<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 11, 2000
REGISTRATION NO. 333-31134
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
PIXELWORKS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<C> <C> <S> <C>
OREGON 3674 91-1761992
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification Number)
Incorporation or Organization) Classification Code Number)
</TABLE>
7700 SW MOHAWK
TUALATIN, OREGON 97062
(503) 612-6700
(Address, including zip code and telephone number, including
area code, of registrant's principal executive offices)
ALLEN H. ALLEY
PRESIDENT
PIXELWORKS, INC.
7700 SW MOHAWK
TUALATIN, OREGON 97062
(503) 612-6700
(Name, address, including zip code and telephone number,
including area code, of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
WILLIAM C. CAMPBELL, ESQ. ERIC S. HAUETER, ESQ.
STEPHEN M. GOING, ESQ. MICHAEL F. TAYLOR, ESQ.
ATER WYNNE LLP BROWN & WOOD LLP
222 S.W. Columbia, Suite 1800 555 California Street, Suite 5000
Portland, OR 97201 San Francisco, CA 94104
(503) 226-1191 (415) 772-1200
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following
box: / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 ("Securities Act"), other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(1)(2) FEE(3)
<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value................. 6,612,500 shares $14.00 $92,575,000 $24,440
</TABLE>
(1) Includes an aggregate of 862,500 shares of Common Stock that the
Underwriters have the option to purchase from the Company to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a) under the Securities Act.
(3) Includes $19,800 previously paid by Registrant on February 25, 2000. An
additional $4,640 has been paid with this filing.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 11, 2000.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
5,750,000 SHARES
[LOGO]
COMMON STOCK
$ PER SHARE
---------
We are selling 5,750,000 shares of common stock. The underwriters named in
this prospectus may purchase up to 862,500 additional shares of common stock
from us to cover over-allotments.
This is an initial public offering of our shares of common stock. We
currently expect the initial public offering price to be between $12.00 and
$14.00 per share. We have applied to have our shares of common stock included
for quotation on the Nasdaq National Market under the symbol "PXLW."
--------------
INVESTING IN OUR SHARES OF COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------- --------------
<S> <C> <C>
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to Pixelworks (before expenses) $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about
, 2000.
--------------
Salomon Smith Barney Deutsche Banc Alex. Brown
SG Cowen
E*OFFERING
, 2000
<PAGE>
[INSIDE FRONT COVER]
Description of Inside Cover Art
The graphic is entitled "Pixelworks System-on-a-Chip Semiconductors Enable the
Display of Broadband Content." A paragraph of text reads: "Pixelworks
system-on-a-chip semiconductors open up the last meter of the broadband pipe by
translating video, computer graphics and Web information for display on a wide
variety of products including flat panel computer monitors, televisions,
multimedia projectors and Internet appliances. We specialize in cost effective
system-on-a-chip semiconductors and software for high-speed digital, analog and
video signal processing."
The page uses a stylized illustration of a representation of a pipeline with
a representation of an ImageProcessor semiconductor linked to various display
devices. At the top is a representation of a human eye. At the bottom of the
illustration are representations of various forms of visual broadband content,
including three illustrated streams identified as PC Graphics, Video and Web
content. The pipe is drawn using perspective with the end at the bottom of the
page appearing to be distant with the pipe labeled "The Broadband Pipe." At the
opening at the top is an illustration of an ImageProcessor semiconductor with a
Pixelworks logo on the top of the chip. Four illustrations of display devices
surround the integrated circuit from left to right as follows: LCD monitor,
multimedia projector, wide-screen television, and an internet appliance.
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE OF THIS PROSPECTUS.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 7
Special Note Regarding Forward-Looking Statements........... 22
Use of Proceeds............................................. 23
Dividend Policy............................................. 23
Capitalization.............................................. 24
Dilution.................................................... 25
Selected Financial Data..................................... 26
Management's Discussion and Analysis of Financial Condition 28
and Results of Operations.................................
Business.................................................... 38
Management.................................................. 50
Certain Transactions........................................ 58
Principal Shareholders...................................... 60
Description of Capital Stock................................ 62
Shares Eligible for Future Sale............................. 65
Underwriting................................................ 67
Legal Matters............................................... 69
Experts..................................................... 69
Where You Can Find More Information......................... 69
Index to Financial Statements............................... F-1
</TABLE>
--------------
Until , 2000, all dealers that buy, sell or trade the shares of
common stock, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
SINCE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT
MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY AND
CONSIDER THE INFORMATION UNDER "RISK FACTORS" AND IN OUR FINANCIAL STATEMENTS
AND THE NOTES RELATING TO THESE FINANCIAL STATEMENTS, TOGETHER WITH THE
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS, BEFORE DECIDING WHETHER TO
INVEST IN OUR SHARES OF COMMON STOCK. OUR FISCAL YEAR ENDS ON DECEMBER 31.
EXCEPT WHERE OTHERWISE NOTED, THE INFORMATION IN THIS PROSPECTUS IS BASED UPON
INFORMATION AS OF MARCH 31, 2000.
OUR COMPANY
We design, develop and market semiconductors and software that enable the
visual display of broadband content through a wide variety of electronic
devices. Broadband content includes video, computer graphics and visual Web
information delivered at high speeds via cable and telecommunications lines to
our homes and offices. Enhancing access to broadband information has typically
been associated with increasing transmission capacity of these lines over the
"last mile," the distance between the telephone and cable company and the user's
home or office. We are focused on the point where the information is processed
and displayed which we refer to as the "last meter." In the last meter, there is
an increasing requirement to rapidly process large amounts of data which is
received in a multitude of broadcast and Web formats. Our semiconductors open up
the last meter by processing broadband content to provide the best possible
image on a wide variety of display products such as flat panel computer
monitors, multimedia projectors and high-definition televisions.
Our semiconductors integrate a microprocessor, memory and image processing
circuits that function like a computer on a single chip, or system-on-a-chip. We
design our products to combine our system-on-a-chip semiconductors with easy to
use, feature-rich software. We pioneered our semiconductor designs in
technically demanding display products including the most advanced
high-resolution flat panel monitors, televisions and multimedia projectors. We
have recently extended our product line into high-volume, mass markets such as
those for flat panel monitors with features and prices designed for mainstream
consumers. In the future, we intend to develop products for new markets
including Internet appliances, electronic devices designed solely for accessing
and displaying Web information.
To date, we have announced that our semiconductors are used in products
marketed by Compaq, Sony and ViewSonic. We have more than 45 customers,
including seven out of the top 10 computer monitor brands and 10 out of the top
15 television brands. Our customers have more than 75 products in development or
production using our system-on-a-chip semiconductors.
The convergence of television and computer applications is creating new
development opportunities for display devices that integrate the ability to
display full motion video and support interactive capabilities such as browsing
the Web while watching television. This convergence requires an increase in
transmission capacity and makes the translation, interpretation and display of
large amounts of information more complex. This has resulted in a bottleneck
that has limited access to the full visual potential of broadband content. Our
system-on-a-chip semiconductors break through this bottleneck by translating and
optimizing high-speed video, computer graphics and Web information in real time.
Our products can also process analog and digital information ranging from basic
computer graphics and broadcast television to the latest theater-quality
high-definition television standards.
Our semiconductors integrate as many as 10 separate components into a single
chip. These semiconductors, combined with our software, enable our customers to
create unique products with substantially more functions and lower overall
development costs in highly efficient designs that allow for miniaturization.
Our highly integrated semiconductors enable our customers to get their products
3
<PAGE>
into the market more rapidly by significantly reducing the selection, sourcing,
testing, integration, debugging, and design when using separate components.
The key benefits of our products include:
- consistent, software-compatible design which can easily be implemented
across product lines;
- broad compatibility with a range of video, Web and computer graphics
signals and display technologies;
- a large suite of features for the most demanding applications; and
- rapid time to market with lower development costs.
Our objective is to be a leading provider of system-on-a-chip semiconductors
and software enabling universal access to broadband content through a wide array
of electronic devices in consumer and business markets.
The key elements of this strategy are to:
- design and sell increasingly integrated semiconductors;
- deliver highly flexible, software-driven products;
- expand from the most technically demanding markets into high-volume mass
markets;
- support and define industry standards; and
- build strategic relationships.
CORPORATE INFORMATION
We were incorporated in Oregon on January 16, 1997. Our principal executive
office is located at 7700 SW Mohawk, Tualatin, Oregon 97062 and our telephone
number is 503-612-6700. Our World Wide Web address is www.pixelworks.com.
Information on our Web site does not constitute part of this prospectus.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered......................... 5,750,000 shares
Common stock to be outstanding after the
offering................................... 35,503,563 shares
Use of proceeds.............................. For working capital and for general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol....... PXLW
</TABLE>
--------------
Unless otherwise indicated, all information in this prospectus, including
the outstanding share information above, is based on the number of shares
outstanding as of March 31, 2000 and:
- gives effect to the automatic conversion of all currently outstanding
shares of preferred stock into 19,708,829 shares of common stock
immediately prior to the completion of the offering;
- reflects a three-for-two split of our common stock effective as of
March 31, 2000;
- excludes 3,010,832 shares of common stock issuable upon the exercise of
options outstanding at March 31, 2000 at a weighted average exercise of
$1.30 per share;
- excludes 2,637,741 shares of common stock available for issuance under our
1997 stock incentive plan;
- excludes 1,500,000 shares of common stock available for issuance under our
2000 employee stock purchase plan; and
- assumes no exercise of the underwriters' over-allotment option.
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table sets forth our summary financial data. You should read
this information together with our financial statements, the notes to those
statements beginning on page F-1 of this prospectus, the information under
"Selected Financial Data," "Capitalization" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The pro forma numbers in the table give effect to the conversion of all
outstanding shares of preferred stock into 19,708,829 shares of common stock
immediately prior to the completion of the offering.
The balance sheet data on a pro forma as adjusted basis reflects the sale of
5,750,000 shares of common stock offered by us at an assumed initial offering
price of $13.00 per share after deducting the underwriting discount and
estimated offering expenses payable by us, and the receipt of net proceeds from
this offering.
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS
JANUARY 16, 1997 YEARS ENDED ENDED
(DATE OF INCEPTION) DECEMBER 31, MARCH 31,
TO DECEMBER 31, -------------------- -------------------
1997 1998 1999 1999 2000
------------------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue....................... $ 400 $ 978 $12,812 $ 616 $ 7,064
Gross profit........................ 376 956 4,443 453 2,569
Loss from operations................ (429) (1,804) (5,293) (978) (1,245)
Net loss............................ $ (376) $(1,603) $(4,887) $ (945) $(4,303)
======= ======= ======= ======= =======
Net loss per share, basic and
diluted........................... $ (0.45) $ (0.61) $ (1.53) $ (0.27) $ (0.67)
======= ======= ======= ======= =======
Weighted average shares of common
stock outstanding................. 828 2,660 5,971 3,828 7,887
Pro forma net loss per share, basic
and diluted (unaudited)........... $ (0.38) $ (0.17)
======= =======
Shares used in computing pro forma
net loss per share, basic and
diluted (unaudited)............... 24,342 31,427
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 35,410 $35,410 $104,028
Working capital.......................................... 35,280 35,280 103,898
Total assets............................................. 44,396 44,396 113,014
Redeemable convertible preferred stock................... 53,183 -- --
Total shareholders' equity (deficit)..................... $(14,175) $39,008 107,626
</TABLE>
6
<PAGE>
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 YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR OPERATIONS
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR FUTURE
PROSPECTS.
