UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2001
OR
For the transition period from ___________ to ____________
Commission File Number: 000-30269
PIXELWORKS, INC.(Exact name of registrant as specified in its charter)
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 ý No o
Number of shares of Common Stock outstanding as of July 31, 2001: 41,227,958
PIXELWORKS, INC.
Table of Contents
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PIXELWORKS, INC.CONDENSED BALANCE SHEETS
(in thousands)
The accompanying notes are an integral part of these condensed financial statements.PIXELWORKS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)(in thousands, except share and per share data)
The accompanying notes are an integral part of these condensed financial statements.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)(in thousands)
PIXELWORKS, INC.NOTES TO CONDENSED FINANCIAL STATEMENTS(in thousands, except share and per share data)
Note 1: Basis of Presentation
The financial information included herein for the three and six months ended June 30, 2001 and 2000 is unaudited; however, such information reflects all adjustments consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The results of operations for the three and six months ended June 30, 2001 are not necessarily indicative of the results expected for the entire fiscal year ending December 31, 2001.
These financial statements have been prepared by Pixelworks, Inc. (the “Company”) 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 accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such regulations, although the Company believes the disclosures provided are adequate to prevent the information presented from being misleading.
This report on Form 10-Q for the quarter ended June 30, 2001, should be read in conjunction with the Company’s Annual Report on Form 10-K filed on April 2, 2001. Portions of the accompanying financial statements are derived from the audited year-end financial statements of the Company dated December 31, 2000.
Segments – Statement of Financial Accounting Standards No. (“SFAS”) 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for disclosure about operating segments in annual financial statements and selected information in interim financial reports. Based on definitions contained within SFAS 131, the Company has determined that it operates within one segment. Substantially all of the assets of the Company are located in the United States. Revenue by geographic region was as follows:
Note 2: Earnings per share
Basic earnings per share (“EPS”) is computed on the basis of weighted average number of common shares outstanding. Diluted EPS is computed on the basis of weighted average common shares outstanding plus the effect of outstanding stock options using the "treasury stock" method, shares of convertible preferred stock on an as converted basis, and shares of restricted stock, if the potential common shares were not anti-dilutive.
The following weighted-average potential common shares have been excluded from the computation of diluted loss per share for the periods presented because the effect would have been anti-dilutive:
Note 3: Inventories
Inventories are stated at the lower of cost (on a first-in, first-out basis) or market (net realizable value) and consist of the following:
Note 4: Acquisitions
On January 30, 2001, the Company acquired all of the outstanding shares of Panstera, Inc. in exchange for approximately 4,500,000 shares of Pixelworks stock valued as follows:
The transaction was accounted for by the purchase method of accounting, and accordingly, the results of operations of Panstera, Inc. are included in the Company's financial statements beginning on the date of acquisition.
The allocation of purchase price was as follows:
Based on the results of this valuation the Company recorded a charge of $32.4 million for the write-off of in-process research and development. The following table reflects the unaudited combined results of Pixelworks, Inc. and Panstera, Inc. as if the merger had taken place at the beginning of the three months and six months ended June 30, 2001 and 2000, respectively. The proforma information includes adjustments for non-cash charges for amortization of goodwill and assembled workforce, over 60 months and 36 months, respectively. Both periods exclude a charge of $32.4 million for in-process research and development expense. The proforma information does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the combined companies.
On January 30, 2001, the Company invested $7.5 million in exchange for a minority equity interest in Jaldi Semiconductor Corporation. Pixelworks has the option to purchase the remaining interest in the company for 1.85 million shares of Pixelworks common stock.
Note 5: Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as amended, establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. Because we currently hold no derivative financial instruments and do not currently engage in hedging activities, adoption of SFAS No. 133 did not have any impact on our financial condition or results of operations for the three months ended June 30, 2001.
In July 2001, FASB issued SFAS Nos. 141 and 142 (“FAS 141 and 142”), Business Combinations and Goodwill and Other Intangible Assets. FAS 141 replaces APB 16 and eliminates pooling-of interests accounting prospectively. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. FAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under FAS 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. FAS 141 and 142 are effective for all business combinations initiated after June 30, 2001.
Upon adoption of FAS 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under FAS 141 will be reclassified to goodwill. Companies are required to adopt FAS 142 for fiscal years beginning after December 15, 2001. The Company will adopt FAS 142 on January 1, 2002. In connection with the adoption of FAS 142, the Company will be required to perform a transitional goodwill impairment assessment. The Company has not yet determined the impact these standards will have on its results of operations and financial position when implemented.
This discussion and analysis is designed to be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in the Company’s Annual Report on Form 10-K filed on April 2, 2001 (the “Form 10-K”).
