets; however, it was determined to have no
value since the technologies were determined to be too early in the research and development
stages.
We also recorded gross deferred tax assets of approximately $63,687, subject to a valuation
allowance of $43,372, and deferred tax liabilities of $17,000 to recognize book basis and tax basis
differences of various balance sheet assets and liabilities and corporate tax attributes acquired.
If the valuation allowance is subsequently changed, the amount of the adjustment may affect net
income or goodwill depending on the nature of the adjustment in the period such change is made.
The goodwill resulting from this transaction was assigned to Pixelworks, Inc., our sole reporting
unit.
In addition to the $107,854 cash consideration included in the purchase price we paid $2,518 in
cash, which was classified as contingent consideration on the acquisition date. The Equator
shareholders will receive disbursement of the contingent consideration if certain revenue targets
are achieved by March 31, 2006. If the target is not fully achieved by March 31, 2006, we will
receive a refund of a portion of the contingent consideration. During the quarter ended September
30, 2005, $558 of the contingent consideration was earned by the shareholders. At September 30,
2005, the remaining $1,960 of contingent consideration is included in prepaid expenses and other
current assets in the condensed consolidated balance sheet.
The purchase price allocation is substantially complete. Certain elements, such as the filing of
pre-acquisition tax returns, may impact the final purchase price
allocation. During the quarter ended September 30, 2005, we
reclassified $18,862 from net deferred tax assets to goodwill due to the completion of an analysis of recoverability of acquired deferred tax assets and related limitations. Although we do not
anticipate significant revisions to the purchase price allocation, material adjustments could
occur.
16
The following table reflects the unaudited combined results of Pixelworks and Equator as if the
merger had taken place as of January 1, 2004. For the three and nine months ended September 30,
2004, weighted average shares related to convertible subordinated debentures of 6,159 and 2,971,
respectively, were excluded from the calculation of diluted weighted average shares outstanding
because their inclusion would have been anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net revenue |
|
$ |
46,794 |
|
|
$ |
48,629 |
|
|
$ |
143,336 |
|
|
$ |
147,783 |
|
Net income (loss) |
|
$ |
(2,325 |
) |
|
$ |
2,041 |
|
|
$ |
(10,677 |
) |
|
$ |
6,977 |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.05 |
) |
|
$ |
0.04 |
|
|
$ |
(0.23 |
) |
|
$ |
0.15 |
|
Diluted |
|
$ |
(0.05 |
) |
|
$ |
0.04 |
|
|
$ |
(0.23 |
) |
|
$ |
0.14 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
47,520 |
|
|
|
46,827 |
|
|
|
47,218 |
|
|
|
46,596 |
|
Diluted |
|
|
47,520 |
|
|
|
48,820 |
|
|
|
47,218 |
|
|
|
49,335 |
|
The adjustment to mark-up inventory to fair value of $5,190 is not included in cost of revenue
in the pro forma results of operations for the nine months ended September 30, 2004 as it is not
reflective of the ongoing operations of the combined entities. The pro-forma information does not
necessarily reflect the actual results that would have occurred, nor is it necessarily indicative
of future results of operations of the combined companies.
NOTE 10: SUBSEQUENT EVENT
During October 2005, we initiated a restructuring of our workforce which resulted in the
elimination of 36 positions. We expect to incur approximately $1,000 in severance expenses in the
fourth quarter of 2005 as a result of this restructuring. In the future, we expect to incur costs
to move employees from two separate facilities in California into one facility. This restructuring
is intended to improve the efficiency and effectiveness of our product development efforts.
17
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking Statements
This Managements Discussion and Analysis of Financial Condition and Results of Operations and
other sections of this Report contain forward-looking statements within the meaning of the
Securities Litigation Reform Act of 1995 that are based on current expectations, estimates,
beliefs, assumptions and projections about our business. Words such as expects, anticipates,
intends, plans, believes, seeks, estimates and variations of such words and similar
expressions are intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks and uncertainties that are difficult to
predict. Actual outcomes and results may differ materially from what is expressed or forecasted in
such forward-looking statements due to numerous factors. Such factors include, but are not limited
to, increased competition, adverse business conditions, failure to design, develop and manufacture
new products, lack of success in technological advancements, lack of acceptance of new products,
the timing of orders for our products, unexpected changes in the demand for our products and
services, the inability to successfully manage inventory pricing pressures, failure to reduce costs
or improve operating efficiencies, changes to and compliance with international laws and
regulations, currency fluctuations and our ability to attract, hire and retain key and qualified
employees. These forward-looking statements speak only as of the date on which they are made, and
we do not undertake any obligation to update any forward-looking statement to reflect events or
circumstances after the date of this Quarterly Report on Form 10-Q. If we do update or correct one
or more forward-looking statements, you should not conclude that we will make additional updates or
corrections with respect thereto or with respect to other forward-looking statements.
(Dollars in thousands)
Overview
We are a leading designer, developer and marketer of semiconductors and software for
use in electronic display devices and equipment for
encoding and decoding streaming digital video. Our system-on-chip semiconductors provide the intelligence for these types of applications by
processing and optimizing video and computer graphic signals to produce high-quality images. Many of the worlds leading manufacturers of consumer electronics and computer display
products utilize our technology to enhance image quality and ease of use of their products. Our
goal is to provide all of the electronics necessary to process the entire signal path in order to
provide a turn-key solution for our customers.
On June 14, 2005, we acquired 100% of the outstanding shares of Equator Technologies, Inc.
(Equator). Equator is at the forefront of delivering programmable advanced video compression
technology with system-on-chip integrated circuits and software solutions that unlock broadband
networks for video entertainment and communications. This acquisition will provide programmable
technologies to Pixelworks customers in order to create a new generation of digital televisions,
including those that might integrate Internet Protocol television decoding technology to allow
viewing of digital video directly over the Internet. The results of operations of Equator are
included in our financial statements beginning on June 14, 2005.
We sell our products worldwide through a direct sales force and indirectly through distributors and
manufacturers representatives. Manufacturers representatives support some of our European and
Asian sales. We sell to distributors in Japan, Taiwan, China and Europe. Sales to distributors
represented 48% and 71% of total revenue for the nine months ended September 30, 2005 and 2004,
respectively, and 38% and 70% of total revenue for the three months ended September 30, 2005 and
2004, respectively. Effective February 4, 2005, we terminated our distributor relationship with
Neoview, one of our Taiwanese distributors. We now sell our products directly to Taiwanese
customers previously served by Neoview, as well as through our other Taiwanese distributors. The
termination of this relationship led to
the decrease in sales to distributors during the three and nine months ended September 30, 2005,
compared to the three and nine months ended September 30, 2004.
18
Historically, significant portions of our revenue have been generated by sales to a relatively
small number of end customers and distributors. Sales to our top five end customers represented
34% and 42% of total revenue for the three months ended September 30, 2005 and 2004, respectively,
and 34% of revenue for the nine months ended September 30, 2005 and 2004. During the three months
ended September 30, 2005, there was one end customer that accounted for more than 10% of total
revenue. There were no end customers that accounted for 10% or more of total revenue during the
nine months ended September 30, 2005. There were two end customers that represented more than 10%
of total revenue during the three months ended September 30, 2004 and no end customer represented
more than 10% of total revenue during the nine months ended September 30, 2004. End customers
include customers who purchase directly from us, as well as customers who purchase our products
indirectly through distributors and contract manufacturers.
Significant portions of our products are sold overseas. Sales outside the U.S. accounted for
approximately 91% and 96% of total revenue for the three and nine months ended September 30, 2005,
respectively, and 99% of total revenue for the three and nine months ended September 30, 2004. Our
integrators, branded manufacturers and branded suppliers 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
Our discussion and analysis of our financial condition and results of operations is based on our
financial statements, which have been prepared in accordance with U.S. generally accepted
accounting principles (GAAP). The preparation of financial statements in conformity with GAAP
requires us to make estimates and judgments that affect the amounts reported in the financial
statements and accompanying notes. On an ongoing basis, we evaluate our estimates, including those
related to product returns, warranty obligations, inventories, property and equipment, intangible
assets and income taxes. We base our estimates on historical experience and various other
assumptions that we believe to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect the more significant judgments and
estimates we use in preparing our consolidated financial statements:
Revenue Recognition. We recognize revenue in accordance with Staff Accounting Bulletin No. 104,
Revenue Recognition. Accordingly, revenue is recognized when an authorized purchase order has been
received, the sales price is fixed and determinable, title and risk of loss have transferred,
collection of the resulting receivable is probable and product returns are reasonably estimable.
This generally occurs upon shipment of the underlying merchandise.
Sales Returns and Allowances. Our customers do not have a stated right to return product other
than under our warranty policy discussed below. As such, customer returns are accepted on a
case-by-case basis as customer accommodations only. However, certain of our distributors have
stock rotation provisions in their distributor agreements, which allow them to return 5-10% of the
products purchased in the prior six months in exchange for products of equal value. Certain
distributors also have price protection provisions in their agreements with us.
We record estimated reductions to gross profit for these sales returns and allowances in our
reserve for sales returns and allowances. We update the balance in this reserve at each reporting
period based on historical experience. If actual returns and allowances increase, we may be
required to recognize additional reductions to gross profit.
19
Product Warranties. We warrant that our products will be free from defects in materials and
workmanship for a period of twelve months from delivery. Warranty repairs are guaranteed for the
remainder of the original warranty period. Our warranty is limited to repairing or replacing
products, or refunding the purchase price.
We provide for the estimated cost of product warranties in our warranty reserve. We update the
balance in this reserve based on historical experience at each reporting period. While we engage
in extensive product quality programs and processes, which include actively monitoring and
evaluating the quality of our suppliers, should actual product failure rates or product replacement
costs differ from our estimates, revisions to the estimated warranty liability may be required.
Allowance for Doubtful Accounts. We offer credit to customers after careful examination of their
creditworthiness. We maintain an allowance for doubtful accounts for estimated losses that may
result from the inability of our customers to make required payments. We evaluate the balance in
the allowance based on historical experience and the age of outstanding receivables at each
reporting period. If the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be required.
Inventory Valuation. We record a reserve against our inventory for estimated obsolete,
unmarketable, and otherwise impaired products by calculating the difference between the cost of
inventory and the estimated market value based upon assumptions about future demand and market
conditions. We review our inventory at the end of each reporting period for valuation issues. If
actual market conditions are less favorable than those we projected at the time the reserve was
recorded, additional inventory reserves may be required.
Useful Lives and Recoverability of Equipment and Other Long-Lived Assets. In accordance with
Statement of Financial Accounting Standards No. (SFAS) 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, we evaluate the remaining useful life and recoverability of
equipment and other assets, including identifiable intangible assets with definite lives, whenever
events or changes in circumstances indicate that the carrying amount of the assets may not be
recoverable. If there is an indicator of impairment, we prepare an estimate of future,
undiscounted cash flows expected to result from the use of each asset and its eventual disposition.
If these cash flows are less than the carrying value of the asset, we adjust the carrying amount
of the asset to its estimated fair value.
Goodwill. Goodwill represents the excess cost over the fair value of net assets acquired in
business combinations. Goodwill is not amortized, instead we test goodwill annually for
impairment, and more frequently if events and circumstances indicate that it might be impaired.
The impairment tests are performed in accordance with SFAS 142, Goodwill and Other Intangible
Assets. Accordingly, an impairment loss is recognized to the extent that the carrying amount of
goodwill exceeds its implied fair value. This determination is made at the reporting unit level.
We have assigned all goodwill to a single, enterprise-level reporting unit. The impairment test
consists of two steps. First, we determine the fair value of the reporting unit. The fair value
is then compared to its carrying amount. Second, if the carrying amount of the reporting unit
exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of
the reporting units goodwill over the implied fair value of that goodwill. The implied fair value
of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to
a purchase price allocation in accordance with SFAS 141, Business Combinations. The residual fair
value after this allocation is the implied fair value of the reporting unit goodwill. We perform
our annual impairment test in the first quarter of each year. We have not recorded any impairment
losses against goodwill as a result of impairment tests performed.
Income Taxes. Deferred income taxes are provided for temporary differences between the amount of
assets and liabilities for financial and tax reporting purposes. We establish a valuation
allowance in accordance with SFAS 109, Accounting for Income Taxes, to reduce our deferred tax
assets to the amount that is more likely than not to be realized. Should we determine that we will
not be able to realize all or
part of our net deferred tax asset in the future, an adjustment to the deferred tax asset will be
charged to income in the period such determination is made.