We were founded in 1997 and have a limited operating history, which makes an
evaluation of our future prospects difficult. In addition, the revenue and
income potential of our business and markets are unproven. We began shipments of
our first product in December 1998. Accordingly, we face risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets. If we do not successfully address these risks, including the risks
discussed below, we would likely not achieve anticipated levels of revenue
growth. In this event, we would be unable to achieve profitability or build a
sustainable business.
WE HAVE INCURRED NET LOSSES SINCE OUR INCEPTION, AND WE MAY NOT ACHIEVE OR
SUSTAIN ANNUAL PROFITABILITY.
We incurred net losses of approximately $376,000, $1.6 million and $4.9
million in 1997, 1998 and 1999, respectively, and had an accumulated deficit of
approximately $11.2 million as of March 31, 2000. In the future we expect our
research and development and selling, general and administrative expenses to
increase. In addition, we will incur substantial non-cash charges relating to
the amortization of deferred stock compensation. Accordingly, we expect to
continue to incur additional operating losses for at least the next 12 months,
and these losses may be substantial. Although we have experienced revenue growth
in recent quarters, this growth is not necessarily indicative of future
operating results, and we cannot assure you that we will be able to sustain the
growth in our revenues. We cannot be certain that we will achieve profitability
or that, if we do, that we can sustain or increase profitability on a quarterly
or annual basis in the future or at all. This may in turn cause the price of our
common stock to decline. In addition, if we do not achieve or sustain
profitability in the future, we may be unable to continue our operations.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAKE IT DIFFICULT TO PREDICT OUR
FUTURE PERFORMANCE AND MAY RESULT IN VOLATILITY IN THE MARKET PRICE OF OUR
COMMON STOCK.
Our quarterly operating results are likely to vary significantly in the
future based on a number of factors related to our industry and the markets for
our products, some of which are not in our control and any of which may cause
the price of our common stock to fluctuate. These factors include:
- demand for flat panel monitors, advanced television displays, multimedia
projectors and Internet appliances;
- demand for our products and the timing of orders for our products;
- the deferral of customer orders in anticipation of our new products or
product enhancements or due to a reduction in our customers' end 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;
7
<PAGE>
- announcement or introduction of products and technologies by our
competitors;
- changes in product mix, product costs or pricing, or distribution
channels; and
- general economic conditions and economic conditions specific to the
personal computer, display and semiconductor markets.
These factors are difficult to forecast, and these or other factors could
seriously harm our business. We anticipate the rate of new orders may vary
significantly from quarter to quarter. Our operating expenses and inventory
levels are based on our expectations of future revenues and our operating
expenses are relatively fixed in the short term. Consequently, if anticipated
sales and shipments in any quarter do not occur when expected, operating
expenses and inventory levels could be disproportionately high, and our
operating results for that quarter and, potentially, future quarters may be
negatively impacted. Any shortfall in our revenues would have a direct impact on
our business. In addition, fluctuations in our quarterly results could adversely
affect the price of our common stock in a manner unrelated to our long-term
operating performance. Because our operating results are volatile and difficult
to predict, you should not rely on the results of one quarter as an indication
of our future performance. It is likely 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.
IF WE DO NOT ACHIEVE ADDITIONAL DESIGN WINS IN THE FUTURE, OUR ABILITY TO GROW
WOULD BE SERIOUSLY LIMITED.
Our future success will depend on developers of advanced display devices
designing our products into their systems. To achieve design wins we must define
and deliver cost-effective, innovative and integrated semiconductors. Once a
supplier's products have been designed into a system, the developer may be
reluctant to change its source of components due to the significant costs
associated with qualifying a new supplier. Accordingly, the failure on our part
to obtain additional design wins with leading branded manufacturers or
integrators, and to successfully design, develop and introduce new products and
product enhancements could harm our business, financial condition and results of
operations.
Achieving a design win does not necessarily mean that a developer will order
large volumes of our products. A design win is not a binding commitment by a
developer to purchase our products. Rather, it is a decision by a developer to
use our products in the design process of that developer's products. Developers
can choose at any time to discontinue using our products in their designs or
product development efforts. If our products are chosen to be incorporated into
a developer's products, we may still not realize significant revenues from that
developer, if that developer's products are not commercially successful.
BECAUSE OF THE COMPLEX NATURE OF OUR SEMICONDUCTOR DESIGNS AND THE ASSOCIATED
MANUFACTURING PROCESS AND THE RAPID EVOLUTION OF OUR CUSTOMERS' PRODUCT DESIGN
WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCTS OR PRODUCT ENHANCEMENTS IN A TIMELY
MANNER WHICH COULD DECREASE CUSTOMER DEMAND FOR OUR PRODUCTS AND REDUCE OUR
REVENUES.
The development of our semiconductors, which incorporate mixed analog and
digital signal processing, is highly complex. These complexities require that we
employ advanced designs and manufacturing processes that are unproven. Since
commencing our operations, we have experienced increased development time and
delays in introducing new products. We will not always succeed in developing new
products or product enhancements nor do so in a timely manner.
8
<PAGE>
Successful development and timely introduction of new or enhanced products
depends on a number of other factors, including:
- accurate prediction of customer requirements and evolving industry
standards, including digital interface and content piracy protection
standards;
- development of advanced display technologies and capabilities;
- timely completion and introduction of new product designs;
- use of advanced foundry processes and achievement of high manufacturing
yields; and
- market acceptance of the new products.
If we are not able to successfully develop and introduce our products in a
timely manner, our business and results of operations will be adversely
affected.
INTEGRATION OF SOFTWARE IN OUR PRODUCTS ADDS COMPLEXITY AND COST WHICH 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.
OUR HIGHLY INTEGRATED PRODUCTS ARE DIFFICULT TO MANUFACTURE WITHOUT DEFECTS AND
THE EXISTENCE OF DEFECTS IN THE MANUFACTURED PRODUCTS COULD RESULT IN AN
INCREASE IN OUR COSTS AND DELAYS IN THE AVAILABILITY OF OUR PRODUCTS.
The manufacture of semiconductors is a complex process and it is often
difficult for semiconductor foundries to produce semiconductors free of defects.
Because our products are more highly integrated than many other semiconductors
and incorporate mixed analog and digital signal processing and embedded memory
technology, they are even more difficult to produce without defects.
The ability to manufacture products of acceptable quality depends on both
product design and manufacturing process technology. Since defective products
can be caused by either design or manufacturing difficulties, identifying
quality problems can occur only by analyzing and testing our semiconductors in a
system after they have been manufactured. The difficulty in identifying defects
is compounded because the process technology is unique to each of the multiple
semiconductor foundries we contract with to manufacture our products. Failure to
achieve defect-free products due to their increasing complexity may result in an
increase in our cost and delays in the availability of our products.
A SIGNIFICANT AMOUNT OF OUR REVENUE COMES FROM A FEW CUSTOMERS AND DISTRIBUTORS
AND ANY DECREASE IN REVENUES FROM, OR LOSS OF ANY OF, THESE CUSTOMERS OR
DISTRIBUTORS COULD SIGNIFICANTLY REDUCE OUR TOTAL REVENUES.
We are and will continue to be dependent on a limited number of large
customers and distributors for a substantial portion of our revenue. In 1999 and
for the three months ended March 31, 2000, sales to Tokyo Electron Device
Limited, our Japanese distributor, represented 54.9% and 64.1% of our total
revenue, respectively, and sales to MicroMax International Corporation, our
Taiwanese distributor, represented 24.4% and 13.1% of our total revenue,
respectively. In 1999 and for the three months
9
<PAGE>
ended March 31, 2000, sales through Tokyo Electron Device to our customer Seiko
Epson Corporation. represented 23.3% and 25.3%, of our total revenue,
respectively, and sales through Tokyo Electron Device to our customer
Hitachi, Ltd represented 11.2% and 12.4% of our total revenue, respectively.
Sales through MicroMax to our customer Optoma Corp., formerly known as CTX
Opto-Electronics Corporation, an integrator for Compaq Computer Corporation,
represented 13.5% and 9.4% of our total revenue for 1999 and the three months
ended March 31, 2000, respectively. As a result of this customer and distributor
concentration, any one of the following factors could significantly impact our
revenues:
- a significant reduction, delay or cancellation of orders from one or more
of our key distributors, branded manufacturers or integrators; or
- a decision by one or more significant customers to select products
manufactured by a competitor, or its own internally developed
semiconductor, for inclusion in future product generations.
The display manufacturing market is highly concentrated among relatively few
large manufacturers. We expect our operating results to continue to depend on
sales and revenues from a relatively small number of distributors that sell our
products to display manufacturers and their suppliers.
THE CONCENTRATION OF OUR ACCOUNTS RECEIVABLE WITH A LIMITED NUMBER OF
DISTRIBUTORS EXPOSES US TO INCREASED CREDIT RISK AND COULD SERIOUSLY HARM OUR
OPERATING RESULTS AND CASH FLOWS.
As of March 31, 2000, we had accounts receivable from Tokyo Electron Device
and MicroMax that represented 69.0% and 14.8%, respectively, of our total
accounts receivable. The failure by either of these distributors to pay these
accounts receivable would result in a significant expense that would seriously
harm our operating results and would reduce our cash flows.
INTERNATIONAL SALES ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUES, AND IF WE
DO NOT SUCCESSFULLY ADDRESS THE RISKS ASSOCIATED WITH OUR INTERNATIONAL
OPERATIONS, OUR REVENUES COULD DECREASE.