Overview
We design, develop and market complete system-on-a-chip integrated circuits (“ICs”) and software that enable the visual display of broadband content. Our technology translates and optimizes video, computer graphics, and visual Web information for display on a wide variety of electronic devices including LCD monitors, projectors, and televisions. We have announced products with Compaq, Dell, InFocus Corporation, NEC-Mitsubishi, Samsung, Sanyo, Sony and ViewSonic, and have more than 75 customers.
On May 19, 2000 we sold 5,750,000 shares of Common Stock at $10.00 per share in an Initial Public Offering (“IPO”). In June 2000, we sold a further 862,500 shares of Common Stock under the terms of the over allotment agreement relating to that Initial Public Offering. The net proceeds, amounting to approximately $60.5 million are currently invested in various marketable securities and may be used for general corporate purposes.
On January 30, 2001 we invested $7.5 million in Jaldi Semiconductor Corporation (“Jaldi”), a privately held fabless semiconductor start-up developing application specific reconfigurable Digital Signal Processing (“DSP”) technology, in exchange for a minority interest in Jaldi. We have an option to purchase the remaining interest in Jaldi for 1.85 million shares of Pixelworks Common Stock, and intend to do so upon Jaldi’s successful completion of specific development milestones.
Also on January 30, 2001 we completed the acquisition of all of the outstanding capital stock and stock options of Panstera, Inc. (“Panstera”), a privately held fabless semiconductor company located in San Jose, California, in exchange for 4.5 million shares of Pixelworks Common Stock. Panstera is developing a broad line of mixed signal ICs that provide an end-to-end family of products for mass-market, XGA-resolution LCD monitors. The acquisition was recorded as a purchase transaction and we recorded a one-time charge for purchased in-process research and development expenses in the first quarter of 2001.
We sell our products worldwide through a direct sales force and indirectly through distributors and manufacturers representatives. Distributors have been established in Japan, Taiwan and China. Manufacturers representatives support European and Korean sales. In addition to our Tualatin, Oregon corporate headquarters, we have facilities in California, Japan, Taiwan and Korea.
We recognize revenue from product sales upon shipment. Pixelworks complies with the revenue recognition guidance summarized in Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. Reserves for sales returns and allowances are recorded at the time of shipment.
Historically, significant portions of our product revenue have been from a relatively small number of customers and distributors. Our top five customers accounted for 44.1% and 54.8% of total revenue for the six months ended June 30, 2001 and 2000, respectively.
Significant portions of our products are sold overseas. Sales outside the U.S. accounted for 91.5% and 97.1% of total revenue for the six months ended June 30, 2001 and 2000, respectively. Our end customers, branded manufacturers and integrators, incorporate our products into systems that are sold worldwide. All revenue to date has been denominated in U.S. dollars.
Results of Operations
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Revenue. Revenue increased $10.6 million from $12.1 million for the three months ended June 30, 2000 to $22.7 million for the three months ended June 30, 2001, an increase of 87.6%. The increase in revenue resulted from increased shipments of PW111, PW112, PW164, PW165, and PW365 ImageProcessor ICs that was partially offset by decreased shipments of PW264 and PW364 ImageProcessor ICs. We shipped ImageProcessors ICs into three primary categories of products, namely LCD monitors, multimedia projectors, and advanced televisions. Revenue from LCD monitor manufacturers and multimedia projector manufacturers represented approximately 95% of revenue for the three months ended June 30, 2001. We had one customer, Epson, that represented approximately 13% of revenue for the three months ended June 30, 2001. No other customer represented 10% or more of revenue for the three months ended June 30, 2001.
Gross profit. Gross profit margin was 47.3% for the three months ended June 30, 2001 compared to 38.9% for the three months ended June 30, 2000. The improvement in gross profit margin resulted primarily from the introduction of new products with higher average gross profit margins, and fixed costs being spread over higher revenue.
Research and development. Research and development expenses were $4.3 million or 19.0% of revenue for the three months ended June 30, 2001 compared to $2.3 million, or 19.3% of revenue for the three months ended June 30, 2000. The increase of $2.0 million resulted primarily from a $1.1 million increase in compensation expenses related to an increase in personnel of 28 employees, primarily as a result of the Panstera acquisition, a $423,000 increase in depreciation and amortization, and a $313,000 increase in expenses related to engineering consulting services and development services for products in development.
Selling, general and administrative. Selling, general and administrative expenses were $4.1 million, or 18.1% of revenue for the three months ended June 30, 2001 compared to $2.1 million, or 17.5% of revenue for the three months ended June 30, 2000. The most significant increase in spending resulted from an increase in personnel of 27 people that resulted in $699,000 in additional compensation expense. Additionally, travel spending increased $198,000 due to a larger number of customer visits, rent expense increased $143,000 due to additional building space being rented to support higher headcount, depreciation and amortization expense increased $117,000 due to additional purchases of long-term assets, outside services increased $144,000 primarily for legal and accounting services, and investor relations expenses increased $84,000 for increased investor relations activities.