20
Tax contingencies are recorded to address potential exposures involving tax positions we have taken
that could be challenged by taxing authorities. These potential exposures result from the varying
applications of statutes, rules, regulations and interpretations. Our tax contingencies contain
assumptions based on past experiences and judgments about potential actions by taxing
jurisdictions. The ultimate resolution of these matters may be greater or less than the amount
that we have accrued.
Results of Operations
The following table sets forth certain unaudited financial data for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Dollars |
|
|
revenue |
|
|
Dollars |
|
|
revenue |
|
|
Dollars |
|
|
revenue |
|
|
Dollars |
|
|
revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net |
|
$ |
46,794 |
|
|
|
100.0 |
% |
|
$ |
43,970 |
|
|
|
100.0 |
% |
|
$ |
128,370 |
|
|
|
100.0 |
% |
|
$ |
137,749 |
|
|
|
100.0 |
% |
Cost of revenue |
|
|
32,147 |
|
|
|
68.7 |
|
|
|
22,260 |
|
|
|
50.6 |
|
|
|
80,603 |
|
|
|
62.8 |
|
|
|
69,620 |
|
|
|
50.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
14,647 |
|
|
|
31.3 |
|
|
|
21,710 |
|
|
|
49.4 |
|
|
|
47,767 |
|
|
|
37.2 |
|
|
|
68,129 |
|
|
|
49.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
15,573 |
|
|
|
33.3 |
|
|
|
8,454 |
|
|
|
19.2 |
|
|
|
36,586 |
|
|
|
28.5 |
|
|
|
24,111 |
|
|
|
17.5 |
|
Selling, general and
administrative |
|
|
8,202 |
|
|
|
17.5 |
|
|
|
5,864 |
|
|
|
13.3 |
|
|
|
22,170 |
|
|
|
17.3 |
|
|
|
17,394 |
|
|
|
12.6 |
|
Stock-based compensation and
amortization of purchased
intangible assets |
|
|
1,042 |
|
|
|
2.2 |
|
|
|
208 |
|
|
|
0.5 |
|
|
|
1,564 |
|
|
|
1.2 |
|
|
|
706 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
24,817 |
|
|
|
53.0 |
|
|
|
14,526 |
|
|
|
33.0 |
|
|
|
60,320 |
|
|
|
47.0 |
|
|
|
42,211 |
|
|
|
30.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(10,170 |
) |
|
|
(21.7 |
) |
|
|
7,184 |
|
|
|
16.3 |
|
|
|
(12,553 |
) |
|
|
(9.8 |
) |
|
|
25,918 |
|
|
|
18.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,031 |
|
|
|
2.2 |
|
|
|
1,474 |
|
|
|
3.4 |
|
|
|
4,439 |
|
|
|
3.5 |
|
|
|
2,238 |
|
|
|
1.6 |
|
Interest expense |
|
|
(657 |
) |
|
|
(1.4 |
) |
|
|
(657 |
) |
|
|
(1.5 |
) |
|
|
(1,974 |
) |
|
|
(1.5 |
) |
|
|
(952 |
) |
|
|
(0.7 |
) |
Realized loss on sale of marketable
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(779 |
) |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
Amortization of debt issuance costs |
|
|
(177 |
) |
|
|
(0.4 |
) |
|
|
(179 |
) |
|
|
(0.4 |
) |
|
|
(532 |
) |
|
|
(0.4 |
) |
|
|
(294 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income, net |
|
|
197 |
|
|
|
0.4 |
|
|
|
638 |
|
|
|
1.5 |
|
|
|
1,154 |
|
|
|
0.9 |
|
|
|
992 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(9,973 |
) |
|
|
(21.3 |
) |
|
|
7,822 |
|
|
|
17.8 |
|
|
|
(11,399 |
) |
|
|
(8.9 |
) |
|
|
26,910 |
|
|
|
19.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (recovery of) income taxes |
|
|
(4,716 |
) |
|
|
(10.1 |
) |
|
|
2,373 |
|
|
|
5.4 |
|
|
|
(4,703 |
) |
|
|
(3.7 |
) |
|
|
9,149 |
|
|
|
6.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(5,257 |
) |
|
|
(11.2) |
% |
|
$ |
5,449 |
|
|
|
12.4 |
% |
|
$ |
(6,696 |
) |
|
|
(5.2) |
% |
|
$ |
17,761 |
|
|
|
12.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentages may not add due to rounding.
Revenue, net
Revenue, net increased $2,824, or 6%, to $46,794 for the three months ended September 30, 2005 from
$43,970 for the three months ended September 30, 2004. Revenue decreased $9,379, or 7%, to
$128,370 for the nine months ended September 30, 2005 from $137,749 for the nine months ended September 30,
2004.
21
Revenue by market as a percentage of total revenue was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Advanced televisions |
|
|
42 |
% |
|
|
42 |
% |
|
|
51 |
% |
|
|
40 |
% |
Multimedia projectors |
|
|
31 |
% |
|
|
48 |
% |
|
|
32 |
% |
|
|
47 |
% |
Advanced media processors |
|
|
19 |
% |
|
|
0 |
% |
|
|
7 |
% |
|
|
0 |
% |
LCD monitors |
|
|
6 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
11 |
% |
Other |
|
|
2 |
% |
|
|
3 |
% |
|
|
3 |
% |
|
|
2 |
% |
Advanced Televisions
Advanced television revenue increased $1,317, or 7%, to $19,767 for the three months ended
September 30, 2005 from $18,450 for the three months ended September 30, 2004. This increase is
due to an increase in units sold of 22%, offset by a decrease in average selling prices of 12%.
Advanced television revenue increased $10,302, or 19%, to $65,743 for the nine months ended
September 30, 2005, from $55,441 for the nine months ended September 30, 2004. This increase is
due to an increase in units sold of 27%, offset by a decrease in average selling prices of 7%.
The advanced television market includes products sold into the flat panel television sector, which
is comprised of liquid crystal display (LCD) televisions and plasma televisions, and products
sold into the digital cathode ray tube (CRT) and digital rear projection television sectors.
Revenue from products sold into the flat panel television sector comprised approximately 94% of our
advanced television revenue during the three and nine months ended September 30, 2005. During the
three and nine months ended September 30, 2004, revenue from products sold into the flat panel
television sector comprised approximately 74% and 68%, respectively, of our total advanced
television revenue. The increases in revenue to the flat panel television sector were attributable
to overall growth in the market. These increases were partially offset by decreases in revenue to
the CRT sector during the three and nine months ended September 30, 2005 compared to the three and
nine months ended September 30, 2004.
Our advanced television revenue is generated on sales to customers primarily located in China,
Taiwan, Europe, Korea and Japan.
In the fourth quarter of 2005, we expect our advanced television revenue to increase approximately
10% to 15% from the third quarter of 2005. This increase will be driven largely by the continued
ramp of our new products.
Multimedia Projectors
Multimedia projector revenue decreased $6,792, or 32%, to $14,488 for the three months ended
September 30, 2005 from $21,280 for the three months ended September 30, 2004. This decrease is
due to a decrease in units sold of 21%, combined with a decrease in average selling prices of 14%.
Multimedia projector revenue decreased $23,776, or 37%, to $40,604 for the nine months ended
September 30, 2005, from $64,380 for the nine months ended September 30, 2004. This decrease is
due to a decrease in units sold of 21%, combined with a decrease in average selling prices of 20%.
The decreases in revenue in the multimedia projector market are primarily attributable to market
share lost to Texas Instruments in projectors using their Digital Light Processing (DLP) display
device.
The majority of our multimedia projector revenue is generated on sales to customers located in
Japan. Japanese customers accounted for 82% and 76% of total multimedia projector revenue for the
three months ended September 30, 2005 and 2004, respectively, and 85% and 69% of total multimedia
projector revenue for the nine months ended September 30, 2005 and 2004, respectively.
22
In the fourth quarter of 2005, we believe multimedia projector revenue will decrease approximately
5% from the third quarter of 2005. This decrease will be driven by softness in demand in the
overall market as we move into the second half of the fourth quarter.
Advanced Media Processors
Advanced media processor revenue was $8,804 and $9,053 for the three and nine months ended
September 30, 2005, respectively. Sales into this market are a result of our acquisition of
Equator Technologies, Inc. in June of 2005. Accordingly, we had no revenue in this market for the
comparable periods of 2004.
The advanced media processor market consists of products sold into video conferencing and
set-top-box applications, as well as products sold into other miscellaneous applications which
include broadcast encoding and imaging. The majority of our advanced media processor revenue is
derived from customers located in United States and Canada.
In the fourth quarter of 2005, we believe advanced media processor revenue will decrease
approximately 15% to 35% from the third quarter of 2005. This decrease will be due to softness in
set-top-box demand as we expect that new orders to support continued rollout from our major
customers will push out beyond the fourth quarter.
LCD Monitors
LCD monitor revenue decreased $179, or 6%, to $2,943 for the three months ended September 30, 2005
from $3,122 for the three months ended September 30, 2004. This decrease is due to a decrease in
units sold of 9%, offset by an increase in average selling prices of 4%. LCD monitor revenue
decreased $5,757, or 39%, to $9,119 for the nine months ended September 30, 2005 from $14,876 for
the nine months ended September 30, 2004. This decrease is due to a decrease in units sold of 59%,
offset by an increase in average selling prices of 51%.
The overall decrease in LCD monitor revenue is primarily attributable to our strategy to stop
developing mainstream products for this market, and to focus on higher end products. The increase
in average selling prices resulted from an increase in the percentage of chips sold into Ultra
Extended Graphics Array (UXGA) monitors, the highest resolution monitors, which carry higher average
selling prices than chips sold into Super Extended Graphics Array
(SXGA), which are high resolution
monitors, or Extended Graphics Array (XGA) monitors,
which are the lowest resolution monitors.
The majority of our LCD monitor revenue is generated on sales to customers located in Taiwan.
In the fourth quarter of 2005, we expect that LCD monitor revenue will decrease approximately
15% to 20% from third quarter of 2005.
Other
Other revenue includes revenue generated from the sales of evaluation kits and from sales into
small, niche markets that are unrelated to the four primary markets for our products, as well as
the impact of any change in our reserve for sales returns and allowances.
Cost of revenue and gross profit
Cost of revenue includes purchased materials, assembly, test, labor and overhead, warranty expense,
royalties, amortization of purchased developed technology, provisions for slow moving and obsolete
inventory and information technology and facilities allocations.
23
Gross profit decreased to 31.3% and 37.2% for the three and nine months ended September 30, 2005,
respectively, from 49.4% and 49.5% for the comparable periods in 2004. The decrease is primarily
driven by an increase in amortization of acquired inventory mark-up, acquired intangible assets and
stock-based compensation of $5,701 and $6,123 for the three and nine months ended September 30,
2005, respectively, and changes in the mix of products sold. The decrease in sales to multimedia
projector manufacturers as a percentage of total revenue contributed significantly to the
overall decrease in gross profit, as our multimedia projector sales generally have the highest
gross profit margins.
We expect our gross profit margin to be approximately 34% to 36% for the fourth quarter of 2005.
This increase will primarily be driven by less non-cash acquisition related expenses in the fourth
quarter of 2005 compared to the third quarter. We expect non-cash acquisition related expenses to
be approximately $3,800 in the fourth quarter compared to $5,797 for the third quarter.
Research and development
Research and development includes compensation and related costs for personnel, depreciation and
amortization, fees for outside services and expensed equipment and software.
Research and development expense, inclusive of stock-based compensation expense, increased $7,473,
or 88%, to $15,997 for the three months ended September 30, 2005 from $8,524 for the three months
ended September 30, 2004 due to the following factors:
|
|
Compensation expense increased $3,463. This increase is
attributable to an increase in research and development headcount
of 122 from 163 at September 30, 2004 to 285 at September 30,
2005. 55 of the headcount increase is in our Shanghai design
center and 43 of the headcount increase is attributable to our
acquisition of Equator. The remaining increase is attributable to
additional headcount in the U.S. and Canada. |
|
|
|
Non-recurring engineering and outside services expenses increased
$1,723. $798 of this increase is attributable to the addition of
Equator expenses. The remaining increase is attributable to an
increase in the number of projects under development. |
|
|
|
Facilities and information technology expenses allocated to
research and development increased $1,091. The increase in the
allocation was driven by increases in rent expense, compensation
expense, outside services expense, and telephone and other
communications charges. |
|
|
|
Depreciation and amortization increased $697 due to increased
licensed technology and software asset purchases. |
|
|
|
Stock-based compensation increased $354 due to the assumption of
outstanding Equator stock options. |
Research and development expense, inclusive of stock-based compensation expense, increased $12,836,
or 53%, to $37,170 for the nine months ended September 30, 2005 from $24,334 for the nine months
ended September 30, 2004 due to the following offsetting factors:
|
|
Compensation expense increased $4,969 due to the headcount increases described above. |
|
|
|
Non-recurring engineering and outside services expenses increased $2,219. $954 of this increase is attributable to the
addition of Equator expenses. The remaining increase is attributable to an increase in the number of projects under
development. |
|
|
|
Facilities and information technology expenses allocated to research and development increased $2,312. |
|
|
|
Depreciation and amortization increased $3,470 due to increased licensed technology and software asset purchases. |
|
|
|
Stock-based compensation increased $361 due to the assumption of outstanding Equator stock options. |
|
|
|
Expensed software and equipment decreased $728. |
We expect our research and development expenses to continue to increase in future periods as a
result of our ongoing investment in new product development programs.