Sales outside of the U.S. accounted for 0.0%, 51.1%, 92.8% and 94.7% of our
total revenue in 1997, 1998, 1999 and for the three months ended March 31, 2000,
respectively. Most of our customers are concentrated in Japan, Korea and Taiwan,
with aggregate sales from those three countries accounting for 89.7% and 90.1%
of our total revenue during the year ended December 31, 1999 and the three
months ended March 31, 2000, respectively. We anticipate that sales outside the
U.S. will continue to account for a substantial portion of our revenues in
future periods. In addition, customers who incorporate our products into their
products sell them outside of the U.S., thereby exposing us indirectly to
foreign risks. In addition, all of our products are manufactured outside of the
U.S. We are, therefore, subject to many international risks, including:
- increased difficulties in managing international distributors and
manufacturers of our products and components due to varying time zones,
languages and business customs;
- foreign currency exchange fluctuations such as the Asian financial crisis
that occurred in 1998 which caused a devaluation in the currencies of
Japan, Taiwan and Korea resulting in an increased cost of procuring our
semiconductors;
- potentially adverse tax consequences such as license fee revenue taxes
imposed in Japan;
- difficulties regarding timing and availability of export and import
licenses, which have limited our ability to freely move demonstration
equipment and samples in and out of Asia;
- political and economic instability, particularly in Taiwan and Korea;
10
<PAGE>
- reduced or limited protection of our intellectual property, significant
amounts of which are contained in software which is more prone to design
piracy;
- increased transaction costs related to sales transactions conducted
outside of the U.S. such as charges to secure letters of credit for
foreign receivables;
- difficulties in maintaining sales representatives outside of the U.S. that
are knowledgeable of the display processor industry and our display
processor products;
- changes in the regulatory environment in Japan, Korea and Taiwan that may
significantly impact purchases of our products by our customers; and
- difficulties in collecting accounts receivable.
OUR DEPENDENCE ON SELLING THROUGH DISTRIBUTORS AND INTEGRATORS INCREASES THE
COMPLEXITY OF MANAGING OUR SUPPLY CHAIN AND MAY RESULT IN EXCESS INVENTORY OR
INVENTORY SHORTAGES.
Selling through distributors reduces our ability to forecast sales and
increases the complexity of our business. Since our distributors are an
intermediary between us and the companies using our products, we must rely on
our distributors to accurately report inventory levels and production forecasts.
This arrangement requires us to manage a more complex supply chain and monitor
the financial condition and credit worthiness of our distributors and customers.
Our failure to manage one or more of these challenges could result in excess
inventory or shortages that could seriously impact our operating revenue or
limit the ability of companies using our semiconductors to deliver their
products.
DEPENDENCE ON A LIMITED NUMBER OF SOLE-SOURCE, THIRD PARTY MANUFACTURERS FOR OUR
PRODUCTS EXPOSES US TO SHORTAGES BASED ON CAPACITY ALLOCATION, PRICE INCREASES
WITH LITTLE NOTICE, VOLATILE INVENTORY LEVELS AND DELAYS IN PRODUCT DELIVERY
WHICH COULD RESULT IN DELAYS IN SATISFYING CUSTOMER DEMAND, INCREASED COSTS AND
LOSS OF REVENUES.
We do not own or operate a semiconductor fabrication facility and we do not
have the resources to manufacture our products internally. We rely on Toshiba
Corporation and Taiwan Semiconductor Manufacturing Company, third party
foundries for wafer fabrication and other contract manufacturers for assembly
and electrical testing of our products. Our requirements represent only a small
portion of the total production capacity of our contract manufacturers. Our
third-party manufacturers have in the past reallocated capacity to other
customers even during periods of high demand for our products. We expect that
this will occur in the future. We do not have a long-term supply contract with
any of our contract manufacturers, and they are not obligated to supply us with
products for any specific period, in any specific quantity or at any specific
price, except as may be provided in a particular purchase order. From time to
time our third-party manufacturers increase prices charged to manufacture our
products with little notice. This requires us to either increase the price we
charge for our products or suffer a decrease in our gross margins. Currently,
this risk is particularly applicable because worldwide semiconductor
manufacturing capacity is at full production. 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. None of our products is currently manufactured by more than
one supplier, and we expect that all of our products will continue to be
manufactured by a single third-party manufacturer. This means that a disruption
in production by a single third-party manufacturer would immediately result in
our inability to deliver our products. For example, in September 1999 we
experienced a delay in delivery of a prototype of a product caused by the
shutdown of our third-party manufacturer's facility due to an earthquake.
If we are unable to obtain our products from manufacturers on schedule, our
ability to satisfy customer demand will be harmed, and revenue from the sale of
products may be lost or delayed. If orders for our products are canceled,
expected revenues will not be realized. In addition, if the price
11
<PAGE>
charged by our third-party manufacturers increases we will be required to
increase our prices, which could harm our competitiveness, or suffer declines in
our gross margin.
WE INTEND TO ASSUME MORE RESPONSIBILITY FOR THE MANUFACTURING OF OUR PRODUCTS
WHICH, IF NOT IMPLEMENTED SUCCESSFULLY, COULD RESULT IN INCREASED COSTS OR A
REDUCTION OR LOSS OF REVENUE.
Currently, we purchase packaged, assembled and tested products from contract
manufacturers. We expect that we will assume greater responsibility for this
process for our next-generation of products by subcontracting separately for the
production of wafers and for their assembly and testing. We intend to build some
future 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. If we do so, we will become subject to increased risks arising from
wafer manufacturing yields and associated with coordination of the
manufacturing, assembly and testing process. Failure to implement this approach
to manufacturing properly, would reduce our revenues and harm our gross margin
and results of operations.
WE ARE DEPENDENT ON OUR FOUNDRIES TO IMPLEMENT COMPLEX SEMICONDUCTOR
TECHNOLOGIES WHICH COULD ADVERSELY AFFECT OUR OPERATIONS IF THOSE TECHNOLOGIES
ARE NOT AVAILABLE, DELAYED OR INEFFICIENTLY IMPLEMENTED.
In order to increase performance and functionality and reduce the size of
our products, we are continuously developing new products using advanced
technologies that further miniaturize semiconductors. However, we are dependent
on our foundries to develop and provide access to the advanced processes that
enable such miniaturization. We cannot be certain that future advanced
manufacturing processes will be implemented without difficulties, delays or
increased expenses. Our business, financial condition and results of operations
could be materially and adversely affected if advanced manufacturing processes
are unavailable to us, substantially delayed or inefficiently implemented.
IF WE HAVE TO QUALIFY A NEW CONTRACT MANUFACTURER OR FOUNDRY FOR ANY OF OUR
PRODUCTS, WE MAY EXPERIENCE DELAYS THAT RESULT IN LOST REVENUES AND DAMAGED
CUSTOMER RELATIONSHIPS.
Our products require manufacturing with state-of-the-art fabrication
equipment and techniques. Because the lead time needed to establish a
relationship with a new contract manufacturer is at least six months, and the
estimated time for us to adapt a product's design to a particular contract
manufacturer's processes is at least four months, there is no readily available
alternative source of supply for any specific product. This could cause
significant delays in shipping products, which may result in lost revenues and
damaged customer relationships.
OUR FUTURE SUCCESS DEPENDS UPON THE CONTINUED SERVICES OF KEY PERSONNEL, MANY OF
WHOM WOULD BE DIFFICULT TO REPLACE AND THE LOSS OF ONE OR MORE OF THESE
EMPLOYEES COULD SERIOUSLY HARM OUR BUSINESS BY DELAYING PRODUCT DEVELOPMENT.
Our future success depends upon the continued services of our executive
officers, key hardware and software engineers, and sales, marketing and support
personnel, many of whom would be difficult to replace. The loss of one or more
of these employees could seriously harm our business. Particularly, because of
the highly technical nature of our business, the loss of key engineering
personnel could delay product introductions and significantly impair our ability
to successfully create future products. In particular, the loss of the services
of Allen Alley, our President, Chief Executive Officer and Chairman, Michael
West, our Vice President, Technology, or Robert Greenberg, our Vice President,
Product Development and Customer Support, could materially and adversely affect
us. We are currently planning to hire a significant number of additional
employees this year and in future periods, and we believe our success depends,
in large part, upon our ability to identify, attract and retain qualified
12
<PAGE>
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 candidates with appropriate
qualifications. If we do not succeed in hiring and retaining candidates 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.
Because our sales are made on the basis of purchase orders rather than
long-term purchase commitments, which our customers may cancel or defer purchase
orders at any time. This process requires us to make multiple demand forecast
assumptions, each of which may introduce error into our estimates. If we or our
customers overestimate demand, we may purchase products which we may not be able
to sell. As a result, we would have excess inventory, which would increase our
losses. Conversely, if we or our customers underestimate demand or if sufficient
manufacturing capacity is unavailable, we would forego revenue opportunities,
lose market share and damage our customer relationships.
DEVELOPMENT ARRANGEMENTS MAY CAUSE US TO INCUR SUBSTANTIAL OPERATING EXPENSES
WITHOUT THE GUARANTEE OF ANY ASSOCIATED REVENUE OR FAR IN ADVANCE OF REVENUE.
We have development arrangements with customers such as Compaq and ViewSonic
and other parties such as Intel Corporation that consume large amounts of
engineering resources far in advance of product revenue. Our work under these
arrangements will be technically challenging and may require deliverables on an
accelerated basis. For example, under our arrangement with Intel we are required
to deliver specifications for a semiconductor shortly after entering into the
arrangement. These arrangements place considerable demands on our limited
resources, particularly on our most senior engineering talent, and may not
result in revenue for twelve to eighteen months, if at all. In addition,
allocating significant resources to these arrangements may detract from or delay
the completion of other important development projects. Any of these development
agreements could be canceled at any time without notice. These factors could
have a material and adverse effect on our long term business and results of
operations.
BECAUSE OF OUR LONG PRODUCT DEVELOPMENT PROCESS AND SALES CYCLE, WE MAY INCUR
SUBSTANTIAL EXPENSES BEFORE WE EARN ASSOCIATED REVENUES AND MAY NOT ULTIMATELY
SELL AS MANY UNITS OF OUR PRODUCTS AS WE FORECASTED.
We develop products based on anticipated market and customer requirements
and incur substantial product development expenditures prior to generating
associated revenues. Because the development of our products incorporates not
only our complex and evolving technology, but our customers' specific
requirements, a lengthy sales process is often required before potential
customers begin the technical evaluation of our products. Our customers
typically perform numerous tests and extensively evaluate our products before
incorporating them into their systems. The time required for testing, evaluation
and design of our products into a customer's equipment can take up to six months
or more. It can take an additional six months before a customer commences volume
shipments of systems that incorporate our products. However, even when we
achieve a design win, the customer may never ship systems incorporating our
products. Because of our relatively limited history in selling our products, we
cannot assure you that the time required for the testing, evaluation and design
of our products by our customers will not exceed six months. Because of this
lengthy development cycle, we will experience
13
<PAGE>
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.
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 1999,
companies that used our products experienced delays in the availability of key
components from other suppliers which, in turn, threatened a delay in demand for
the products that we supplied to them.
SHORTAGES OF MATERIALS USED IN THE MANUFACTURING OF OUR PRODUCTS MAY INCREASE
OUR COSTS OR LIMIT OUR REVENUES AND IMPAIR OUR ABILITY TO SHIP OUR PRODUCTS ON
TIME.
From time to time, shortages of materials that are used in our board
products may occur. In particular, we may experience shortages of semiconductor
wafers and packages. If material shortages occur, we may incur additional costs
or be unable to ship our products to our customers in a timely fashion, all of
which could harm our business and negatively impact our earnings.