Amortization of goodwill and assembled workforce. Expenses for the amortization of goodwill and assembled workforce were $4.4 million for the three months ended June 30, 2001. At the time of the acquisition of Panstera in January 2001, the Company recorded assets of $83.6 million in goodwill, which is being amortized over sixty months, and $1.8 million in assembled workforce, which is being amortized over thirty months.
Amortization of deferred stock compensation. Stock compensation expense was $2.5 million for the three months ended June 30, 2001, an increase of $2.0 million from $582,000 for the three months ended June 30, 2000. The increase in stock compensation expense resulted from the assumption of Panstera unvested stock option grants to employees. As a result of the acquisition of Panstera, the Company recorded $13.4 million in deferred stock compensation, which is being amortized on an accelerated method over the vesting period of the assumed stock options. Amortization of the June 30, 2001 balance of $11.3 million in deferred stock compensation is estimated to be $5.0 million for the remainder of 2001 and $4.2 million, $1.7 million, and $400,000 for the years ending December 31, 2002, 2003, and 2004, respectively.
Interest and other income and expense, net. Interest and other income and expense, net consists of interest income. Interest income increased $202,000 from $926,000 for the three months ended June 30, 2000 to $1.1 million for the three months ended June 30, 2001. This increase was a result of higher average cash balances as a result of proceeds from the initial public offering in May 2000, which was partially offset by lower yields on invested cash.
Provision for income taxes. The Company recorded no provision for income tax expense during the three months ended June 30, 2001 because the Company does not expect to have an income tax expense for the year ending December 31, 2001. As a result of the acquisition of Panstera the Company added $1.6 million in deferred tax assets, related to Panstera’s NOL carry-forward, which will be offset against goodwill when utilized. The combined deferred tax assets of the Company will have a full valuation allowance established until the Company expects that it is more likely than not that the assets will be realized.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Revenue.Revenue increased $24.9 million from $19.2 million for the six months ended June 30, 2000 to $44.1 million for the six months ended June 30, 2001, an increase of 129.7%. The increase in revenue resulted from increased shipments of PW111, PW112, PW164, PW165, PW171, and PW365 ImageProcessor ICs. All of these products, with the exception of the PW164, were products that were newly introduced and not shipping in the period ended June 30, 2000. Revenue from PW364 and PW264 ImageProcessor ICs were approximately the same in both periods.
Gross profit. Gross profit margin was 45.4% for the six months ended June 30, 2001 compared to 37.9% for the six months ended June 30, 2000. The improvement in gross profit margin resulted primarily from the shipment of newly introduced products with higher gross profit margins, and fixed costs being spread over higher revenue. Additionally, a portion of the increase in gross profit margins was attributable to a more favorable mix of mature products with higher than average gross profit margins.
Research and development. Research and development expenses were $8.5 million or 19.4% of revenue for the six months ended June 30, 2001 compared to $4.0 million, or 21.0% of revenue for the six months ended June 30, 2000. The increase of $4.5 million resulted primarily from a $2.0 million increase in compensation expenses related to an increase in personnel of 28 employees, primarily as a result of the Panstera acquisition, a $732,000 increase in depreciation and amortization due to purchases of long-term assets, and a $1.5 million increase in expenses related to engineering consulting and development services for products in development.
Selling, general and administrative. Selling, general and administrative expenses were $7.6 million, or 17.3% of revenue for the six months ended June 30, 2001 compared to $3.9 million, or 20.4% of revenue for the six months ended June 30, 2000. Most of the $3.7 million increase resulted from a $1.3 million increase in compensation expenses related to an increase in personnel of 27 employees. The balance of the increase consisted of an increase of $342,000 in sales commissions, $269,000 increase in rent due to increased building space to support additional headcount, a $218,000 increase in insurance, a $205,000 increase in accounting and legal expenses, a $215,000 increase in depreciation and amortization, and $307,000 increase in travel as a result of an increase in the number of customer visits and investor relations activities.
Amortization of goodwill and assembled workforce. Expenses for the amortization of goodwill and assembled workforce were $7.3 million for the six months ended June 30, 2001. At the time of the acquisition of Panstera in January 2001, the company recorded assets of $83.6 million in goodwill, which is being amortized over sixty months, and $1.8 million in assembled workforce, which is being amortized over thirty months. The company began amortizing these assets in February 2001.
Amortization of deferred stock compensation. Stock compensation expense was $4.3 million for the six months ended June 30, 2001, an increase of $3.3 million from $1.0 million for the six months ended June 30, 2000. The increase in stock compensation expense is the result of the assumption of Panstera unvested stock option grants to employees. As a result of the acquisition of Panstera, the Company recorded $13.4 million in deferred stock compensation, which is being amortized on an accelerated method over the vesting period of the assumed stock options.