24
Selling, general and administrative
Selling, general and administrative expense includes compensation and related costs for personnel,
travel, outside services, sales commissions and other overhead incurred in our sales, marketing,
customer support, management, legal and other professional and administrative support functions.
Selling, general and administrative expense, inclusive of stock-based compensation expense,
increased $2,487, or 42%, to $8,368 for the three months ended September 30, 2005 from $5,881 for
the three months ended September 30, 2004 due to the following offsetting factors:
|
|
Compensation expense increased $1,291. This increase is
attributable to an increase in selling, general and administrative
headcount of 65 from 139 at September 30, 2004 to 204 at September
30, 2005. 15 of the headcount increase is attributable to our
acquisition of Equator. |
|
|
|
Commissions expense increased $473 due to increased sales through
our manufacturers representatives. |
|
|
|
Facilities and information technology expenses allocated to
selling, general and administrative increased $416. The increase
in the allocation was driven by increases in rent expense,
compensation expense, outside services expense, and telephone and
other communications charges. |
|
|
|
Travel and entertainment and trade show expenses increased $293. |
|
|
|
Stock-based compensation expense increased $149 due to the
assumption of outstanding Equator stock options. |
Selling, general and administrative expense, inclusive of stock-based compensation expense,
increased $4,887, or 28%, to $22,400 for the nine months ended September 30, 2005 from $17,513 for
the nine months ended September 30, 2004 due to the following offsetting factors:
|
|
Compensation expense increased $2,868 due to the headcount increases described above. |
|
|
|
Facilities and information technology expenses allocated to selling, general and administrative increased $1,157. |
|
|
|
Commissions expense increased $728 due to increased sales through our manufacturers representatives. |
|
|
|
Travel and entertainment and trade show expenses increased $583. |
|
|
|
Stock-based compensation increased $111 due to the assumption of outstanding Equator stock options. |
|
|
|
Insurance expense decreased $284 due to lower directors and officers insurance premiums. |
|
|
|
Recruiting expense decreased $91. |
|
|
|
Telephone and other communications charges decreased $90. |
We expect our selling, general and administrative expenses to increase in future periods. The
increases will result from higher sales-related and overhead costs.
25
Stock-based compensation and amortization of purchased intangible assets
Stock-based compensation and amortization of purchased intangible assets is comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Stock-based compensation |
|
$ |
590 |
|
|
$ |
87 |
|
|
$ |
814 |
|
|
$ |
342 |
|
Amortization of acquired assembled workforce |
|
|
119 |
|
|
|
121 |
|
|
|
362 |
|
|
|
364 |
|
Amortization of acquired customer relationships |
|
|
283 |
|
|
|
|
|
|
|
330 |
|
|
|
|
|
Amortization of acquired trademark |
|
|
50 |
|
|
|
|
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,042 |
|
|
$ |
208 |
|
|
$ |
1,564 |
|
|
$ |
706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation and amortization of purchased intangible assets increased $834, or 401%,
and $858, or 122%, for the three and nine months ended September 30, 2005 from the comparable
periods in 2004, respectively. These increases are due to our acquisition of Equator, which closed
June 14, 2005, offset by the diminishing amortization of purchased intangible assets from a
previous asset purchase. As a result of the acquisition of Equator, we recorded, among other
identifiable intangible assets, acquired customer relationships of $3,400, deferred stock-based
compensation of $2,219, and acquired trademark of $200.
Interest income, net
Interest income, net includes interest income earned on cash equivalents and short and long-term
marketable securities, interest expense related to our 1.75% convertible subordinated debentures,
realized loss on the sale of marketable securities and amortization of our debt issuance costs and
is comprised of the following for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Interest income |
|
$ |
1,031 |
|
|
$ |
1,474 |
|
|
$ |
4,439 |
|
|
$ |
2,238 |
|
Interest expense |
|
|
(657 |
) |
|
|
(657 |
) |
|
|
(1,974 |
) |
|
|
(952 |
) |
Realized loss on sale of marketable securities |
|
|
|
|
|
|
|
|
|
|
(779 |
) |
|
|
|
|
Amortization of debt issuance costs |
|
|
(177 |
) |
|
|
(179 |
) |
|
|
(532 |
) |
|
|
(294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
197 |
|
|
$ |
638 |
|
|
$ |
1,154 |
|
|
$ |
992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income decreased $443, or 30%, to $1,031 for the three months ended September 30, 2005
from $1,474 for the three months ended September 30, 2004, due to the acquisition of Equator in
June 2005 which lowered our combined cash and cash equivalents and short-term and long-term
marketable securities balances. Interest income increased $2,201, or 98%, to $4,439 for the nine
months ended September 30, 2005 from $2,238 for the nine months ended September 30, 2004, due to
the investment of the proceeds from the issuance of the debentures which were issued in May and
June of 2004.
Interest expense increased $1,022, or 107%, for the nine months ended September 30, 2005 compared
to the comparable period of 2004. Our 1.75% convertible debentures were issued in May and June of
2004 and were therefore not outstanding for the entire nine month period ended September 30, 2004.
During the second quarter of 2005, we realized a loss on the sale of marketable securities of $779
as a result of the sale of marketable securities to fund the acquisition of Equator.
Debt issuance costs related to the convertible debentures have been capitalized and are being
amortized over seven years.
26
Provision for income taxes
We have recorded a recovery of income taxes of $4,716 and $4,703 for the three and nine months
ended September 30, 2005, respectively. The provision for income taxes was $2,373 and $9,149 for
the three and nine months ended September 30, 2004, respectively. The decrease in the provision
was primarily attributable to our decreased income before taxes and the generation of various
credits offset by the recognition of valuation allowance and other permanent items. The effective
tax rate differs from the federal statutory rate primarily due to the following: the utilization of
federal, state and foreign tax credits, non-cash and other permanent expense items treated
differently for book and tax purposes, the accrual of contingent amounts related to potential
permanent establishment exposure and the establishment of valuation allowance against credits
generated in state and foreign jurisdictions.
Liquidity and Capital Resources
Cash and cash equivalents and short and long-term marketable securities
As of September 30, 2005 we had cash and cash equivalents of $54,054, short and long-term
marketable securities of $93,322 and working capital of $166,012. Cash used in operating
activities during the nine months ended September 30, 2005 was $5,057 compared to cash provided by
operating activities of $17,092 during the nine months ended September 30, 2004. The decrease in
cash provided by operating activities is primarily attributable to the net loss of $6,696 for the nine months ended September 30, 2005 compared to the net income of $17,761 for the nine
months ended September 30, 2004.
Cash provided by investing activities during the nine months ended September 30, 2005 was $24,574.
This compares to $140,197 used in investing activities during the nine months ended September 30,
2004. Cash provided by investing activities during the nine months ended September 30, 2005 was
primarily generated from sales and maturities of marketable securities offset by the
acquisition of Equator, purchases of marketable securities, purchases of property and equipment and
other assets, and payments on accrued balances related to asset acquisitions. Cash used in
investing activities during the nine months ended September 30,
2004 was primarily attributable to purchases
of marketable securities, purchases of property and equipment and other assets, and payments on
accrued balances related to asset acquisitions offset by proceeds from sales and maturities of
marketable securities.
Cash provided by financing activities was $1,952 for the nine months ended September 30, 2005.
This compares to $150,161 provided by financing activities during the nine months ended September
30, 2004. Cash provided by financing activities for the nine months ended September 30, 2005 was
primarily generated by proceeds from the issuance of common stock, while cash provided by financing
activities for the nine months ended September 30, 2004 was primarily generated from the issuance
of the convertible subordinated debentures and issuances of common stock.
We anticipate that our existing cash and investment balances, along with cash expected to be
generated from operations will be adequate to fund our operating and investing needs for the next
twelve months and the foreseeable future. From time to time, we may evaluate acquisitions of
businesses, products or technologies that complement our business. Any such transactions, if
consummated, may consume a material portion of our working capital or require the issuance of
equity securities that may result in dilution to existing shareholders.
Accounts receivable, net
Accounts receivable, net increased to $27,420 at September 30, 2005 from $14,605 at December 31,
2004. The increase is attributable to the acquisition of Equator which contributed $6,458 to
consolidated accounts receivable as of September 30, 2005. The increase is also attributable to
higher sales during the last month of the quarter ended September 30, 2005 compared to the quarter
ended December 31, 2004. Average days sales outstanding was 53 at September 30, 2005 compared to 34 days at December 31,
2004.
27
Inventories, net
Inventories, net increased to $27,809 at September 30, 2005 from $18,575 at December 31, 2004. The
increase is primarily attributable to the acquisition of Equator. Equators inventory balance was
$7,000 as of September 30, 2005. Inventory turnover on an annualized basis was approximately four
at September 30, 2005, which represents approximately 13 weeks of inventory.
Contractual Payment Obligations
A summary of our contractual payment obligations as of September 30, 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period |
|
|
|
|
|
|
|
|
|
|
2006 and |
|
2008 and |
|
2010 and |
Contractual Obligation |
|
Total |
|
2005 |
|
2007 |
|
2009 |
|
beyond |
Long-term debt |
|
$ |
150,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
150,000 |
|
Interest on long-term debt |
|
|
16,721 |
|
|
|
2,625 |
|
|
|
5,250 |
|
|
|
5,250 |
|
|
|
3,596 |
|
Estimated Q4
2005 non-cancelable purchase commitments to contract manufacturers |
|
|
23,948 |
|
|
|
23,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
12,785 |
|
|
|
4,089 |
|
|
|
6,060 |
|
|
|
2,271 |
|
|
|
365 |
|
The lease payments above are net of sublease rentals of $95 and $40 for the years ending December
31, 2005 and 2006, respectively.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a
material current or future effect on our financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. (SFAS) 154, Accounting Changes and Error Corrections a replacement of APB Opinion
No. 20 and FASB Statement No. 3. SFAS 154 replaces Accounting Principles Board (APB) Opinion
No. 20, Accounting Changes, and SFAS 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for, and reporting of, a change in
accounting principle. This statement carries forward without change the guidance contained in
Opinion 20 for reporting the correction of an error in previously issued financial statements and a
change in accounting estimate. SFAS 154 is effective for accounting changes and corrections of
errors in fiscal years beginning after December 31, 2005. Early adoption is permitted for
accounting changes and corrections of errors made in fiscal years beginning after the date SFAS 154
is issued. We do not expect that the adoption of SFAS 154 will have a material impact on our
consolidated financial statements.
In April 2005, the Securities and Exchange Commission issued release number 33-8568, Amendment to
Rule 4-01(a) of Regulation S-X Regarding the Compliance Date for Statement of Financial Accounting
Standards No. 123 (Revised 2004), Share Based Payment. This release delays the date for compliance
with SFAS 123 (Revised 2004), Share Based Payment from the first interim or annual reporting period
beginning after June 15, 2005 to the registrants first fiscal year beginning on or after June 15,
2005. SFAS 123R requires public entities to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value of the award, and no
longer allows companies to apply the intrinsic value based method of accounting for stock
compensation described in APB Opinion No. 25, Accounting for Stock Issued to Employees. While we
are still in the process of determining how
we will adopt Statement 123R and what the impact will be on our financial statements, we do expect
it to have an adverse effect on our consolidated statements of operations and earnings per share.
28
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 face considerable business and financial risks related to our acquisition of Equator
Technologies, Inc.