OUR PRODUCTS COULD BECOME OBSOLETE IF NECESSARY LICENSES OF THIRD-PARTY
TECHNOLOGY ARE NOT AVAILABLE TO US OR ARE ONLY AVAILABLE ON TERMS THAT ARE NOT
COMMERCIALLY VIABLE.
We license technology from third parties that is incorporated into our
products or product enhancements. Future products or product enhancements may
require additional third-party licenses that may not be available to us or
available on terms that are commercially reasonable. If we are unable to obtain
any third-party license required to develop new products and product
enhancements, we may have to obtain substitute technology of lower quality or
performance standards or at greater cost, either of which could seriously harm
the competitiveness of our products.
WE MAY NOT BE ABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE IN THE MARKETS
IN WHICH WE COMPETE, OR WE MAY NOT BE ABLE TO COMPLY WITH INDUSTRY STANDARDS IN
THE FUTURE MAKING OUR PRODUCTS LESS DESIRABLE OR OBSOLETE.
The markets in which we compete or seek to compete are subject to rapid
technological change, frequent new product introductions, changing customer
requirements for new products and features, and evolving industry standards. The
introduction of new technologies and the emergence of new industry standards
could render our products less desirable or obsolete which could harm our
business. Recent examples of changing industry standards include the
introduction of high-definition television, or HDTV, new digital receivers and
displays with resolutions that have required us to accelerate development of new
products to meet these new standards.
OUR SOFTWARE DEVELOPMENT TOOLS MAY BE INCOMPATIBLE WITH INDUSTRY STANDARDS AND
CHALLENGING TO IMPLEMENT, WHICH COULD SLOW PRODUCT DEVELOPMENT OR CAUSE US TO
LOSE CUSTOMERS AND DESIGN WINS.
Our existing products incorporate complex software tools designed to help
customers bring products into production. Software development is a complex
process and we are dependent on software development languages and operating
systems from vendors which may compromise our ability to design software in a
timely manner. Also, software development is a volatile market and new software
languages are introduced to the market that may be incompatible with our
existing systems and tools. New software development languages may not be
compatible with our own requiring significant engineering efforts to migrate our
existing systems in order to be compatible with those new languages. Our current
products are developed using Visual C, a popular software development
14
<PAGE>
language. However, existing or new software development tools could make our
current products obsolete or hard to use. Software development disruptions could
slow our product development or cause us to lose customers and design wins.
OUR INTEGRATED CIRCUITS AND SOFTWARE COULD CONTAIN DEFECTS, WHICH COULD REDUCE
SALES OF THOSE PRODUCTS OR RESULT IN CLAIMS AGAINST US.
Despite testing by us and our customers, errors 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.
OUR MANUFACTURERS AND CUSTOMERS ARE CONCENTRATED IN THE SAME GEOGRAPHIC REGION
WHICH INCREASES THE RISK THAT A NATURAL DISASTER, LABOR STRIKE OR POLITICAL
UNREST COULD DISRUPT OUR OPERATIONS.
Our current manufacturers and substantially all of our customers are located
in Japan, Korea and Taiwan. The risk of earthquakes in the Pacific Rim region is
significant due to the proximity of major earthquake fault lines in the area. In
September 1999, a current manufacturer's facilities were affected by a
significant earthquake in Taiwan. As a consequence of this earthquake, this
manufacturer suffered power outages and disruption that impaired its production
capacity. Earthquakes, fire, flooding and other natural disasters in the Pacific
Rim region, or political unrest, labor strikes or work stoppages in countries
where our manufacturers' and customers are located likely would result in the
disruption of our foundry partners' assembly capacity. Any disruption resulting
from extraordinary events could cause significant delays in shipments of our
solutions until we are able to shift our manufacturing or assembling from the
affected contractor to another third-party vendor. There can be no assurance
that alternative capacity could be obtained on favorable terms, if at all.
OTHERS MAY BRING INFRINGEMENT ACTIONS AGAINST US WHICH COULD BE TIME-CONSUMING
AND EXPENSIVE TO DEFEND.
We may become subject to claims involving patents or other intellectual
property rights. For example, we were recently notified by InFocus Systems, Inc.
that InFocus believed we were infringing patents held by InFocus that relate to
methods and apparatus for automatic pixel clock phase and frequency correction.
While we do not believe we are infringing these patents, in order to avoid the
business uncertainty and diversion of management attention associated with
contesting this assertion, we have entered into a license agreement with InFocus
granting us the right to use the technology covered by the InFocus patents in
exchange for 156,863 shares of our Series D preferred stock and $2.4 million in
cash payable in four quarterly installments commencing in March 2000. Under this
license agreement, we also received a release of any claims that InFocus may
have against us relating to these patents. 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
15
<PAGE>
management and technical personnel. Any future intellectual property litigation
or claims also could force us to do one or more of the following:
- stop selling products using technology that contain the allegedly
infringing intellectual property;
- attempt to obtain a license to the relevant intellectual property, which
license may not be available on reasonable terms or at all; and
- attempt to redesign those products that contain the allegedly infringing
intellectual property.
If we are forced to take any of the foregoing actions, we may be unable to
manufacture and sell our products, which could seriously harm our business. In
addition, we may not be able to develop, license or acquire non-infringing
technology under reasonable terms. These developments could result in an
inability to compete for customers or could adversely affect our ability to
increase our earnings.
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
COULD HARM OUR COMPETITIVE POSITION BY ALLOWING OUR COMPETITORS TO ACCESS OUR
PROPRIETARY TECHNOLOGY AND TO INTRODUCE SIMILAR DISPLAY PROCESSOR PRODUCTS.
Our ability to compete effectively with other companies will depend, in
part, on our ability to maintain the proprietary nature of our technology,
including our semiconductor designs and software. We rely on a combination of
patent, copyright, trademark and trade secret laws, as well as nondisclosure
agreements and other methods to protect our proprietary technologies. We have
three patent applications pending with the U.S. Patent and Trademark Office for
protection of our significant technologies. We cannot assure you that the degree
of protection offered by patents or trade secret laws will be sufficient.
Furthermore, we cannot assure you that any patents will be issued as a result of
any pending applications, or that, if issued, any claims allowed will be
sufficiently broad to protect our technology. In addition, it is possible that
existing or future patents may be challenged, invalidated or circumvented. We
provide the computer programming code for our software to selected customers in
connection with their product development efforts, thereby increasing the risk
that customers will misappropriate our proprietary software. Competitors in both
the United States and foreign countries, many of which have substantially
greater resources, may apply for and obtain patents that will prevent, limit or
interfere with our ability to make and sell our products, or develop similar
technology independently or design around our patents. Effective copyright,
trademark and trade secret protection may be unavailable or limited in foreign
countries.
ANY ACQUISITION WE MAKE COULD DISRUPT OUR BUSINESS AND SEVERELY HARM OUR
FINANCIAL CONDITION.
We intend to consider investments in or acquisitions of complementary
businesses, products or technologies. While we have no current agreements to do
so, we may acquire businesses, products or technologies in the future. In the
event of any future acquisitions, we could:
- issue stock that would dilute our current stockholders' percentage
ownership;
- incur debt;
- assume liabilities;
- incur amortization expenses related to goodwill and other intangible
assets; or
- incur large and immediate write-offs.
Our operation of any acquired business will also involve numerous risks,
including:
- problems combining the purchased operations, technologies or products;
- unanticipated costs;
16
<PAGE>
- diversion of management's attention from our core business;
- adverse effects on existing business relationships with customers;
- risks associated with entering markets in which we have no or limited
prior experience; and
- potential loss of key employees, particularly those of the acquired
organizations.
We may not be able to successfully integrate businesses, products or
technologies or personnel that we might acquire in the future and any failure to
do so could disrupt our business and seriously harm our financial condition.
FAILURE TO MANAGE OUR EXPANSION EFFECTIVELY COULD ADVERSELY AFFECT OUR ABILITY
TO INCREASE OUR BUSINESS AND RESULTS OF OPERATIONS.
Our ability to successfully market and sell our products in a rapidly
evolving market requires effective planning and management processes. We
continue to increase the scope of our operations domestically and
internationally and have increased our headcount substantially. We grew from 22
employees on January 1, 1999, to 89 employees on March 31, 2000. In addition, we
are currently planning to hire a significant number of additional employees this
year. Our past growth, and our expected future growth, places a significant
strain on our management systems and resources including our financial and
managerial controls, reporting systems and procedures. To manage our growth
effectively, we must implement and improve operational and financial systems,
train and manage our employee base, attract and retain qualified personnel with
relevant experience. We must also manage multiple relationships with customers,
business partners, contract manufacturers, suppliers and other third parties.
Moreover, we will spend substantial amounts of time and money in connection with
our rapid growth and may have unexpected costs. Our systems, procedures or
controls may not be adequate to support our operations and we may not be able to
expand quickly enough to exploit potential market opportunities. While we have
not, to date, suffered any significant adverse consequences due to our growth,
if we do not continue to manage growth effectively our business would be
seriously harmed.
RISKS RELATED TO OUR INDUSTRY
FAILURE OF CONSUMER DEMAND FOR FLAT PANEL DISPLAYS AND OTHER DISPLAY
TECHNOLOGIES TO INCREASE COULD IMPEDE OUR GROWTH.
Our product development strategies anticipate that consumer demand for flat
panel displays and other emerging display products will increase in the future.
The success of our products is dependent on increased demand for these products,
which are at early stages of development. The potential size of the flat panel
display market and the timing of its development are uncertain and will depend
upon a number of factors, all of which are beyond our control. In order for the
market for many of our products to grow, advanced flat panel displays must be
widely available and affordable to consumers. Currently there is a limited
supply of advanced flat panel displays, and increasing the supply of advanced
displays is a costly and lengthy process requiring significant capital
investment. Accordingly, we do not expect the current shortage of advanced flat
panel displays or their high prices to change in the near term. In the past, the
supply of advanced flat panel displays has been cyclical. We expect this pattern
to continue. Undercapacity in the advanced flat panel display market may limit
our ability to increase our revenues because our customers may limit their
purchases of our products if they cannot obtain sufficient supplies of advanced
flat panel displays. In addition, advance flat panel display prices may remain
high because of limited supply, and consumer demand may not grow if the supply
of advanced flat panel displays does not increase.
17
<PAGE>
THE FAILURE OF BROADBAND COMMUNICATIONS TO DEVELOP WILL ADVERSELY AFFECT DEMAND
FOR OUR PRODUCTS.
We anticipate deriving significant portions of our future revenues from
products that are dependent on the delivery of information via broadband
communications. Our business will be negatively impacted if broadband
communications develop more slowly than we anticipate. Factors impacting the
acceptance of broadband communications include the introduction of new
technologies, consumer pricing, cost and time required to provide broadband
infrastructure, lack of industry standards and government regulation. The
emergence of industry standards could make our products or those of our
customers unmarketable or obsolete and may require us to incur substantial
unanticipated development costs to comply with any new standards.
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 the 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 INCREASE LOSSES.