Interest and other income and expense, net. Interest and other income and expense, net consists of interest income, interest expense and other income. Interest and other income and expense, net increased $1.4 million from $1.2 million for the six months ended June 30, 2000 to $2.6 million for the six months ended June 30, 2001. This increase was primarily related to an increase in interest income of $1.4 million that resulted from higher average cash balances as a result of proceeds from the initial public offering in May 2000.
Provision for income taxes. The Company recorded no provision for income tax expense during the six months ended June 30, 2001 because the Company does not expect to have an income tax expense for the year ending December 31, 2001.
Liquidity and Capital Resources
As of June 30, 2001, the Company had cash and cash equivalents of $57.2 million and working capital of $89.9 million as compared to cash and cash equivalents of $49.7 million and working capital of $100.4 million as of December 31, 2000. Principal sources of cash during the six months ended June 30, 2001 were proceeds from the maturities of marketable securities, net of purchases of marketable securities, of $15.7 million, cash generated by operating activities of $2.4 million and proceeds from the issuance of stock under the Company’s employee stock purchase plan and stock option plans of $1.0 million. Principal uses of cash during the six months ended June 30, 2001 were the investment in Jaldi Semiconductor of $7.5 million and property and equipment expenditures and purchases of other assets of $4.0 million.
As of June 30, 2001, principal commitments consisted of obligations outstanding under operating leases. These commitments include leases for approximately 31,000 square feet in two facilities located in Tualatin, Oregon, expiring in 2002 and 2004. In connection with the acquisition of Panstera, the Company has assumed the leases of two facilities in San Jose, CA for approximately 8,958 square feet. The total annual estimated costs for these commitments are $848,000, $786,000, $745,000 and $232,000 for the years ending December 31, 2001, 2002, 2003 and 2004, respectively. Although the Company has no other material commitments, we anticipate a substantial increase in our capital expenditures consistent with anticipated growth in our operations, infrastructure and personnel. In the future we may also require a larger inventory of products in order to support anticipated growth in our business.
Upon Jaldi’s successful completion of specific development milestones, the Company has an option to purchase the remaining interest in Jaldi for 1.85 million shares of Pixelworks stock, and will incur a breakup fee if the option is not exercised.
The Company believes that its existing cash and cash equivalents and funds generated from operations will be sufficient to fund its operations for the next twelve months. From time to time, we may evaluate acquisitions of businesses, products or technologies that compliment our business. Any such transactions, if consummated, may consume a material portion of our working capital or require the issuance of equity securities that may result in dilution to existing shareholders.
Recent Accounting Pronouncements
Upon adoption of FAS 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under FAS 141 will be reclassified to goodwill. Companies are required to adopt FAS 142 for fiscal years beginning after December 15, 2001. The Company will adopt FAS 142 on January 1, 2002. In connection with the adoption of FAS 142, the Company will be required to perform a transitional goodwill impairment assessment. The Company has determined that the impact of these standards will not have a material impact on its results of operations and financial position when implemented.
Forward-looking Statements
The statements in this report on Form 10-Q relative to the future constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on current expectations, estimates and projections about the company’s business. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Actual results could vary materially from the description contained herein due to many factors including those described above and the following: business and economic conditions, changes in growth in the flat panel monitor, multimedia projector, and advanced television industries, changes in customer ordering patterns, competitive factors, such as rival chip architectures, pricing pressures, insufficient, excess or obsolete inventory and variations in inventory valuation, continued success in technological advances, shortages of manufacturing capacity from our third-party foundries, litigation involving antitrust and intellectual property, the non-acceptance of the combined technologies by leading manufacturers, and other risk factors listed from time to time in the company’s Securities and Exchange Commission filings, including but not limited to, the risks detailed in the “Business – Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2000. The forward-looking statements contained in this Form 10-Q speak only as of the date on which they are made, and the company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this filing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our primary market risk exposure is the impact of interest rate fluctuations on interest income earned on our investment portfolio. The risks associated with market, liquidity and principal are mitigated by investing in high-credit quality securities and limiting concentrations of issuers and maturity dates. Derivative financial instruments are not part of our investment portfolio. We currently have no debt instruments or credit facilities.
All of our sales are denominated in U.S. dollars and as a result, we have relatively little exposure to foreign currency exchange risk with respect to any of our sales. We do not currently hedge against foreign currency rate fluctuations. The effect of an immediate 10% change in exchange rates would not have a material impact on our future operating results or cash flows.
PART II - OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Shareholders
The Company’s 2001 Annual Meeting of Shareholders was held on May 8, 2001. At the Annual Meeting, the following nominees were elected as Directors by the votes and for the terms indicated below:
Item 6: Exhibits and Reports on Form 8-K
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.