In June 2005, we completed the acquisition of Equator Technologies, Inc. (Equator), a privately
held company, for an aggregate purchase price of $118,091. The acquisition of Equator required a
substantial expenditure and involves substantial risks on our part. Equators current product
offerings and technological developments relate to internet protocol television (IPTV) set top
boxes, digital media appliances, videoconferencing devices and security devices. These are
emerging technologies and the markets they serve are as yet developing and largely untested, and we
do not have direct experience developing and selling products into these markets. In addition, in
making the acquisition of Equator we have made certain assumptions and projections with respect to
the following: Equators revenue for future quarters; our expectations regarding the growth of the
markets Equator serves; the ability of Equator to introduce new products and software and the risk
that customers will not accept those new products and software; and the synergies we believe we can
realize from the acquisition. We cannot be sure that such assumptions are correct. For these
reasons we cannot provide assurance that the acquisition of Equator will produce the revenues,
earnings or business synergies that we anticipate, or that it will perform as expected.
We may be unable to successfully integrate Equator Technologies, Inc., and any future acquisition
or equity investment we make could disrupt our business and severely harm our financial condition.
We may not be able to successfully integrate businesses, products, technologies or personnel of
Equator or of any other entity that we might acquire in the future and any failure to do so could
disrupt our business and seriously harm our financial condition. In addition, if we acquire
companies with weak internal controls, it will take time to get the acquired company up to the same
level of operating effectiveness as Pixelworks and to implement adequate internal control,
management, financial and operating reporting systems. Our inability to address these risks could
negatively affect our operating results.
To date, we have acquired Panstera, Inc. in January 2001, nDSP in January 2002, Jaldi Semiconductor
in September 2002 and Equator Technologies, Inc. in June 2005. In March 2003, we announced the
execution of a definitive merger agreement with Genesis Microchip, Inc.; however, the merger was
terminated in August of 2003, and we incurred $8,949 of expenses related to the transaction. In the
third quarter of 2003, we made an investment of $10,000 in Semiconductor Manufacturing
International Corporation (SMIC). We intend to continue to consider investments in or acquisitions
of complementary businesses, products or technologies.
The acquisitions of Panstera, nDSP and Jaldi contained a very high level of risk primarily because
the investments were made based on in-process technological development that may not have been
completed, or if completed, may not have become commercially viable.
These and any future acquisitions and investments could result in:
|
|
issuance of stock that dilutes current shareholders percentage ownership; |
|
|
|
incurrence of debt; |
29
|
|
assumption of liabilities; |
|
|
|
amortization expenses related to other intangible assets; |
|
|
|
impairment of goodwill; |
|
|
|
large and immediate write-offs; or |
|
|
|
decrease in cash that could otherwise serve as working capital. |
Our operation of any acquired business will also involve numerous risks, including, but not limited to:
|
|
problems combining the purchased operations, technologies or products; |
|
|
|
unanticipated costs; |
|
|
|
diversion of managements 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. |
The year ended December 31, 2004 was our first year of annual profitability since inception and we
may be unable to achieve profitability in future periods.
While we had net income of $21,781 for the year ended December 31, 2004, we incurred a net loss of
$6,696 in the nine months ended September 30, 2005 and our accumulated deficit is $66,284 through
September 30, 2005. The year ended December 31, 2004 was our first year of annual profitability
since inception and we do not expect to be profitable in the year ending December 31, 2005. In the
future we expect our research and development and selling, general and administrative expenses to
increase. Given expected increases in operating expenses, we must increase revenues and gross
profit to become profitable again. We cannot be certain that we will achieve profitability in the
future or, if we do, that we can sustain or increase profitability on a quarterly or annual basis.
This may in turn cause the price of our common stock to decline. In addition, if we are not
profitable in the future we may be unable to continue our operations.
Fluctuations in our quarterly operating results make it difficult to predict our future performance
and may result in volatility in the market price of our common stock.
Our quarterly operating results have varied from quarter to quarter and are likely to vary in the
future based on a number of factors related to our industry and the markets for our products. Some
of these factors are not in our control and any of them may cause the price of our common stock to
fluctuate. These factors include:
|
|
our success in integrating the operations of our recently acquired subsidiary, Equator Technologies, Inc.; |
|
|
|
demand for multimedia projectors, advanced televisions, LCD monitors, Internet protocol television (IPTV) set top
boxes, digital media appliances, videoconferencing devices, and other digital video display devices; |
|
|
|
demand for our products and the timing of orders for our products; |
30
|
|
the deferral of customer orders in anticipation of new products or product enhancements from us or our competitors or
due to a reduction in our end customers demand; |
|
|
|
the loss of one or more of our key distributors or customers or a reduction, delay or cancellation of orders from one
or more of these parties; |
|
|
|
changes in the available production capacity at the semiconductor fabrication foundries that manufacture our products
and changes in the costs of manufacturing; |
|
|
|
our ability to provide adequate supplies of our products to customers and avoid excess inventory; |
|
|
|
the announcement or introduction of products and technologies by our competitors; |
|
|
|
changes in product mix, product costs or pricing, or distribution channels; and |
|
|
|
general economic conditions and economic conditions specific to the advanced display and semiconductor markets. |
These factors are difficult or impossible to forecast, and these or other factors could seriously
harm our business. We anticipate the rate of new orders may vary significantly from quarter to
quarter.
Our operating expenses and inventory levels are based on our expectations of future revenues and
our operating expenses are relatively fixed in the short term. Consequently, if anticipated sales
and shipments in any quarter do not occur when expected, operating expenses and inventory levels
could be disproportionately high, and our operating results for that quarter and, potentially,
future quarters may be negatively impacted. Any shortfall in our revenues would have a direct
impact on our business. In addition, fluctuations in our quarterly results could adversely affect
the price of our common stock in a manner unrelated to our long-term operating performance. Because
our operating results are volatile and difficult to predict, you should not rely on the results of
one quarter as an indication of our future performance. It is possible that in some future quarter
our operating results will fall below the expectations of securities analysts and investors. In
this event, the price of our common stock may decline significantly.
Our products are characterized by average selling prices that decline over relatively short time
periods, which will negatively affect financial results unless we are able to reduce our product
costs or introduce new products with higher average selling prices.
Average selling prices for our products decline over relatively short time periods while many of
our product costs are fixed. When our average selling prices decline, our gross profits decline
unless we are able to sell more units or reduce the cost to manufacture our products. Our operating
results are negatively affected when revenue or gross profit margins decline. We have experienced
these results and expect that we will continue to experience them in the future, although we cannot
predict when they may occur or how severe they will be.
If we do not achieve design wins in the future, or design wins that we do achieve are not commercially successful, our ability to have a sustainable business would be seriously limited.
Our future success will depend on developers of advanced display products designing our products
into their systems. To achieve design wins we must define and deliver cost-effective, innovative
and integrated semiconductors. Once a suppliers 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 developers
products. Developers can choose at any time to discontinue using our products in their designs or
product development efforts. Even if our products are chosen to be
incorporated into a developers products, we may not realize sufficient revenue from sales of that product to even offset the expenses associated with achieving the design win if that developers products are not commercially successful or if the developer chooses to qualify a second source for its products. For example, we have had design wins with leading original design manufacturers in Taiwan
who have not been successful in getting design wins from leading television companies in Japan. We have had design wins with customers who cancelled their
products well before the products natural life cycle. We have had design wins at leading companies who have lost market share or who have not been able to gain
market share with products that utilize our products. And, we have also had design wins with customers whose product sales were much less than expected due to
economic weakness in the particular region in which those products were sold.
Our highly integrated products and high-speed mixed signal products are difficult to manufacture
without defects and the existence of defects could result in an increase in our costs and delays in
the availability of our products.
The manufacture of semiconductors is a complex process and it is often difficult for semiconductor
foundries to produce semiconductors free of defects. Because many of our products are more highly
integrated than other semiconductors and incorporate mixed analog and digital signal processing and
embedded memory technology, they are even more difficult to produce without defects.
The ability to manufacture products of acceptable quality depends on both product design and
manufacturing process technology. Since defective products can be caused by either design or
manufacturing difficulties, identifying quality problems can occur only by analyzing and testing
our
31
semiconductors in a system after they have been manufactured. The difficulty in identifying defects
is compounded because the process technology is unique to each of the multiple semiconductor
foundries we contract with to manufacture our products. Failure to achieve defect-free products due
to their increasing complexity may result in an increase in our cost and delays in the availability
of our products. For example, we have experienced field failures of our semiconductors in certain
customer system applications that required us to institute additional semiconductor level testing.
As a result of these field failures we incurred costs due to customers returning potentially
affected products. Additionally, customers have experienced delays in receiving product shipments
from us that resulted in the loss of revenue and profits. Shipment of defective products may also
harm our reputation with customers.
Because of the complex nature of our semiconductor designs and of the associated manufacturing
process and the rapid evolution of our customers product designs, we may not be able to develop
new products or product enhancements in a timely manner, which could decrease customer demand for
our products and reduce our revenues.
The development of our semiconductors, some of which incorporate mixed analog and digital signal
processing, is highly complex. These complexities require that we employ advanced designs and
manufacturing processes that are unproven. We have experienced increased development time and
delays in introducing new products that resulted in significantly less revenue than originally
expected for those products. We will not always succeed in developing new products or product
enhancements nor will we always do so in a timely manner. Acquisitions have significantly added to
the complexity of our product development efforts. We must now coordinate very complex product
development programs between multiple geographically dispersed locations.
Many of our designs involve the development of new high-speed analog circuits that are difficult to
simulate and that require physical prototypes not required by the primarily digital circuits we
currently design. The result could be longer and less predictable development cycles.
Successful development and timely introduction of new or enhanced products depends on a number of
other factors, including:
|
|
accurate prediction of customer requirements and evolving industry standards, including video decoding, digital
interface and content piracy protection standards; |
|
|
|
development of advanced display technologies and capabilities; |
|
|
|
timely completion and introduction of new product designs; |
32
|
|
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. 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 48% of our total
revenue for the nine months ended September 30, 2005, and 69%, 69% and 68% of total revenue for the
years ending December 31, 2004, 2003 and 2002, respectively. During the nine months ended
September 30, 2005, sales to Tokyo Electron Device Limited, or TED, our Japanese distributor,
represented 23% of our total revenue. Sales to TED represented 31%, 39% and 45%, respectively, of
our total revenue for the years ended December 31, 2004, 2003 and 2002. Sales to our top five end
customers accounted for approximately 34% of our total revenue for the nine months ended September
30, 2005, and 33%, 35% and 41% of our total revenue for the years ended December 31, 2004, 2003 and
2002, respectively. As a result of this distributor and end customer concentration, any one of the
following factors could significantly impact our revenues:
|
|
a significant reduction, delay or cancellation of orders from one
or more of our key distributors, branded manufacturers or
integrators; or |
|
|
|
a decision by one or more significant customers to select products
manufactured by a competitor, or its own internally developed
semiconductor, for inclusion in future product generations. |
The display manufacturing market is highly concentrated among relatively few large manufacturers.
We expect our operating results to continue to depend on revenues from a relatively small number of
customers.
The concentration of our accounts receivable with a limited number of customers exposes us to
increased credit risk and could harm our operating results and cash flows.
At September 30, 2005 we had one customer that represented more than 10% of our accounts
receivable. TED represented 15% and 26% of total accounts receivable at September 30, 2005 and
December 31, 2004, respectively. The failure to pay this balance by this or any other customer
would result in an expense that would increase our operating expenses and would reduce our cash
flows.
33
International sales account for almost all of our revenue, and if we do not successfully address
the risks associated with our international operations, our revenue could decrease.
Sales outside the U.S. accounted for approximately 96% and 99% of total revenue for the nine months
ended September 30, 2005 and 2004, respectively. We anticipate that sales outside the U.S. will
continue to account for a substantial portion of our revenue in future periods. In addition,
customers who incorporate our products into their products sell a substantial portion outside of
the U.S., thereby exposing us indirectly to further international risks. In addition, all of our
products are manufactured outside of the U.S. We are, therefore, subject to many international
risks, including, but not limited to:
|
|
increased difficulties in managing international distributors and manufacturers of our products and components due to
varying time zones, languages and business customs; |
|
|
|
foreign currency exchange fluctuations such as the devaluation in the currencies of Japan, Peoples Republic of China
(PRC), Taiwan and Korea that could result 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 the PRC, 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 about our industry and
products; |
|
|
|
changes in the regulatory environment in the PRC, Japan, Korea and Taiwan that may significantly impact purchases of
our products by our customers; |
|
|
|
outbreaks of SARS or other pandemics in the PRC or other parts of Asia; and |
|
|
|
difficulties in collecting accounts receivable. |
Our growing presence and investment within the Peoples Republic of China subjects us to risks of
economic and political instability in the area, which could adversely impact our results of
operations.