Rapid technological change, evolving industry standards, compressed product
life cycles and declining average selling prices are characteristics of our
market and could have a material adverse effect on our business, financial
condition and results of operations. As the overall price of advanced flat panel
display screens continues to fall, we may be required to offer our products to
manufacturers at discounted prices due to increased price competition. At the
same time, new, alternative display processing technologies and industry
standards may emerge that directly compete with technologies that we offer. We
may be required to increase our investment in research and development at the
same time that product prices are falling. In addition, even after making this
investment, we cannot assure you that our technologies will be superior to those
of our competitors or that our products will achieve market acceptance, whether
for performance or price reasons. Failure to effectively respond to these trends
could reduce the demand for our products.
We compete with a range of specialized and diversified electronic and
semiconductor companies that offer display processors. In particular, we compete
against Genesis Microchip, Inc., Macronix International Co., Ltd., Sage, Inc.,
Silicon Image, Inc., SmartASIC, Inc., STMicroelectronics NV, Trident
Microsystems, Inc. and other companies. Potential competitors may include
diversified semiconductor manufacturers including Broadcom Corporation, National
Semiconductor Corp., Texas Instruments, Inc. and other diversified semiconductor
companies. We also compete in some instances against in-house processing
solutions designed by our customers. Many of our competitors have longer
operating histories and greater resources to support development and marketing
efforts. Some of our competitors may operate their own fabrication facilities.
These competitors may be able to react faster and devote more resources to
efforts that compete directly with our own. In the future, our current or
potential customers may also develop their own proprietary display processors
and become our competitors. In addition, start-up companies may seek to compete
in our markets. Our competitors may develop advanced technologies enabling them
to offer more cost-effective and higher quality semiconductors to our customers
than those offered by us. Increased competition could harm our business,
financial condition and results of operations by, for example, increasing
pressure on our profit
18
<PAGE>
margin or causing us to lose sales opportunities. We cannot assure you that we
can compete successfully against current or potential competitors.
THE MARKET FOR INTERNET APPLIANCES MAY NOT EVOLVE RAPIDLY ENOUGH TO SUPPORT
EXPANDED MARKET ACCEPTANCE OF OUR PRODUCTS AND INDUSTRY STANDARDS IN THIS MARKET
CONTINUE TO EVOLVE.
If the emerging market for Internet appliances does not develop or does not
evolve fast enough to support rapid market acceptance of our products, our
business, financial condition and results of operations will be materially and
adversely affected. The Internet appliance market includes netTVs, screenphones,
e-mail terminals, Web terminals and tablets. Our success will depend on our
ability to achieve design wins with customers developing new products and
enhanced products for the Internet appliance market and their ability to
successfully introduce and promote these products. There can be no assurance
that the Internet appliance market will develop to the extent or in the
timeframes necessary to support expansion of our business. We anticipate that
Internet appliance products will be generally based on industry standards, which
are continually evolving. The emergence of new industry standards could render
our products or our customers products unmarketable or obsolete and we may incur
substantial unanticipated costs to comply with any new standards. Moreover, our
past sales have resulted, to a significant extent, from our ability to
anticipate changes in technology and industry standards and to develop and
introduce new and enhanced products addressing changes within our industry. Our
continued ability to adapt to industry changes and to anticipate future
standards, and the rate of adoption and acceptance of those standards, will be a
significant factor in maintaining or improving our competitive position and our
prospects for growth. There can be no assurance that we will be able to
anticipate the evolving standards in the semiconductor industry and, in
particular, the applications in the Internet appliance market, or that we will
be able to successfully develop and introduce new products into this market.
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY MAY LEAD TO SIGNIFICANT
VARIANCES IN THE DEMAND FOR OUR PRODUCTS AND COULD HARM OUR OPERATIONS.
In the past, the semiconductor industry has been characterized by
significant downturns and wide fluctuations in supply and demand. Also, during
this time, the industry has experienced significant fluctuations in anticipation
of changes in general economic conditions, including economic conditions in
Asia. 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.
RISKS RELATING TO THE OFFERING
THE SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE
COULD CAUSE THE MARKET PRICE OF SHARES OF OUR COMMON STOCK TO DECLINE.
We will have approximately 35,503,563 shares of common stock outstanding
immediately after the offering. The shares of our common stock sold in the
offering will be freely transferable. Additional shares may be sold in the
public market to the extent permitted by Rule 144 or exemptions under the
Securities Act of 1933. Lock-up agreements executed by our officers, directors
and existing shareholders limit the number of shares of our common stock that
may be sold in the public market for periods of up to 180 days. However, Salomon
Smith Barney may, in its sole discretion and at any time, release all or some
portion of the securities subject to the lock-up agreements. The market price of
shares of our common stock could decline as a result of sales of a large number
of shares of our common stock in the market after the offering, or the
perception that significant sales could occur. These factors also could make it
more difficult for us to raise funds through future offerings of our common
stock.
19
<PAGE>
INVESTORS IN THIS OFFERING WILL EXPERIENCE SUBSTANTIAL AND IMMEDIATE DILUTION IN
THE BOOK VALUE OF THEIR INVESTMENT.
The initial public offering price of shares of our common stock will be
substantially higher than the net tangible book value per share of the
outstanding common stock immediately after this offering. Therefore, based upon
an assumed initial public offering price of $13.00 per share, if you purchase
our common stock in this offering, you will incur substantial and immediate
dilution of approximately $10.02 per share. If additional shares are sold by the
underwriters following the exercise of their over-allotment option, or if
outstanding options to purchase shares of our common stock are exercised, there
will be further dilution of your investment. See "Dilution."
THE ANTI-TAKEOVER PROVISIONS OF OREGON LAW AND IN OUR ARTICLES OF INCORPORATION
COULD ADVERSELY AFFECT THE RIGHTS OF THE HOLDERS OF OUR COMMON STOCK BY
PREVENTING A SALE OR TAKEOVER OF US AT A PRICE OR PRICES FAVORABLE TO THE
HOLDERS OF OUR COMMON STOCK.
The anti-takeover provisions of Oregon law and our articles of incorporation
may make a change in control of our business more difficult, even if a change in
control would be beneficial to the shareholders. These provisions may allow the
board of directors to prevent changes in the management and control of our
business. Under Oregon law, our board of directors may adopt additional
anti-takeover measures in the future. One anti-takeover provision that we have
is the ability of our board of directors to determine the terms of preferred
stock and issue preferred stock without the approval of the holders of the
common stock. At the time of the offering, there are no shares of preferred
stock outstanding. However, because the rights and preferences of any series of
preferred stock may be set by the board of directors in its sole discretion
without approval of the holders of the common stock, the rights and preferences
of this preferred stock may be superior to those of the common stock.
Accordingly, the rights of the holders of common stock may be adversely
affected.
OUR PRINCIPAL SHAREHOLDERS HAVE SIGNIFICANT VOTING POWER AND MAY TAKE ACTIONS
THAT MAY MAKE IT MORE DIFFICULT TO SELL OUR SHARES AT A PREMIUM TO TAKEOVER
CANDIDATES.
Immediately after the offering, our executive officers, directors and other
principal shareholders will, in the aggregate, beneficially own 22,263,145
shares or approximately 62% of our outstanding common stock, assuming the
exercise of all options and warrants held by them. Although these shareholders
will not have majority control, they currently have, and likely 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 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 shareholders from realizing a premium over the market price
for their common stock.
OUR COMMON STOCK HAS NOT BEEN PUBLICLY TRADED, AND WE EXPECT THAT THE PRICE OF
OUR COMMON STOCK MAY FLUCTUATE SUBSTANTIALLY.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined through negotiations
between the underwriters and us, and may not be indicative of the price that
will prevail in the open market after this offering. An active trading market
for our common stock may not develop or be sustained after this offering. You
may not be able to sell your shares of our common stock at or above the initial
public offering price due to a number of factors, including:
- actual or anticipated fluctuations in our operating results;
- changes in expectations as to our future financial performance;
20
<PAGE>
- changes in financial estimates of securities analysts;
- announcements by us or our competitors of technological innovations,
design wins, contracts, standards or acquisitions;
- the operating and stock price performance of other comparable companies;
- changes in market valuations of other technology companies; and
- inconsistent trading volume levels of our common stock.
In particular, the stock prices of technology companies like us have been
highly volatile recently. These fluctuations often have been unrelated or
disproportionate to the operating performance of those companies. Market
fluctuations as well as general economic, political and market conditions
including recessions, interest rate changes or international currency
fluctuations, may negatively impact the market price of our common stock.
Therefore, the price of our common stock may decline, and the value of your
investment may be reduced regardless of our performance.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS WHICH WOULD LIMIT OUR
ABILITY TO GROW.
We believe our net proceeds from this offering, together with our existing
cash balances and funds available under our credit facility will be sufficient
to meet our capital requirements for at least the next 12 months. However, we
may need, or could elect, to seek additional funding prior to that time. To the
extent that funds generated by this offering, together with existing resources,
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.
21
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary," Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" contains forward-looking information. This
forward-looking information is subject to risks and uncertainties including the
factors listed under "Risk Factors," Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well as
elsewhere in this prospectus. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "intends,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential" or
"continue," or the negative of these terms or other comparable terminology.
These statements are only predictions and may be inaccurate. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk
Factors." These factors may cause our actual results to differ materially from
any forward-looking statement. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
22
<PAGE>
USE OF PROCEEDS
Based on an assumed initial public offering price of $13.00 per share, our
net proceeds from the sale of the 5.75 million shares of common stock that we
are offering will be approximately $68.6 million after deducting the
underwriting discount and estimated expenses payable by us in connection with
this offering. If the underwriters exercise their over-allotment option in full,
our net proceeds will be approximately $79.0 million.
The principal purposes of this offering are to increase our working capital
and other general corporate purposes. See "Management Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
Although we may use a portion of the net proceeds to acquire complementary
technologies or businesses, we have no current plans in this regard. Pending
these uses, we plan to invest the net proceeds in short-term, interest-bearing,
investment grade securities. Management will retain broad discretion in the
allocation of the net proceeds of this offering. You will not have the
opportunity to evaluate the economic, financial or other information on which we
base our decisions on how to use the proceeds.
DIVIDEND POLICY
We have never declared or paid cash dividends on shares of our capital
stock. We currently expect to retain any future earnings to fund the operation
and expansion of our business, and therefore we do not currently expect to pay
cash dividends in the foreseeable future.
23
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000:
- on an actual basis;
- on a pro forma basis after giving effect to the automatic conversion of
all outstanding shares of preferred stock into 19,708,829 shares of common
stock immediately prior to the completion of the offering; and
- on a pro forma as adjusted basis, after giving effect to the sale of
5,750,000 shares of common stock offered by us at an assumed initial
public offering price of $13.00 per share after deducting the underwriting
discount and estimated offering expenses payable by us, and the receipt of
net proceeds from this offering.