A substantial and potentially increasing portion of our products are manufactured by foundries
located in the PRC and a large number of our customers are geographically concentrated in the PRC.
In addition, approximately 40% of our employees are located in this area and we made an investment
of $10,000 in SMIC, located in Shanghai, China in the third quarter of 2003. Disruptions from
natural disasters, health epidemics (including new outbreaks of SARS or bird flu) and political,
social and economic instability may affect the region, and would have a negative impact on our
results of operations. In addition, the economy of the PRC differs from the economies of many
countries in respects such as structure, government involvement, level of development, growth rate,
capital reinvestment, allocation of resources, self-sufficiency, rate of inflation and balance of
payments position, among others. In the past, the economy of the PRC has been primarily a planned
economy subject to state plans. Since the entry of the PRC into the World Trade Organization in
2002, the PRC government has been reforming its economic and political systems. These reforms have
resulted in significant economic growth and social change. We cannot assure,
34
however, that the PRCs policies for economic reforms will be consistent or effective. Our results
of operations and financial position may be harmed by changes in the PRCs political, economic or
social conditions.
Our dependence on selling through distributors and integrators increases the complexity of managing
our supply chain and may result in excess inventory or inventory shortages.
Selling through distributors and integrators reduces our ability to forecast sales and increases
the complexity of our business. Since our distributors act as intermediaries between us and the
companies using our products, we must rely on our distributors to accurately report inventory
levels and production forecasts. Some of our products are sold to integrators, who then integrate
our semiconductors into a system that is then sold to an original equipment manufacturer or OEM.
This adds another layer between us and the ultimate source of demand for our products, the
consumer. These arrangements require us to manage a more complex supply chain and monitor the
financial condition and creditworthiness of our distributors, integrators and customers. Our
failure to manage one or more of these challenges could result in excess inventory or shortages
that could seriously impact our operating revenue or limit the ability of companies using our
semiconductors to deliver their products.
Dependence on a limited number of sole-source, third party manufacturers for our products exposes
us to shortages based on capacity allocation or low manufacturing yield, errors in manufacturing,
price increases with little notice, volatile inventory levels and delays in product delivery, which
could result in delays in satisfying customer demand, increased costs and loss of revenues.
We do not own or operate a semiconductor fabrication facility and we do not have the resources to
manufacture our products internally. We rely on third-party foundries for wafer fabrication and
other contract manufacturers for assembly and testing of our products. Our requirements represent
only a small portion of the total production capacity of our contract manufacturers. Our
third-party manufacturers have in the past re-allocated capacity to other customers even during
periods of high demand for our products. We expect that this may occur again in the future. We have
limited control over delivery schedules, quality assurance, manufacturing yields, potential errors
in manufacturing and production costs. We do not have long-term supply contracts with our
third-party manufacturers so they are not obligated to supply us with products for any specific
period of time, in any specific quantity or at any specific price, except as may be provided in a
particular purchase order. From time to time our third-party manufacturers increase prices charged
to manufacture our products with little notice. This requires us to either increase the price we
charge for our products or suffer a decrease in our gross margins. We try not to maintain
substantial inventories of products, but need to order products 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 cancelled, expected revenues would not be realized. In addition, if the
price charged by our third-party manufacturers increases we will be required to increase our
prices, which could harm our competitiveness.
The concentration of our manufacturers and customers in the same geographic region increases our
risk that a natural disaster, labor strike or political unrest could disrupt our operations.
Most of our current manufacturers and customers are located in the PRC, Japan, Korea and Taiwan.
The risk of earthquakes in the Pacific Rim region is significant due to the proximity of major
earthquake fault lines in the area. Common consequences of earthquakes include power outages and
disruption and/or impairment production capacity. Earthquakes, fire, flooding, power outages and
other natural disasters in the Pacific Rim region, or political unrest, labor strikes or work
stoppages in countries where our manufacturers and customers are located likely would result in the
disruption of our manufacturers and customers operations. Any disruption resulting from
extraordinary events could cause significant delays in shipments of our
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products until we are able to shift our manufacturing from the affected contractor to another
third-party vendor. There can be no assurance that alternative capacity could be obtained on
favorable terms, if at all.
We use a COT, or customer owned tooling, process for manufacturing some of our products which
exposes us to the possibility of poor yields and unacceptably high product costs.
We are building many of our products on a customer owned tooling basis, also known in the
semiconductor industry as COT, where we directly contract the manufacture of wafers and assume the
responsibility for the assembly and testing of our products. As a result, we are subject to
increased risks arising from wafer manufacturing yields and risks associated with coordination of
the manufacturing, assembly and testing process. Poor product yields would result in higher product
costs, which could make our products uncompetitive with products offered by our competitors if we
chose to increase our prices, or could result in low gross profit margins if we did not increase
our prices.
We are dependent on our foundries to implement complex semiconductor technologies, which could
adversely affect our operations if those technologies are 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.
Manufacturers of our semiconductor products periodically discontinue manufacturing processes, which
could make our products unavailable from our current suppliers.
Semiconductor manufacturing technologies change rapidly and manufacturers typically discontinue
older manufacturing processes in favor of newer ones. Once a manufacturer makes the decision to
retire a manufacturing process, notice is generally given to its customers. Customers will then
either retire the affected part or develop a new version of the part that can be manufactured on
the newer process. In the event that a manufacturing process is discontinued, our products could
become unavailable from our current suppliers. Additionally, migrating to a new, more advanced
process requires significant expenditures for research and development. A significant portion of
our products use embedded DRAM technology and the required manufacturing process for this
technology may only be available for the next two years. We also utilize 0.18um, 0.15um and 0.13um
standard logic processes, which may only be available for the next five to seven years. We have
commitments from our suppliers to notify us in the event of a discontinuance of a manufacturing
process in order to assist us with product transitions.
If we have to qualify a new contract manufacturer or foundry for any of our products, we may
experience delays that result in lost revenues and damaged customer relationships.
None of our products are fabricated by more than one supplier. Additionally, our products require
manufacturing with state-of-the-art fabrication equipment and techniques. Because the lead-time
needed to establish a relationship with a new contract manufacturer is at least nine months, and
the estimated time for us to adapt a products design to a particular contract manufacturers
process is at least four months, there is no readily available alternative source of supply for any
specific product. This could cause significant delays in shipping products, which may result in
lost revenues and damaged customer relationships.
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Our future success depends upon the continued services of key personnel, many of whom would be
difficult to replace and the loss of one or more of these employees could seriously harm our
business by delaying product development.
Our future success depends upon the continued services of our executive officers, key hardware and
software engineers, and sales, marketing and support personnel, many of whom would be difficult to
replace. The loss of one or more of these employees, particularly Allen Alley, our President and
Chief Executive Officer, could seriously harm our business. In addition, because of the highly
technical nature of our business, the loss of key engineering personnel could delay product
introductions and significantly impair our ability to successfully create future products. We
believe our success depends, in large part, upon our ability to identify, attract and retain
qualified hardware and software engineers, and sales, marketing, finance and managerial personnel.
Competition for talented personnel is intense and we may not be able to retain our key personnel or
identify, attract or retain other highly qualified personnel in the future. We have experienced,
and may continue to experience, difficulty in hiring and retaining employees with appropriate
qualifications. If we do not succeed in hiring and retaining employees with appropriate
qualifications, our product development efforts, revenues and business could be seriously harmed.
Because we do not have long-term commitments from our customers, and plan purchases based on
estimates of customer demand which may be inaccurate, we must contract for the manufacture of our
products based on those potentially inaccurate estimates.
Our sales are made on the basis of purchase orders rather than long-term purchase commitments. Our
customers may cancel or defer purchase orders at any time. This process requires us to make
multiple demand forecast assumptions, each of which may introduce error into our estimates. If our
customers or we overestimate demand, we may purchase components or have products manufactured that
we may not be able to use or sell. As a result, we would have excess inventory, which would
negatively affect our operating results. Conversely, if our customers or we underestimate demand or
if sufficient manufacturing capacity is unavailable, we would forego revenue opportunities, lose
market share and damage our customer relationships.
Development projects may cause us to incur substantial operating expenses without the guarantee of
any associated revenue or far in advance of revenue.
We have development projects that consume large amounts of engineering resources far in advance of
product revenue. Our work under these projects is technically challenging and places considerable
demands on our limited resources, particularly on our most senior engineering talent, and may not
result in revenue for twelve to eighteen months, if at all. In addition, allocating significant
resources to these projects may detract from or delay the completion of other important development
projects. Any of these development projects could be canceled at any time without notice. These
factors could have a material and adverse effect on our long-term business and results of
operations.
Because of our long product development process and sales cycle, we may incur substantial expenses
before we earn associated revenues and may not ultimately sell as many units of our products as we
forecasted.
We develop products based on anticipated market and customer requirements and incur substantial
product development expenditures, which can include the payment of large up-front, third-party
license fees and royalties, prior to generating associated revenues. Because the development of our
products incorporates not only our complex and evolving technology, but also our customers
specific requirements, a lengthy sales process is often required before potential customers begin
the technical evaluation of our products. Our customers typically perform numerous tests and
extensively evaluate our products before incorporating them into their systems. The time required
for testing, evaluation and design of our products into a customers equipment can take up to nine
months or more. It can take an additional nine months before a customer commences volume shipments
of systems that incorporate our products. Even when we achieve a design win, the customer may never
ship systems incorporating our products. We cannot assure you that the
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time required for the testing, evaluation and design of our products by our customers would not
exceed nine months. Because of this lengthy development cycle, we will experience delays between
the time we incur expenditures for research and development, sales and marketing, inventory levels
and the time we generate revenues, if any, from these expenditures. Additionally, if actual sales
volumes for a particular product are substantially less than originally forecasted, we may
experience large write-offs of capitalized license fees, product masks and prepaid royalties that
would negatively affect our operating results.
Shortages of other key components for our customers products could delay our ability to sell our
products.
Shortages of components and other materials that are critical to the design and manufacture of our
customers products could limit our sales. These components include liquid crystal display panels
and other display components, analog-to-digital converters, digital receivers and video decoders.
During 2000, some of our customers experienced delays in the availability of key components from
other suppliers, which, in turn, caused a delay in demand for the products that we supplied to our
customers.
Shortages of materials used in the manufacturing of our products may increase our costs or limit
our revenues and impair our ability to ship our products on time.
From time to time, shortages of materials that are used in our products may occur. In particular,
we may experience shortages of semiconductor wafers and packages. If material shortages occur, we
may incur additional costs or be unable to ship our products to our customers in a timely fashion,
both of which could harm our business and negatively impact our earnings.
Our products could become obsolete if necessary licenses of third-party technology are not
available to us or are only available on terms that are not commercially viable.
We license technology from third parties that is incorporated into our products or product
enhancements. Future products or product enhancements may require additional third-party licenses
that may not be available to us or on terms that are commercially reasonable. If we are unable to
obtain any third-party license required to develop new products and product enhancements, we may
have to obtain substitute technology of lower quality or performance standards or at greater cost,
either of which could seriously harm the competitiveness of our products.
We may not be able to respond to the rapid technological changes in the markets in which we
compete, or we may not be able to comply with industry standards in the future making our products
less desirable or obsolete.
The markets in which we compete or seek to compete are subject to rapid technological change,
frequent new product introductions, changing customer requirements for new products and features,
and evolving industry standards. The introduction of new technologies and the emergence of new
industry standards could render our products less desirable or obsolete, which could harm our
business. Examples of changing industry standards include the introduction of high-definition
television, or HDTV, new video decoding technology (such as H.264 or Windows Media 9), 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
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existing systems in order to be compatible with those new languages. Existing or new software
development tools could make our current products obsolete or hard to use. Software development
disruptions could slow our product development or cause us to lose customers and design wins.
Our integrated circuits and software could contain defects, which could reduce sales of those
products or result in claims against us.
Despite testing by both our customers and us, errors or performance problems may be found in
existing or new semiconductors and software. This could result in a delay in the recognition or
loss of revenues, loss of market share or failure to achieve market acceptance. These defects may
cause us to incur significant warranty, support and repair costs. 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.
Others may bring infringement actions against us that could be time-consuming and expensive to
defend.
We may become subject to claims involving patents or other intellectual property rights. For
example, in early 2000, we were notified by InFocus Corporation (InFocus) that we were infringing
on patents held by InFocus. In February 2000, we entered into a license agreement with InFocus
granting us the right to use the technology covered by those InFocus patents. As a result, we
recorded a one-time charge of $4,078 for patent settlement expense in the first quarter of 2000.