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 35,410 $ 35,410 $104,028
Redeemable convertible preferred stock, $.001 par value:
Authorized 16,100,000 shares; issued and outstanding
13,139,219 shares (actual); no shares (pro forma and
as adjusted)............................................ 53,183 -- --
Common stock, $.001 par value:
Authorized 35,000,000 shares; issued and outstanding
10,044,734 shares (actual); 29,753,563 shares (pro
forma); 35,503,563 shares (as adjusted)................. -- 53,183 121,801
Deferred stock compensation................................. (2,807) (2,807) (2,807)
Note receivable for common stock............................ (199) (199) (199)
Accumulated deficit......................................... (11,169) (11,169) (11,169)
-------- -------- --------
Total shareholders' equity (deficit)........................ (14,175) 39,008 107,626
-------- -------- --------
Total capitalization........................................ $ 39,008 $ 39,008 $107,626
======== ======== ========
</TABLE>
Common stock excludes:
- 3,010,832 shares of common stock issuable upon the exercise of options
outstanding at March 31, 2000 at a weighted average exercise price of
$1.30 per share;
- 2,637,741 shares of common stock available for issuance under our 1997
stock incentive plan; and
- 1,500,000 shares of common stock available for issuance under our 2000
employee stock purchase plan.
24
<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 2000 was approximately
$37.3 million or approximately $1.25 per share. Pro forma net tangible book
value per share represents pro forma tangible assets less total liabilities,
divided by our pro forma number of outstanding shares of common stock after
giving effect to, on a pro forma basis, the automatic conversion of all
currently outstanding shares of preferred stock into 19,708,829 shares of common
stock immediately prior to the completion of the offering.
Without taking into account any changes in pro forma net tangible book value
per share after March 31, 2000, other than to give effect to the sale of the
shares of common stock in this offering at an assumed initial public offering
price of $13.00 per share after deducting the underwriting discount and
estimated expenses payable by us and the receipt of the net proceeds of the
sale, the pro forma net tangible book value as of March 31, 2000 would have been
approximately $105.9 million or approximately $2.98 per share. This represents
an immediate increase in pro forma net tangible book value per share of $1.73 to
existing shareholders and an immediate dilution of $10.02 per share to new
investors. The following table sets forth this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $13.00
Pro forma net tangible book value per share at March 31,
2000.................................................... $ 1.25
Increase in pro forma net tangible book value per share
attributable to this offering........................... 1.73
------
Pro forma net tangible book value per share after the
offering.................................................. 2.98
------
Dilution in pro forma net tangible book value per share to
new investors............................................. $10.02
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 2000,
the differences between the number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid by the
existing shareholders and by the new investors in this offering, before
deducting the underwriting discounts and commissions and estimated offering
expenses payable by us, at an assumed initial public offering price of $13.00
per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PAID
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
Existing shareholders...................... 29,753,561 83.8% $49,489,264 39.8% $ 1.66
New investors.............................. 5,750,000 16.2 74,750,000 60.2 13.00
---------- ----- ----------- -----
Total.................................... 35,503,561 100.0% 124,239,264 100.0%
========== ===== =========== =====
</TABLE>
The foregoing discussion and table excludes:
- 3,010,832 shares of common stock issuable upon the exercise of options
outstanding at March 31, 2000 at a weighted average exercise price of
$1.30 per share;
- 2,637,741 shares of common stock available for issuance under our 1997
stock incentive plan; and
- 1,500,000 shares of common stock available for issuance under our 2000
employee share purchase plan.
If all options outstanding at March 31, 2000 were exercised, the pro forma
net tangible book value per share immediately after completion of the offering
would be $2.85, which represents an immediate dilution in net tangible book
value per share of $10.15 to purchasers of shares of common stock in the
offering. See "Management--Employee Benefit Plans" and the notes to our
financial statements for more information on our option plans.
25
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements, including the related notes found
elsewhere in this prospectus. The statement of operations data for the period
from January 16, 1997 through December 31, 1997 and years ended December 31,
1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999 are
derived from the audited financial statements of Pixelworks included elsewhere
in this prospectus, which have been audited by KPMG LLP, independent auditors.
The audited balance sheet data as of December 31, 1997 is derived from the
audited financial statements not included in this Prospectus. The statement of
operations data for the periods ended March 31, 1999 and 2000 and the balance
sheet data as of March 31, 2000, are derived from unaudited interim financial
statements included in this prospectus. The unaudited financial statements have
been prepared on substantially the same basis as the audited financial
statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for these periods. Historical results
are not necessarily indicative of the results to be expected in the future, and
results of interim periods are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS
JANUARY 16, 1997 YEARS ENDED ENDED
(DATE OF INCEPTION) DECEMBER 31, MARCH 31,
TO DECEMBER 31, ------------------- -------------------
1997 1998 1999 1999 2000
------------------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue, net........................... $ 25 $ 105 $12,647 $ 451 $ 7,064
Commissions.................................... 375 373 65 65 --
Licensing and development fees................. -- 500 100 100 --
--------------- ------- ------- ------- -------
Total revenue.................................. $ 400 $ 978 $12,812 $ 616 $ 7,064
Cost of revenue.................................. 24 22 8,369 163 4,495
--------------- ------- ------- ------- -------
Gross profit..................................... 376 956 4,443 453 2,569
--------------- ------- ------- ------- -------
Operating expenses:
Research and development....................... 215 1,446 4,805 823 1,690
Selling, general and administrative............ 590 1,314 4,366 604 1,784
Amortization of deferred stock compensation.... -- -- 565 4 340
--------------- ------- ------- ------- -------
Total operating expenses......................... 805 2,760 9,736 1,431 3,814
--------------- ------- ------- ------- -------
Loss from operations............................. (429) (1,804) (5,293) (978) (1,245)
Interest and other income (expense), net......... 53 215 409 36 (3,058)
--------------- ------- ------- ------- -------
Loss before income taxes......................... (376) (1,589) (4,884) (942) (4,303)
Income taxes..................................... -- 14 3 3 --
--------------- ------- ------- ------- -------
Net loss......................................... (376) (1,603) (4,887) (945) (4,303)
Accretion of preferred stock redemption
preference..................................... -- (10) (4,278) (98) (954)
--------------- ------- ------- ------- -------
Net loss attributable to common shareholders..... $ (376) $(1,613) $(9,165) $(1,043) $(5,257)
=============== ======= ======= ======= =======
Historical loss per share:
Basic and diluted.............................. $ (0.45) $ (0.61) $ (1.53) $ (0.27) $ (0.67)
=============== ======= ======= ======= =======
Weighted average shares, basic and diluted..... 828 2,660 5,971 3,828 7,887
Pro forma loss per share (unaudited):
Basic and diluted.............................. $ (0.38) $ (0.17)
======= =======
Shares used in computing basic and diluted..... 24,342 31,427
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, MARCH 31,
------------------------------ ---------
1997 1998 1999 2000
-------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 367 $ 6,119 $12,199 $35,410
Working capital.......................................... 568 4,427 12,770 35,280
Total assets............................................. 1,006 7,676 18,394 44,396
Long-term obligations, net of current portion............ -- -- 591 --
Redeemable convertible preferred stock................... 1,216 7,755 23,701 53,183
Total shareholders' deficit.............................. (366) (1,908) (9,295) (14,175)
</TABLE>
The pro forma statement of operations data presented above reflects the
automatic conversion upon the closing of the offering of all outstanding shares
of preferred stock into 19,708,829 shares of common stock.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH OUR FINANCIAL
STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. AS USED
BELOW, REFERENCES TO THE YEAR ENDED DECEMBER 31, 1997 REFER TO THE PERIOD FROM
JANUARY 16, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997.
OVERVIEW
We design, develop and market complete system-on-a-chip semiconductors 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. We have announced products
in production with Compaq, Sony and ViewSonic, and have more than 45 customers
who are using our products in more than 75 products.
During our first year of operation, we were the sole marketing and sales
agent of plasma display panels for Fujitsu General America, Inc. in the United
States. The relationship began in January 1997 and provided us with operating
revenue through the conclusion of the relationship in March 1999. The revenues
helped finance research and development of our core business of system-on-a-chip
design and the development of our marketing and sales infrastructure.
In December 1998, we began shipping PW364 ImageProcessor semiconductors,
which we believe to be the world's first single-chip flat panel display
controller. Additional semiconductors were introduced in 1999: the PW264
ImageProcessor semiconductors in April and the PW164 ImageProcessor
semiconductors in August. These semiconductors extended the product line into
new markets by providing new features for specific display applications at lower
price points.
We sell our products worldwide through a direct sales force and indirectly
through distributors and manufacturers representatives. Distributors have been
established in Japan and Taiwan. Manufacturers representatives support European
and Korean sales. In February 2000, sales and marketing offices were established
in Japan and Taiwan.
We recognize revenue from product sales to direct customers upon shipment.
We recognize revenue from product sales to distributors upon shipment if the
distributor has a firm sales commitment from an end customer. 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 62.3% of product revenue in 1999. See "Risk Factors--A significant
amount of our revenue comes from a few customers and distributors and any
decrease in revenues from, or loss of any of, these customers or distributors
could significantly reduce our total revenue" and "Risk Factors--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."
Significant portions of our products are sold overseas. Sales outside the
U.S. accounted for 92.8% of total revenue in 1999 and 94.7% of total revenue for
the three months ended March 31, 2000. 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. See "Risk
Factors--International sales account for a significant portion of our revenues,
and if we do not successfully address the risks associated with our
international operations, our revenues could decrease."
Product gross profit fluctuated over the past several quarters due to a
change in mix from low volume chip and evaluation board samples to high volume
semiconductor production. We expect average selling prices to decrease as we
move to higher volume, lower cost products. Additionally there will be some
average selling price reductions for our existing products due to the highly
competitive nature of the semiconductor industry. We anticipate that our product
gross profit may fluctuate quarter to quarter
28
<PAGE>
because we sell multiple products with varying margins and the mix of products
sold from period to period will change. Our gross profit will also be affected
by our move from a turnkey application specific integrated circuit, or ASIC,
business model to a customer owned tooling, or COT, business model which should,
if executed successfully, offset some of the negative effect on gross margins
resulting from reductions in average selling prices. See "Risk Factors--Intense
competition in our markets may reduce sales of our products, reduce our market
share, decrease our gross profit and increase losses."
Within the semiconductor industry we are known as a "fabless" company,
meaning that we do not fabricate the semiconductors that we design and develop,
but instead rely on third parties to manufacture our products. This business
model enables us to focus on designing, developing, and marketing our products
and significantly reduces the amount of capital we need to invest in capital
expenditures related to semiconductor manufacturing. See "Risk Factors--We
depend on a limited number of contract manufacturers for our products, and we
must order products from them based on forecasts from our customers from which
we do not have firm purchase orders."
Substantially all of our sales are made on the basis of purchase orders
rather than long-term agreements. In addition, the sales cycle for our products
is long which may cause us to experience a delay between the time we incur
expenses and the time we generate revenue from these expenditures. We intend to
increase our investment in research and development, selling, general and
administrative functions and inventory as we seek to expand our operations. We
anticipate the rate of new orders may vary significantly from quarter to
quarter. Consequently, if anticipated sales and shipments in any quarter do not
occur when expected, expenses and inventory levels could be disproportionately
high, seriously harming our operating results for that quarter and, potentially,
future quarters. See "Risk Factors--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" and "Risk Factors--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."
29
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth statement of operations data expressed as a
percentage of total revenue for the periods indicated.
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS
JANUARY 16, 1997 YEARS ENDED ENDED
(DATE OF INCEPTION) DECEMBER 31, MARCH 31,
TO DECEMBER 31, ---------------------- ----------------------
1997 1998 1999 1999 2000
------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue, net.... 6.2% 10.8% 98.7% 73.2% 100.0%
Commissions............. 93.8 38.1 0.5 10.6 0.0
Licensing and
development fees...... 0.0 51.1 0.8 16.2 0.0
------ ------ ------ ------ ------
Total revenue............. 100.0 100.0 100.0 100.0 100.0
Cost of revenue........... 6.0 2.2 65.3 26.5 63.6
------ ------ ------ ------ ------
Gross profit.............. 94.0 97.8 34.7 73.5 36.4
------ ------ ------ ------ ------
Operating expenses:
Research and
development........... 53.8 147.8 37.5 133.6 23.9
Selling, general and
administrative........ 147.5 134.4 34.1 98.0 25.3
Amortization of deferred
stock compensation.... 0.0 0.0 4.4 0.7 4.8
------ ------ ------ ------ ------
Total operating expense... 201.3 282.2 76.0 232.3 54.0
------ ------ ------ ------ ------
Loss from operations...... (107.3) (184.4) (41.3) (158.8) (17.6)
Interest and other income
(expense), net.......... 13.3 21.9 3.2 5.9 (43.3)
------ ------ ------ ------ ------
Loss before income
taxes................... (94.0) (162.5) (38.1) (152.9) (60.9)
Income taxes.............. 0.0 1.4 0.0 0.5 0.0
------ ------ ------ ------ ------
Net loss.................. (94.0)% (163.9)% (38.1)% (153.4)% (60.9)%
====== ====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
PRODUCT REVENUE. Product revenue increased from $451,000 for the three
months ended March 31, 1999 to $7.1 million for the three months ended
March 31, 2000. The $6.6 million dollar increase in product revenue was related
to increased volume shipments of ImageProcessor semiconductors.
COMMISSIONS REVENUE. Commissions revenue decreased from $65,000 for the
three months ended March 31, 1999 to $0 for the three months ended March 31,
2000. Commissions revenue for the three months ended March 31, 1999 was derived
from an agreement with Fujitsu General America, Inc. to sell their plasma
display products in the United States.
LICENSING AND DEVELOPMENT FEES. Licensing and development fees decreased
from $100,000 for the three months ended March 31, 1999 to $0 for the three
months ended March 31, 2000. Licensing and development fees from the three
months ended March 31, 1999 resulted from a 1998 agreement with a major customer
to develop a product for exclusive use by the customer for front projection
applications.
GROSS PROFIT. Gross profit was 73.5% for the period ended March 31, 1999
compared to 36.4% for the period ended March 31, 2000. Gross profit was
significantly higher in the first quarter of 1999 as a result of 26.8% of total
revenue coming from commissions revenue and licensing and development fees,
which have no associated cost of sales. Gross profit decreased to 36.4% in the
first quarter of 2000 due to the increase of product revenue as a percent of
total revenue, which have associated cost of sales.
30
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development expense was $823,000, or
133.6% of total revenue for the three months ended March 31, 1999 compared to
$1.7 million, or 23.9% of revenue for the three months ended March 31, 2000. The
increase of $867,000 resulted primarily from a $505,000 increase in compensation
expenses related to an increase in personnel and a $111,000 increase in expenses
related to engineering consulting services.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense was $604,000, or 98.0% of total revenue for the three months ended
March 31, 1999 as compared to $1.8 million, or 25.3% of total revenue. Most of
the $1.2 million increase resulted from a $713,000 increase in compensation
expenses related to an increase in personnel, $94,000 increase in accounting and
legal expenses, $86,000 increase in travel expenses and $62,000 increase in
sales commissions.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Stock compensation expense
increased $336,000 to $340,000 for the three months ended March 31, 2000 from
$4,000 for the three months ended March 31, 1999. The increase in stock
compensation expense is the result of the issuance of additional stock options
to employees at a deemed discount from the fair value of the common stock on the
date of grant through March 31, 2000. At March 31, 2000, the amount of employee
unearned compensation was $2.8 million. The deferred balance will be amortized
on an accelerated method as the employee provides services over the vesting
period of the options.
INTEREST AND OTHER INCOME & EXPENSE. Interest and other income and expense
consists of interest income, interest expense and other non-operating income and
expense. Interest and other income and expense, net was $36,000 of income and
$3.1 million expense for the three months ended March 31, 1999 and March 31,
2000, respectively. The $3.1 million of increase in expense is attributable to
$3.3 million in other expense associated with the patent settlement between
Pixelworks, Inc. and InFocus Systems, Inc., in February 2000. This increase was
partially offset by the increased interest income of $231,000 related to higher
average cash balances.
PROVISION FOR INCOME TAXES. During the three months ended March 31, 1999 we
had approximately $3,000 of income tax expenses related to foreign taxes on
license fee revenue. We recorded no provision for income tax expense during the
three months ended March 31, 2000.
YEAR ENDED DECEMBER 31, 1997, 1998 AND 1999
PRODUCT REVENUE. Product revenue increased from $25,000 in 1997 to $105,000
in 1998, and increased to $12.6 million in 1999. Revenues in 1997 and 1998 were
from the sale of stands and cases for flat screen televisions. In
December 1998, we shipped our first ImageProcessor semiconductors. Two
additional, lower cost products, the PW264 ImageProcessor semiconductor and the
PW164 ImageProcessor semiconductor, were introduced in April 1999 and
August 1999, respectively, to broaden our addressable market. The increase in
revenue from 1998 to 1999 resulted from the introduction of these ImageProcessor
semiconductors.
COMMISSIONS REVENUE. Commissions revenue decreased from $375,000 in 1997 to
$373,000 in 1998, and decreased to $65,000 in 1999. Commissions revenue
decreased from 1998 to 1999 as a result of the termination of an agreement with
Fujitsu General America, Inc. to sell their plasma display products in the
United States. We have not recognized commissions revenue since the first
quarter of 1999 and do not expect to recognize commissions revenue in future
periods.
LICENSING AND DEVELOPMENT FEES. Licensing and development fees were
$500,000 in 1998 and $100,000 in 1999. Licensing and development fees resulted
from a 1998 agreement with a major customer to develop a product for exclusive
use by the customer for front projection applications. We have not recognized
licensing and development fees since the first quarter of 1999. However to the
extent we enter
31
<PAGE>
into licensing or development arrangements in future periods, we would recognize
licensing and development fees in those periods.
GROSS PROFIT. Gross profit was 94.0% in 1997 and 97.8% in 1998 as a
majority of revenues came from commissions revenue and licensing and development
fees which have no associated cost of sales. Gross profit decreased from 97.8%
in 1998 to 34.7% in 1999 as a result of the increase of product revenue as a
percent of total revenue. Product sales which have associated cost of sales
increased from 10.8% in 1998 to 98.7% in 1999.
RESEARCH AND DEVELOPMENT. Research and development expense was $215,000, or
53.8% of total revenue for 1997, $1.4 million, or 147.8% of total revenue in
1998, and $4.8 million, or 37.5% of total revenue for 1999. Most of the
$1.2 million increase from 1997 to 1998 resulted from an increase of $555,000 in
compensation expenses related to an increase in personnel, an increase of
$344,000 in depreciation expense from capital expenditures and an increase of
$187,000 in engineering professional services. Most of the $3.4 million increase
from 1998 to 1999 resulted from an increase of $2.0 million in compensation
expenses related to an increase in personnel, an increase of $761,000 in
depreciation expense and an increase of $432,000 in engineering professional
services. Although absolute expenses increased from 1998 to 1999, research and
development expenses, as a percentage of total revenue, declined. We believe
that continued investment in research and development is critical to our
strategic objectives and we expect these expenses to increase in the future.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense was $590,000, or 147.5% of total revenue for 1997, $1.3 million, or
134.4% of total revenue for 1998, and $4.4 million or 34.1% for 1999. A majority
of the $724,000 increase from 1997 to 1998 resulted from an increase of $309,000
in compensation expenses related to an increase in personnel and an increase of
$97,000 in professional service expense. Most of the $3.1 million increase from
1998 to 1999 resulted from a $1.7 million increase in personnel expenses, an
increase of $312,000 in travel expenses, an increase of $272,000 in professional
services and an increase of $161,000 in reserves for doubtful accounts. We
expect selling, general and administrative expenses to increase in the future as
we add personnel, incur additional costs to support continued growth and
implement additional internal systems to support a public company.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Stock compensation expense was
$565,000 or 4.4% of total revenue in 1999. We will incur substantial stock
compensation expense in future periods which represents non-cash charges
incurred as a result of the issuance of stock options to employees and
consultants. At December 31, 1999, the amount of employee unearned compensation
was $2.2 million which will be amortized in future periods. Amortization of the
December 31, 1999 balance of deferred stock compensation for the years ending
December 31, 2000, 2001, 2002 and 2003 is estimated to be $1.1 million,
$640,000, $346,000 and $131,000, respectively. With respect to stock options
granted to employees, charges are recorded based on the difference between the
deemed fair value of the common stock and the option exercise price of the
subject options at the date of grant.
INTEREST AND OTHER INCOME, NET. Interest and other income, net consists of
interest income, interest expense and other non-operating income. Interest and
other income, net was $53,000, $215,000 and $409,000 in 1997, 1998 and 1999,
respectively. The increases are attributable to interest income from cash
proceeds from financing activities, partially offset by interest expense related
to higher average debt balance.
32
<PAGE>
PROVISION FOR INCOME TAXES. We recorded no provision for income tax in
1997. We recorded income tax expense of $14,000 and $3,000 for 1998 and 1999,
respectively, related to foreign taxes on license fee revenue. As of
December 31, 1999 we had approximately $5 million of net operating loss
carryforwards to offset against future taxable income. The carryforwards expire
on various dates through 2018, if not used. Utilization of net operating losses
is subject to an annual limitation due to the changes in ownership provisions of
the Internal Revenue Code of 1986 and similar state provisions. We are in a
deferred tax asset position, which has been fully reserved. We will continue to
provide a valuation allowance for our deferred tax assets until it becomes more
likely than not, in our assessment, that our deferred tax assets will be
realized.