Intellectual property claims could subject us to significant liability for damages and invalidate
our proprietary rights. In addition, intellectual property claims may be brought against customers
that incorporate our products in the design of their own products. These claims, regardless of
their success or merit and regardless of whether we are named as defendants in a lawsuit, would
likely be time-consuming and expensive to resolve and would divert the time and attention of
management and technical personnel. Any future intellectual property litigation or claims also
could force us to do one or more of the following:
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stop selling products using technology that contains the allegedly infringing intellectual property; |
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attempt to obtain a license to the relevant intellectual property, which license may not be available on reasonable
terms or at all; |
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attempt to redesign those products that contain the allegedly infringing intellectual property; and |
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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 products.
Our ability to compete effectively with other companies will depend, in part, on our ability to
maintain the proprietary nature of our technology, including our semiconductor designs and
software. We rely on a combination of patent, copyright, trademark and trade secret laws, as well
as nondisclosure agreements and other methods, to protect our proprietary technologies. We hold 36
patents and have 77 patent applications
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pending for protection of our significant technologies. We cannot assure you that the degree of
protection offered by patents or trade secret laws will be sufficient. Furthermore, we cannot
assure you that any patents will be issued as a result of any pending applications, or that, if
issued, any claims allowed will be sufficiently broad to protect our technology. In addition, it is
possible that existing or future patents may be challenged, invalidated or circumvented.
Competitors in both the U.S. and foreign countries, many of whom have substantially greater
resources, may apply for and obtain patents that will prevent, limit or interfere with our ability
to make and sell our products, or develop similar technology independently or design around our
patents. Effective copyright, trademark and trade secret protection may be unavailable or limited
in foreign countries. In addition, we provide the computer programming code for our software to
selected customers in connection with their product development efforts, thereby increasing the
risk that customers will misappropriate our proprietary software.
Goodwill represents a significant portion of our total assets.
As of September 30, 2005, goodwill amounted to $134,022 or approximately 31% of our total assets.
We are required to review goodwill for possible impairment on an annual basis or when events and
circumstances arise which indicate a possible impairment. The review of goodwill for impairment may
result in large write-offs of goodwill, which could have a material adverse effect on our results
of operations.
We have incurred substantial indebtedness as a result of the sale of convertible debentures.
In the second quarter of 2004, we issued $150,000 of 1.75% convertible debentures due 2024 in a
private placement pursuant to Rule 144A and Regulation S under the Securities Act of 1933. As a
result of this indebtedness, our principal obligations increased substantially. These debt
obligations could materially and adversely affect our ability to obtain debt financing for working
capital, acquisitions or other purposes, limit our flexibility in planning for or reacting to
changes in our business, reduce funds available for use in our operations and could make us more
vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service
obligations will be dependent upon our future performance, which will be subject to financial,
business and other factors affecting our operations, many of which are beyond our control.
Failure to manage our expansion effectively could adversely affect our ability to increase our
business and our results of operations.
Our ability to successfully market and sell our products in a rapidly evolving market requires
effective planning and management processes. We continue to increase the scope of our operations
domestically and internationally and have increased our headcount from 349 employees at the end of
2004 to 515 at September 30, 2005, which includes 61 employees from our acquisition of Equator
Technologies, Inc. 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 and attract and retain qualified
personnel with relevant experience. We must also manage multiple relationships with customers,
business partners, contract manufacturers, suppliers and other third parties. Moreover, we could
spend substantial amounts of time and money in connection with our rapid growth and may have
unexpected costs. Our systems, procedures or controls may not be adequate to support our operations
and we may not be able to expand quickly enough to exploit potential market opportunities. While we
have not, to date, suffered any significant adverse consequences due to our growth, if we do not
continue to manage growth effectively our operating expenses could increase more rapidly than our
revenue, causing decreased profitability.
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Risks Related to Our Industry
Failure of consumer demand for advanced displays and other digital display technologies to increase
would impede our growth and adversely affect our business.
Our product development strategies anticipate that consumer demand for flat panel displays, digital
televisions, IPTV televisions and set top boxes and other emerging display technologies will
increase in the future. The success of our products is dependent on increased demand for these
display technologies. The potential size of the market for products incorporating these display
technologies and the timing of its development are uncertain and will depend upon a number of
factors, all of which are beyond our control. In order for the market for many of our products to
grow, advanced display products must be widely available and affordable to consumers. In the past,
the supply of advanced display products has been cyclical. We expect this pattern to continue.
Undercapacity in the advanced display market may limit our ability to increase our revenues because
our customers may limit their purchases of our products if they cannot obtain sufficient supplies
of LCD panels or other advanced display components. In addition, advanced display prices may remain
high because of limited supply, and consumer demand may not grow.
If products incorporating our semiconductors are not compatible with computer display protocols,
video standards and other devices, the market for our products will be reduced and our business
prospects could be significantly limited.
Our products are incorporated into our customers products, which have different parts and
specifications and utilize multiple protocols that allow them to be compatible with specific
computers, video standards and other devices. If our customers products are not compatible with
these protocols and standards, consumers will return these products, or consumers will not purchase
these products, and the markets for our customers products could be significantly reduced. As a
result, a portion of our market would be eliminated, and our business would be harmed.
Intense competition in our markets may reduce sales of our products, reduce our market share,
decrease our gross profit and result in large losses.
Rapid technological change, evolving industry standards, compressed product life cycles and
declining average selling prices are characteristics of our market and could have a material
adverse effect on our business, financial condition and results of operations. As the overall price
of advanced flat panel display screens continues to fall, we may be required to offer our products
to manufacturers at discounted prices due to increased price competition. At the same time, new,
alternative technologies and industry standards may emerge that directly compete with technologies
that we offer. We may be required to increase our investment in research and development at the
same time that product prices are falling. In addition, even after making this investment, we
cannot assure you that our technologies will be superior to those of our competitors or that our
products will achieve market acceptance, whether for performance or price reasons. Failure to
effectively respond to these trends could reduce the demand for our products.
We compete with specialized and diversified electronics and semiconductor companies that offer
advanced display, digital TV and IPTV semiconductor products. Some of these include Analog Devices, ATI, Broadcom, Genesis
Microchip, I-Chips, ITE, Macronix, Mediatek, Media Reality Technologies, Micronas, MStar
Semiconductor, Inc., Oplus, Realtek, Sigma Designs, Silicon Image, Silicon Optix,
STMicroelectronics, Techwell, Topro, Trident, Trumpion, Weltrend, Zoran and other companies.
Potential competitors may include diversified semiconductor manufacturers and the semiconductor
divisions or affiliates of some of our customers, including Intel, Koninlijke Philips Electronics,
LG Electronics, Matsushita Electric Industrial, Mitsubishi, National Semiconductor, NEC, nVidia,
Samsung Electronics, Sanyo Electric Company, Sharp Corporation, Sony Corporation, Texas Instruments
and Toshiba Corporation. In addition, start-up companies may seek to compete in our markets. Many
of our competitors have longer operating histories and greater resources to support development and
marketing efforts. Some of our competitors may operate their own fabrication facilities. These
competitors may be able to react more quickly and devote more resources to efforts that compete
directly with our own. In the future, our current or potential customers may also develop their own
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proprietary technologies and become our competitors. Our competitors may develop advanced
technologies enabling them to offer more cost-effective and higher quality semiconductors to our
customers than those offered by us. Increased competition could harm our business, financial
condition and results of operations by, for example, increasing pressure on our profit margin or
causing us to lose sales opportunities. We cannot assure you that we can compete successfully
against current or potential competitors.
The cyclical nature of the semiconductor industry may lead to significant variances in the demand
for our products and could harm our operations.
In the past, the semiconductor industry has been characterized by significant downturns and wide
fluctuations in supply and demand. Also, during this time, the industry has experienced significant
fluctuations in anticipation of changes in general economic conditions, including economic
conditions in Asia and North America. The cyclical nature of the semiconductor industry has led to
significant variances in product demand and production capacity. 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.
Provisions of our articles of incorporation and bylaws and provisions of Oregon law may have the
effect of delaying or preventing a merger or acquisition of us, making a merger or acquisition of
us less desirable to a potential acquirer or preventing a change in our management, even if the
shareholders consider the merger or acquisition favorable or if doing so would benefit our
shareholders. In addition, these provisions could limit the price that investors would be willing
to pay in the future for shares of our common stock. The following are examples of such provisions
in our articles of incorporation or bylaws:
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our board of directors is authorized, without prior shareholder approval, to create and issue preferred stock with
voting or other rights or preferences that could impede the success of any attempt to acquire us or change our control,
commonly referred to as blank check preferred stock; |
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members of our board of directors can only be removed for cause; |
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the board of directors may alter our bylaws without obtaining shareholder approval; and |
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shareholders are required to provide advance notice for nominations for election to the board of directors or for
proposing matters to be acted upon at a shareholder meeting. |
Our principal shareholders have significant voting power and may take actions that may make it more
difficult to sell our shares at a premium to take over candidates.
Our executive officers, directors and other principal shareholders, in the aggregate, beneficially
own 25,917,461 shares or approximately 54% of our outstanding common stock and exchangeable shares
as of October 31, 2005. 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.
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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:
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actual or anticipated fluctuations in our operating results; |
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changes in expectations as to our future financial performance; |
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changes in financial estimates of securities analysts; |
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announcements by us or our competitors of technological innovations, design wins, contracts, standards or acquisitions; |
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the operating and stock price performance of other comparable companies; |
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announcements of future expectations by our customers; |
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changes in market valuations of other technology companies; and |
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inconsistent trading volume levels of our common stock. |
In particular, the stock prices of technology companies similar to us have been highly volatile.
These fluctuations often have been unrelated or disproportionate to the operating performance of
those companies. Market fluctuations as well as general economic, political and market conditions
including recessions, interest rate changes or international currency fluctuations, may negatively
impact the market price of our common stock. Therefore, the price of our common stock may decline,
and the value of your investment may be reduced regardless of our performance.
We may be unable to meet our future capital requirements, which would limit our ability to grow.
We believe our current cash and marketable security balances will be sufficient to meet our capital
requirements for the next twelve months. However, we may need, or could elect to seek, additional
funding prior to that time. To the extent that currently available funds are insufficient to fund
our future activities, we may need to raise additional funds through public or private equity or
debt financing. Additional funds may not be available on terms favorable to us or our shareholders.
Further, if we issue equity securities, our shareholders may experience additional dilution or the
new equity securities may have rights, preferences or privileges senior to those of our common
stock. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our
products, take advantage of future opportunities or respond to competitive pressures or
unanticipated requirements.
We may be unable to meet changing laws, regulations and standards relating to corporate governance
and public disclosure.
We are spending an increasing amount of management time and external resources to comply with
changing laws, regulations and standards relating to corporate governance and public disclosure,
including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ Stock Market rules. In
particular, Section 404 of the Sarbanes-Oxley Act of 2002 requires managements annual review and
evaluation of our internal control systems, and attestations of the effectiveness of these systems
by our independent registered public accounting firm. The process of documenting and testing our
controls has required that we hire additional personnel and outside advisory services and has
resulted in additional accounting and legal expenses. While we invested significant time and money
in our effort to evaluate and test our internal control over financial reporting, a material
weakness was identified in our internal control over financial reporting in 2004. In addition,
there are inherent limitations to the effectiveness of any system of disclosure controls and
procedures, including cost limitations, the possibility of human
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error, judgments and assumptions regarding the likelihood of future events, and the circumvention
or overriding of the controls and procedures. Accordingly, even effective disclosure controls and
procedures can provide only reasonable assurance of achieving their control objectives.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our primary market risk exposure is the impact of interest rate fluctuations on interest income
earned on our investment portfolio. We mitigate risks associated with such fluctuations, as well as
the risk of loss of principal, by investing in high-credit quality securities and limiting
concentrations of issuers and maturity dates. Derivative financial instruments are not part of our
investment portfolio.
As of September 30, 2005, we had convertible subordinated debentures of $150,000 outstanding with a
fixed interest rate of 1.75%. Interest rate changes affect the fair value of the debentures, but
do not affect our earnings or cash flow.
All of our sales are denominated in U.S. dollars and as a result, we have relatively little
exposure to foreign currency exchange risk with respect to our sales. We have employees located in
offices in Canada, Japan, Taiwan, the Peoples Republic of China, and Korea, and as such, a portion
of our operating expenses are denominated in foreign currencies. Accordingly, our operating
results are affected by changes in the exchange rate between the U.S. dollar and those currencies.
Any future strengthening of those currencies against the U.S. dollar could negatively impact our
operating results by increasing our operating expenses as measured in U.S. dollars. While we
cannot reasonably estimate the effect that an immediate 10% change in foreign currency exchange
rates would have on our operating results or cash flows, we believe that the effect would not be
material. We do not currently hedge against foreign currency rate fluctuations.
Item 4. Controls and Procedures.
(a) |
|
Evaluation of Disclosure Controls and Procedures. |
|
|
|
Our management, with the participation of our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), carried out an evaluation of the effectiveness of the Companys
disclosure controls and procedures as of the end of the period covered by this report pursuant
to Securities Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon this evaluation, our CEO
and CFO concluded that our controls and procedures are effective in timely alerting them to
material information regarding the Company (including its consolidated subsidiaries) required to
be included in our periodic SEC filings. |
(b) |
|
Changes in Internal Controls. |
|
|
|
There has been no change in our internal control over financial reporting during the quarter
ended September 30, 2005 that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting. |
44
PART II OTHER INFORMATION
Item 6. Exhibits.
|
|
|
10.1
|
|
Equator Technologies, Inc. 1996 Stock Option Plan, as amended (incorporated by reference to
Exhibit 99.1 to the Companys Registration Statement on Form S-8 filed June 17, 2005). + |
|
|
|
10.2
|
|
Stock Option Agreement, dated April 18, 2002, between Equator Technologies, Inc. and
Christopher H. Basoglu (incorporated by reference to Exhibit 99.2 to the Companys
Registration Statement on Form S-8 filed June 17, 2005). + |
|
|
|
10.3
|
|
Stock Option Agreement, dated April 8, 2003, between Equator Technologies, Inc. and
Christopher H. Basoglu (incorporated by reference to Exhibit 99.3 to the Companys
Registration Statement on Form S-8 filed June 17, 2005). + |
|
|
|
10.4
|
|
Stock Option Agreement, dated November 11, 2003, between Equator Technologies, Inc. and
Christopher H. Basoglu (incorporated by reference to Exhibit 99.4 to the Companys
Registration Statement on Form S-8 filed June 17, 2005). + |
|
|
|
10.5
|
|
Stock Option Agreement, dated April 18, 2002, between Equator Technologies, Inc. and Richard
E. Christopher (incorporated by reference to Exhibit 99.5 to the Companys Registration
Statement on Form S-8 filed June 17, 2005). + |
|
|
|
10.6
|
|
Stock Option Agreement, dated April 8, 2003, between Equator Technologies, Inc. and Richard
E. Christopher (incorporated by reference to Exhibit 99.6 to the Companys Registration
Statement on Form S-8 filed June 17, 2005). + |
|
|
|
10.7
|
|
Stock Option Agreement, dated November 11, 2003, between Equator Technologies, Inc. and
Richard E. Christopher (incorporated by reference to Exhibit 99.7 to the Companys
Registration Statement on Form S-8 filed June 17, 2005). + |
|
|
|
10.8
|
|
Stock Option Agreement, dated September 15, 2004, between Equator Technologies, Inc. and
Richard E. Christopher (incorporated by reference to Exhibit 99.8 to the Companys
Registration Statement on Form S-8 filed June 17, 2005). + |
|
|
|
10.9
|
|
Stock Option Agreement, dated November 11, 2003, between Equator Technologies, Inc. and
Michael Myhre (incorporated by reference to Exhibit 99.9 to the Companys Registration
Statement on Form S-8 filed June 17, 2005). + |
|
|
|
10.10
|
|
Stock Option Agreement, dated July 18, 2002, between Equator Technologies, Inc. and Tedford
Niday (incorporated by reference to Exhibit 99.10 to the Companys Registration Statement on
Form S-8 filed June 17, 2005). + |
|
|
|
10.11
|
|
Stock Option Agreement, dated April 8, 2003, between Equator Technologies, Inc. and Tedford
Niday (incorporated by reference to Exhibit 99.11 to the Companys Registration Statement on
Form S-8 filed June 17, 2005). + |
|
|
|
10.12
|
|
Stock Option Agreement, dated November 11, 2003, between Equator Technologies, Inc. and
Tedford Niday (incorporated by reference to Exhibit 99.12 to the Companys Registration
Statement on Form S-8 filed June 17, 2005). + |
|
|
|
10.13
|
|
Stock Option Agreement, dated March 29, 2001, between Equator Technologies, Inc. and John
ODonnell (incorporated by reference to Exhibit 99.13 to the Companys Registration Statement
on Form S-8 filed June 17, 2005). + |
45
|
|
|
10.14
|
|
Stock Option Agreement, dated July 18, 2002, between Equator Technologies, Inc. and John
ODonnell (incorporated by reference to Exhibit 99.14 to the Companys Registration Statement
on Form S-8 filed June 17, 2005). + |
|
|
|
10.15
|
|
Stock Option Agreement, dated April 8, 2003, between Equator Technologies, Inc. and John
ODonnell (incorporated by reference to Exhibit 99.15 to the Companys Registration Statement
on Form S-8 filed June 17, 2005). + |
|
|
|
10.16
|
|
Stock Option Agreement, dated November 11, 2003, between Equator Technologies, Inc. and John
ODonnell (incorporated by reference to Exhibit 99.16 to the Companys Registration Statement
on Form S-8 filed June 17, 2005). + |
|
|
|
10.17
|
|
Pixelworks, Inc. 1997 Stock Incentive Plan, as amended (incorporated by reference to Exhibit
99.1 to the Companys Registration Statement on Form S-8 filed June 21, 2005). + |
|
|
|
10.18
|
|
Office Lease dated April 12, 2001, by and between Equator Technologies, Inc. and Pike Street
Delaware, Inc. (incorporated by reference to Exhibit 10.18 to the Companys Quarterly Report
on Form 10-Q filed August 9, 2005) |
|
|
|
10.19
|
|
Real Property Lease dated March 21, 2001, by and between Equator Technologies, Inc. and
Limar Realty Corp. #30. (incorporated by reference to Exhibit 10.19 to the Companys Quarterly
Report on Form 10-Q filed August 9, 2005) |
|
|
|
10.20
|
|
Amendment No. 1 to Office Lease dated July 7, 2005, by and between Equator Technologies,
Inc. and 520 Pike Street, Inc. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer. |
|
|
|
32.1
|
|
Certification of Chief Executive Officer. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer. |
|
|
|
|
|
|
|
+ |
|
Indicates a management contract or compensation arrangement. |
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
PIXELWORKS, INC.
(Registrant)
|
|
Date: November 7, 2005 |
By: |
/s/ Jeffrey B. Bouchard
|
|
|
|
Jeffrey B. Bouchard |
|
|
|
Vice President, Finance and
Chief Financial Officer |
|
47
exv10w20
Exhibit
10.20
AMENDMENT NO. 1 TO OFFICE LEASE
THIS AMENDMENT NO. 1 TO OFFICE LEASE (this Amendment) is made this 7th day of July, 2005, by
and between 520 Pike Street, Inc., a Delaware corporation (Landlord), and Equator Technologies,
Inc., a Delaware corporation (Tenant).
WITNESSETH:
RECITALS: Landlord and Tenant are now parties to that certain Office Lease dated April 12, 2001
(the Lease), whereby Landlord leases to Tenant and Tenant leases from Landlord certain premises
commonly known as Suite 900 of the 520 Pike Tower located at 520 Pike Street in the City of
Seattle, County of King, State of Washington, all as more particularly described in the Lease.
Landlord and Tenant desire to change the location of the Premises, extend the term of the Lease,
provide for expansion of the Premises, grant Tenant certain options to further expand the Premises,
change the rent and make certain other changes to the Lease. The terms and provisions of this
Amendment shall be effective as of August 15, 2005, or such later date on which the Initial
Installations are Substantially Complete (as described in Section 6 of the Workletter), but in no
event later than August 25, 2005 (the Effective Date), except that Sections 2 and 11 of this
Amendment shall be effective on the earlier dates set forth in such Sections. The terms and
provisions of the Lease, without giving effect to this Amendment, including without limitation, the
provisions relating to the Premises, Base Rent Additional Rent, the Base Tax Year, and the Base
Expense Year, shall remain effective for all purposes as to all periods prior to the Effective
Date. All terms used in this Amendment, but not defined in this Amendment, shall have the same
meanings ascribed to them in the Lease. This Recital forms a contractual part of this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants contained in the Lease and herein and
other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged,
Landlord and Tenant hereby agree that the Lease is amended, effective as of as of the Effective
Date as follows:
1. Article 1, Section B. of the Lease is amended to read as follows:
|
|
|
B. Premises:
|
|
Suite 1375 in the Building as
outlined or cross-hatched on Exhibit A-2. |
2. Delivery
of Possession of Suite 1375; Vacation of Suite 900. Landlord shall deliver
possession of Suite 1375 to Tenant on the Effective Date. Tenant shall vacate Suite 900 on the
Effective Date, in accordance with Article 23 of the Lease and all other applicable provisions of
the Lease.
1
3. Article 1, Section D. of the Lease is amended to read as follows:
|
|
|
D. Expiration Date:
|
|
October 15, 2011, or the date which is six (6) years
and two (2) months after the Effective Date. |
4. Article 1, Section E. of the Lease is amended to read as follows:
|
|
|
E. Rentable Area:
|
|
The rentable area of the Premises shall be deemed
7,589 square feet, and the rentable area of the Property shall be deemed 374,225 square feet, for
purposes of this Lease, subject to Article 32. |
5. Article 1, Section F. of the Lease is amended to read as follows:
|
|
|
F. Tenants Share:
|
|
Two and 03/100ths percent (2.02%), subject to
Articles 4 and 32. |
6. Article 1, Section G. of the Lease is amended to read as follows:
|
|
|
G. Base Rent:
|
|
Base Rent shall be the following amounts per month
during the following periods: |
|
|
|
|
|
|
|
Monthly |
Period |
|
Amount |
August 15, 2005 August 14, 2006
|
|
$ |
13,596.96 |
|
August 15, 2006 August 14, 2007
|
|
$ |
14,229.38 |
|
August 15, 2007 August 14, 2008
|
|
$ |
14,861.79 |
|
August 15, 2008 August 14, 2009
|
|
$ |
15,494.21 |
|
August 15, 2009 August 14, 2010
|
|
$ |
16,126.63 |
|
August 15, 2010 August 14, 2011
|
|
$ |
16,759.04 |
|
August 15, 2011 October 15, 2011
|
|
$ |
17,391.46 |
|
If the Effective Date is later than August 15, 2005, then the above rent schedule shall be
appropriately adjusted.
7. Article. 1, Section H. of the Lease is amended to read as follows:
|
|
|
H. Additional Rent:
|
|
Tenant shall pay Tenants Share of Taxes and
Expenses in excess of the amounts, respectively, for the year 2005 (Base Tax Year) and for the
year 2005 (Base Expense Year), as further described in Article 4. |
2
8. Article 1, Section J. of the Lease is amended to read as follows:
|
|
|
J. Security Deposit:
|
|
$59,000.00, provided, however, that if, as of
September 1, 2007, Tenant has not been, and is not then, in default under this Lease beyond applicable notice and cure periods, the Security Deposit
shall be reduced to $27,950.00, and the difference of $31,050.00 shall be credited against Base
Rent, or, at Landlords option and in lieu of such credit, refunded directly to Tenant. The
Security Deposit shall be subject to Article 16. |
9. Termination
Payment. The Lease, without giving effect to this Amendment, provides for Base Rent,
Additional Rent and other charges during the period from August 15, 2005 to September 30, 2006, of
approximately $750,000. In consideration of the termination of the original terms of the Lease,
Tenant agrees to pay to Landlord a termination payment equal to the sum of Four Hundred Thousand
and No/100 Dollars ($400,000), without interest (the Termination Payment), payable in
seventy-three (73) equal monthly installments of Five Thousand Four Hundred Seventy-nine and 45/100
Dollars ($5,479.45) on the first day of each month commencing on September 1, 2005, and ending on
September 1, 2011 (the Amortization Rent). If the Lease is terminated due to destruction of the
Building and/or the Premises or a taking of the Building and/or the Premises by condemnation during
the period from September 1, 2005 to September 30, 2006, then the Termination Payment shall be
reduced by an amount that is in the same ratio to the Termination Payment as the number of days
from the date of such destruction or taking to September 30, 2006 bears to the total number of days
from September 1, 2005 to September 30, 2006. If the Lease is terminated for any reason, including
the destruction of the Building and/or the Premises or a taking of the Building and/or the Premises
by condemnation, Tenants obligation to pay the Termination Payment (as the Termination Payment may
be reduced pursuant to this Section) to Landlord shall survive the termination of the Lease. If the
Termination Payment is reduced pursuant to this Section, then the Amortization Rent shall be
proportionately reduced.
10. Condition of Premises; Landlords Contribution; Tenant
Improvements. Tenant accepts Suite 1375 in its AS IS condition. Landlord shall
provide a tenant improvement allowance for permanent improvements to the Premises,
including telephone cabling, data cabling, and other low voltage cabling, of Twelve and
50/100 Dollars ($12.50) times the number of rentable square feet of space in the
Premises, for a total tenant improvement allowance of Ninety-four Thousand Eight
Hundred Sixty-two and 50/100 Dollars ($94,862.50) (Landlords Contribution). If the cost of the
tenant improvements is more than Landlords Contribution, Tenant shall pay such excess cost. If
the cost of the tenant improvements is less than Landlords Contribution, then Tenant may apply the
unused portion of Landlords Contribution to pay for permanent improvements to the Must
Take Expansion Space, including telephone cabling, data cabling, and other low voltage
cabling. Landlord and Tenant shall enter into the Workletter attached to this
Amendment as Exhibit B (the Workletter), which shall govern construction of the tenant
improvements.
3
11. Landlords
Additional Contribution. Landlord shall provide an allowance of One
Hundred Fifty-nine Thousand Five Hundred Fourteen and No/100 Dollars ($159,514.00)
(Landlords Additional Contribution) to Tenant for Tenants relocation costs, moving costs,
tenant improvement costs and other related costs. The Landlords Additional Contribution shall be
paid within thirty (30) days of the date Tenant vacates Suite 900.
12. Must
Take Expansion Space. Landlord shall deliver vacant possession of Suite 1340,
consisting of 2,249 rentable square feet of space (the Must Take Expansion Space), to
Tenant promptly after the existing lease covering the Must Take Expansion Space expires or after
Landlord relocates the existing tenant of the Must Take Expansion Space, and the Premises shall be
expanded to include the Must Take Expansion Space upon such delivery of possession. The existing
lease covering the Must Take Expansion Space expires on September 30, 2006. Base Rent
shall commence sixty (60) days after delivery of possession of the Must Take Expansion Space to
Tenant (the Must Take Expansion Space Rent Commencement Date). Base
Rent per month for the Must Take Expansion Space shall be equal to 2,249, times the applicable
rate per square foot per year set forth in the below Rent Schedule, divided by twelve (12). Tenant
will accept the Must Take Expansion Space in its then AS IS condition. Landlord shall provide a
tenant improvement allowance for permanent tenant improvements to the Must Take Expansion Space,
including telephone cabling: data cabling, and other low voltage cabling, of Twelve and 50/100
Dollars ($12.50) times the number of rentable square feet of space in the Must Take Expansion Space
(the Must Take Expansion Space Landlord Contribution). If the cost of the tenant improvements to
the Must Take Expansion Space is less than the portion of Landlords Contribution, if any, applied
to pay for tenant improvements to the Must Take Expansion Space and the Must Take Expansion Space
Landlord Contribution, then Landlord and Tenant shall split the savings equally
Rent Schedule
|
|
|
|
|
|
|
Rate per Square |
Period |
|
Foot per Year |
August 15, 2005 August 14, 2006
|
|
$ |
21.50 |
|
August 15, 2006 August 14, 2007
|
|
$ |
22.50 |
|
August 15, 2007 August 14, 2008
|
|
$ |
23.50 |
|
August 15, 2008 August 14, 2009
|
|
$ |
24.50 |
|
August 15, 2009 August 14, 2010
|
|
$ |
25.50 |
|
August 15, 2010 August 14, 2011
|
|
$ |
26.50 |
|
August 15, 2011 October 15, 2011
|
|
$ |
27.50 |
|
Tenants Share shall be appropriately adjusted sixty (60) days after delivery of possession of
the Must Take Expansion Space to Tenant. If the Premises have not otherwise been expanded prior to
that time, then Tenants Share shall be increased to two and 63/100ths percent (2.63%) sixty (60)
days after delivery of possession of the Must Take Expansion Space to Tenant.
4
13. Temporary
Space. Landlord shall deliver possession of Suite 1210,
consisting of 2,382 rentable square feet of space (the Temporary Space), to Tenant the day after
execution of this Amendment by both parties (the Temporary Space Delivery Date). Tenant shall
lease the Temporary Space from Landlord from the Temporary Space Delivery Date to the
Must Take Expansion Space Rent Commencement Date. No Base Rent shall be payable by Tenant
for the Temporary Space, however, Tenant shall pay to Landlord Tenants Temporary Space Share of
Taxes and Expenses (as defined in the Lease) during the period from the Temporary Space Delivery
Date to the Must Take Expansion Space Rent Commencement Date. Tenants Temporary Space Share is
64/100ths percent (.64%). Landlord estimates that Taxes and Expenses will be Ten and 28/100
Dollars ($10.28) per square foot during calendar year 2005. Tenant acknowledges that Tenants
Temporary Space Share shall apply to the total amount of Taxes and Expenses, rather than to
increases in Taxes and Expenses over the Base Tax Year and the Base Expense Year, respectively.
Tenant shall vacate the Temporary Space within ten (10) days after the Must Take Expansion Space
Rent Commencement Date, in accordance with Article 23 of the Lease and all other applicable
provisions of the Lease.
14. Option
to Expand. Tenant shall have the right, at its option, to expand the Premises to
include any or all of the spaces described below (each, an Expansion Space) as of the dates set
forth below (each, an Availability Date), by giving Landlord notice to such effect (the
Expansion Notice) not less than three (3) months before the relevant Availability Date, or, if
the relevant Expansion Space remains or becomes vacant and legally available for lease after the
Availability Date, by giving Landlord notice to such effect (the Expansion Notice) not less than
three (3) months before the anticipated commencement date as to the relevant Expansion Space set
forth in the Expansion Notice (the Expansion Space Commencement Date). Landlord, at its
option, may waive the requirement for three (3) months prior notice by giving notice to such
effect to Tenant, and, if Landlord does so, then the Expansion Space
Commencement Date shall be ten (10) days after receipt of Tenants Expansion Notice. Landlord shall
deliver possession of each Expansion Space to Tenant in its AS IS condition on the Availability
Date, the Expansion Space Commencement Date, or the date ten (10) days after receipt of Tenants
Expansion Notice, as applicable. As of the Availability Date, the Expansion Space Commencement
Date, or the date ten (10) days after receipt of Tenants Expansion Notice, as applicable, the
Expansion Space shall be added to the Premises, and as of the date sixty (60) days after the
Availability Date, the Expansion Space Commencement Date, or the date ten (10) days after receipt
of Tenants Expansion Notice, as applicable, the Base Rent shall be increased by the then current
Fair Market Value of the relevant Expansion Space, and Tenants Share shall be appropriately
adjusted. The term Fair Market Value shall mean the then prevailing market rate per square foot
for full service base rent for tenants of comparable quality for leases in comparable Class A
office buildings of comparable age, use, location and quality in the Central Business District of
Seattle, Washington taking into consideration the extent of the availability of space as large as
the Premises in the marketplace and all other economic terms then customarily prevailing in
the marketplace, all as
5
reasonably determined by Landlord, times the number of rentable square feet of space in the
relevant Expansion Space. No real estate commissions shall be payable by Landlord with respect to
any of the Expansion Spaces.
|
|
|
|
|
|
|
Space |
|
Area |
|
Availability Date |
|
|
Suite 1320
|
|
1,324 RSF
|
|
November 1, 2008 |
|
|
Suite 1330
|
|
778 RSF
|
|
January 1, 2009 |
|
|
Suite 1310
|
|
1,331 RSF
|
|
August 1,2009 |
|
|
If an Expansion Space remains or becomes vacant and legally available for lease after the
Availability Date; if Tenant gives an Expansion Notice to Landlord as to such Expansion Space, and
if Landlord is then engaged in negotiations with one or more third parties to lease part or all of
such Expansion Space, then Tenant shall elect to either (i) give Landlord ninety (90) days to
complete such negotiations, and, if Landlord completes such negotiations, then Landlord shall have
the right to lease such Expansion Space to such third party or parties, or (ii) lease all of such
Expansion Space from Landlord on the terms and conditions, including Base Rent, Additional Rent and
other terms and conditions set forth in Landlords last offer to such third party or parties.
15. Parking. Tenant shall have the right to use one (1) parking stall in the parking garage of
the Building per each 1,450 rentable square feet of space in the Premises from time to time. All
such parking stalls shall be on a non-exclusive and unreserved basis. Based on 7,589 rentable
square feet of space in the Premises, and either 2,382 rentable square feet of space in the
Temporary Space, or 2,249 rentable square feet of space in the Must Take Expansion Space, Tenant
shall have the right to use up to seven (7) parking stalls in the parking garage of the Building.
Tenant shall pay Landlords current rates for such parking stalls used during the Term. Upon
Landlords request, Tenant shall execute the parking garage operators standard form of parking
agreement.
16. Replacement
of Exhibit. Exhibit A-2 of the Lease is replaced with Exhibit A-2 of this
Amendment attached hereto
17. No
Other Modification. Except as expressly amended herein, all of the terms, conditions
and provisions of the Lease shall remain unmodified and in full force and effect.
6
DATED the date and year first above written.
|
|
|
|
|
|
LANDLORD:
520 PIKE STREET, INC.,
a Delaware corporation
|
|
|
By: |
/s/ Paul A. Galiano
|
|
|
|
PAUL A. GALIANO
|
|
|
Its: VICE PRESIDENT
TENANT:
Equator Technologies, Inc., a Delaware
corporation
|
|
|
By: |
/s/ Jeff Bouchard
|
|
|
Its: Secretary
|
|
7
exv31w1
Exhibit 31.1
CERTIFICATION
I, Allen H. Alley, certify that:
1. |
|
I have reviewed this quarterly report on Form 10-Q of Pixelworks, Inc.; |
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report; |
|
3. |
|
Based on my knowledge, the financial statements and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented
in this report; |
|
4. |
|
The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a. |
|
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in
which this report is being prepared; |
|
|
b. |
|
Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles; |
|
|
c. |
|
Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and |
|
|
d. |
|
Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and |
5. |
|
The registrants other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants auditors
and the audit committee of the registrants board of directors (or persons performing the
equivalent functions): |
|
a. |
|
All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial
information; and |
|
|
b. |
|
Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over financial
reporting. |
|
|
|
|
|
|
|
|
Date: November 7, 2005 |
/s/ Allen H. Alley
|
|
|
Allen H. Alley |
|
|
Chairman of the Board, President and
Chief Executive Officer |
|
exv31w2
Exhibit 31.2
CERTIFICATION
I, Jeffrey B. Bouchard, certify that:
1. |
|
I have reviewed this quarterly report on Form 10-Q of Pixelworks, Inc.; |
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report; |
|
3. |
|
Based on my knowledge, the financial statements and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented
in this report; |
|
4. |
|
The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a. |
|
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in
which this report is being prepared; |
|
|
b. |
|
Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles; |
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c. |
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Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and |
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d. |
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Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and |
5. |
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The registrants other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants auditors
and the audit committee of the registrants board of directors (or persons performing the
equivalent functions): |
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a. |
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All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial
information; and |
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b. |
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Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over financial
reporting. |
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Date: November 7, 2005 |
/s/ Jeffrey B. Bouchard
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Jeffrey B. Bouchard |
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Vice President, Finance and
Chief Financial Officer |
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exv32w1
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Pixelworks, Inc. (the Company) on Form 10-Q for the
quarterly period ended September 30, 2005 as filed with the Securities and Exchange Commission on
the date hereof (the Report), I, Allen H. Alley, Chairman of the Board, President and Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906
of the Sarbanes-Oxley Act of 2002, that:
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1. |
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The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and |
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2. |
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The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company. |
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By: |
/s/ Allen H. Alley
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Allen H. Alley |
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Chairman of the Board, President and
Chief Executive Officer |
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exv32w2
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Pixelworks, Inc. (the Company) on Form 10-Q for the
quarterly period ended September 30, 2005 as filed with the Securities and Exchange Commission on
the date hereof (the Report), I, Jeffrey B. Bouchard, Vice President, Finance and Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the
Sarbanes-Oxley Act of 2002, that:
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1. |
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The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and |
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2. |
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The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company. |
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By: |
/s/ Jeffrey B. Bouchard
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Jeffrey B. Bouchard |
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Vice President, Finance and
Chief Financial Officer |
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