QUARTERLY RESULTS OF OPERATIONS
The tables below set forth our quarterly results of operations in dollars
and as a percentage of revenue for our last five quarters. This data has been
derived from unaudited financial statements that have been prepared on the same
basis as our annual audited financial statements and, in our opinion, include
all adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation of this information. These unaudited quarterly
results should be read in conjunction with the annual audited financial
statements and notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1999 1999 1999 1999 2000
--------- --------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue, net........................... $ 451 $ 1,849 $ 4,289 $ 6,058 $ 7,064
Commissions.................................... 65 -- -- -- --
Licensing and development fees................. 100 -- -- -- --
------ ------- ------- ------- -------
Total revenue.................................... 616 1,849 4,289 6,058 7,064
Cost of revenue.................................. 163 1,318 2,850 4,038 4,495
------ ------- ------- ------- -------
Gross profit..................................... 453 531 1,439 2,020 2,569
------ ------- ------- ------- -------
Operating expenses:
Research and development....................... 823 1,052 1,342 1,588 1,690
Selling, general and administrative............ 604 915 1,270 1,577 1,784
Amortization of deferred stock compensation.... 4 29 140 392 340
------ ------- ------- ------- -------
Total operating expenses......................... 1,431 1,996 2,752 3,557 3,814
------ ------- ------- ------- -------
Loss from operations............................. (978) (1,465) (1,313) (1,537) (1,245)
Interest and other income (expense), net......... 36 74 157 142 (3,058)
------ ------- ------- ------- -------
Loss before income taxes......................... (942) (1,391) (1,156) (1,395) (4,303)
Income taxes..................................... 3 -- -- -- --
------ ------- ------- ------- -------
Net loss......................................... $ (945) $(1,391) $(1,156) $(1,395) $(4,303)
====== ======= ======= ======= =======
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1999 1999 1999 1999 2000
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue, net...................... 73.2 % 100.0 % 100.0 % 100.0 % 100.0 %
Commissions............................... 10.6 0.0 0.0 0.0 0.0
Licensing and development fees............ 16.2 0.0 0.0 0.0 0.0
------ ------ ------ ------ ------
Total revenue............................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue............................. 26.5 71.3 66.4 66.7 63.6
------ ------ ------ ------ ------
Gross profit................................ 73.5 28.7 33.6 33.3 36.4
------ ------ ------ ------ ------
Operating expenses:
Research and development.................. 133.6 56.9 31.3 26.2 23.9
Selling, general and administrative....... 98.0 49.5 29.6 26.0 25.3
Amortization of deferred stock
compensation............................ 0.7 1.6 3.3 6.5 4.8
------ ------ ------ ------ ------
Total operating expenses.................... 232.3 108.0 64.2 58.7 54.0
------ ------ ------ ------ ------
Loss from operations........................ (158.8) (79.2) (30.6) (25.4) (17.6)
Interest and other income (expense), net.... 5.9 4.0 3.6 2.4 (43.3)
------ ------ ------ ------ ------
Loss before income taxes.................... (152.9) (75.2) (27.0) (23.0) (60.9)
Income taxes................................ 0.5 0.0 0.0 0.0 0.0
------ ------ ------ ------ ------
Net loss.................................... (153.4)% (75.2)% (27.0)% (23.0)% (60.9)%
====== ====== ====== ====== ======
</TABLE>
TOTAL REVENUE. Quarterly revenue increased in each quarter from $616,000 in
the quarter ended March 31, 1999 to $7.1 million in the quarter ended March 31,
2000. The increase in revenue resulted from increasing unit shipments of the
PW364 ImageProcessor semiconductor which began shipping in December 1998 and the
introduction of two new products, the PW264 ImageProcessor semiconductor and
PW164 ImageProcessor semiconductor, which began shipping in April and August,
respectively.
GROSS PROFIT. As a percentage of total revenue, gross profit decreased from
73.5% in the first quarter of 1999 to 28.7% in the second quarter of 1999 as a
result of a decrease in commissions revenue and licensing and development fees,
which have higher gross profits than product revenues. As a percentage of total
revenue, gross profit increased from 28.7% in the second quarter to 33.6% and
33.3% in the third and fourth quarters of 1999, respectively and 36.4% in the
first quarter of 2000. This increase was a result of a change in product mix
which included the introduction of a new product, the PW164 ImageProcessor
semiconductor, which began shipping in August.
OPERATING EXPENSES. Research and development expense increased in absolute
dollars each quarter as a result of an increase in personnel for the development
of new products. Selling, general and administrative expense also increased in
absolute dollars in each quarter as a result of an increase in sales and
marketing personnel to support customer growth. Amortization of deferred stock
compensation increased each quarter as a result of additional stock options
granted in each quarter.
We believe that period-to-period comparisons of our operating results are
not necessarily meaningful. You should not rely on them to predict future
performance. The amount and timing of our operating expenses may fluctuate
significantly in the future as a result of a variety of factors. We face a
number of risks and uncertainties encountered by early stage companies,
particularly those in rapidly evolving markets such as the display device
industry. We may not be able to address these risks and difficulties
successfully. In addition, we may not be able to increase sales to existing
customers or add new customers on a regular basis and our revenue may not grow,
and we may not achieve or maintain profitability in the future.
34
<PAGE>
Our quarterly and annual operating results have fluctuated in the past and
are likely to fluctuate significantly in the future. It is likely that in some
future quarter our operating results will fall below the expectations of
securities analysts and investors. In this event, the market price of our common
share could significantly decline. See "Risk Factors--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" for more
information on the factors affecting our quarterly results.
Our sales cycle, which is typically between two and 12 months, contributed
to fluctuations in our quarterly operating results. Most of our operating
expenses are relatively fixed in the near term. In addition, our expense levels
are based, in part, on our expectations regarding future revenues. As a result,
any shortfall in revenues relative to our expectations could cause significant
changes in our operating results from quarter to quarter.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed operations through private placements
of our preferred convertible stock. Through March 31, 2000, gross proceeds from
private placements of preferred stock and the exercise of common stock purchase
warrants issued to investors totaled approximately $47.3 million. To a lesser
extent, we have financed operations through accounts payable and equipment lines
of credit, and the exercise of options and warrants to purchase common stock.
As of March 31, 2000, we had cash and cash equivalents of $35.4 million, an
increase of $23.2 million from cash and cash equivalents held as of
December 31, 1999. The increase was due to the sale of our preferred stock,
which raised $26.5 million, offset by cash used in operating activities and
purchases of property and equipment and other assets. In addition, we paid off
all of our short-term and long-term borrowings.
Net cash used in operating activities was $306,000, $901,000, $5.0 million,
$903,000 and $71,000 for the years ended December 31, 1997, 1998 and 1999 and
the three months ended March 31, 1999 and 2000, respectively. These net cash
outflows resulted from operating losses as well as increases in inventory and
accounts receivable due to increased sales and were partially offset by
increases in accounts payable and accrued liabilities.
Net cash used in investing activities was $553,000, $1.3 million,
$2.2 million, $335,000 and $1.5 million for the years ended December 31, 1997,
1998 and 1999 and the three months ended March 31, 1999 and 2000, respectively.
In 1997, the use of cash was attributable to purchases of short-term investments
and property equipment. In 1998 and 1999, the use of cash was attributable to
purchases of property and equipment. For the three months ended March 31, 1999
and 2000, the use of cash was attributable to purchases of intangible assets and
property and equipment.
Net cash provided by financing activities was $1.2 million, $7.9 million,
$13.3 million, $127,000 and $24.8 million for the years ended December 31, 1997,
1998 and 1999 and the three months ended March 31, 1999 and 2000. In 1997, cash
provided by financing activities was attributable to the issuance of convertible
preferred stock. In 1998, cash provided by financing activities was attributable
to proceeds from the financing of equipment and the issuance of convertible
preferred stock. In 1999, cash provided by financing activities was attributable
to proceeds from borrowings against the accounts receivable line of credit and
proceeds from the issuance of common stock, warrants and convertible preferred
stock. During the three months ended March 31, 2000 cash provided by financing
activities was attributable to proceeds from the issuance of our Series D
preferred stock to strategic investors. The participants include: Analog
Devices, Compaq, Sanyo, SeikoEpson, Toshiba, ViewSonic and a major semiconductor
company.
As of March 31, 2000, our principal commitment consisted of obligations
outstanding under operating leases. In June 1999, we agreed to lease
approximately 23,400 square feet in a facility located
35
<PAGE>
in Tualatin, Oregon, for a term of 60 months. The first year annual cost of this
lease is approximately $312,000, increasing to an approximate annual cost of
$462,000 for the next two years and an approximate annual cost of $497,000 for
the remaining two years. Although we have 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.
In February of 2000, we licensed rights to two patents from InFocus Systems,
Inc. The terms of the license call for four quarterly payments of $600,000
beginning on March 31, 2000.
From time to time, we may evaluate acquisitions of businesses, products or
technologies that compliment our business. Although we have no current plans in
this regard, any transactions, if consummated, may consume a material portion of
our working capital or require the issuance of equity securities that may result
in further dilution to existing shareholders.
We intend to substantially increase our operating expenses. These operating
expenses will consume a material amount of our cash resources, including a
portion of the net proceeds of this offering. We believe that the net proceeds
from this offering, together with existing cash balances and funds available
under our existing credit facilities, will be sufficient to meet our capital
requirements for at least the next 12 months. After this period, capital
requirements will depend on many factors, including the levels at which we
maintain accounts receivable and inventory. We may need to raise additional
funds, and additional financing may not be available on favorable terms, if at
all. Further, if we issue additional equity securities, shareholders may
experience dilution, and the new equity securities may have rights, preferences
or privileges senior to those of existing holders of our common stock. If we
cannot raise funds, if needed, on acceptable terms, we may not be able to
develop new products or enhance our existing products, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements.
This may seriously harm our business and results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our cash equivalents and short-term investments are exposed to financial
market risk due to fluctuation in interest rates, which may affect our interest
income and the fair market value of our investments. We manage the exposure to
financial market risk by performing ongoing evaluations of our investment
portfolio and investing in short-term investment-grade corporate securities.
These securities are highly liquid and generally mature within 12 months from
our purchase date. Due to the short maturities of our investments, the carrying
value approximates the fair value. In addition, we do not use our investments
for trading or other speculative purposes.
We have performed an analysis to assess the potential effect of reasonably
possible near-term changes in interest and foreign currency exchange rates. The
effect of such rate changes is not expected to be material to our results of
operations, cash flows or financial condition. All transactions to date have
been denominated in United States dollars.
As of March 31, 2000 our cash included money market securities. Due to the
short duration of our investment portfolio, an immediate 10% change in interest
rates would not have a material effect on the fair market value of our
portfolio. Therefore, we would not expect our operating results or cash flows to
be affected to any significant degree by the effect of a sudden change in market
interest rates on our securities portfolio.
FOREIGN CURRENCY EXCHANGE RISK
We are an international company, selling our products globally and, in
particular, in Japan, Taiwan and Korea. Although we transact our business in
U.S. dollars, we cannot assure you that future
36
<PAGE>
fluctuations in the value of the U.S. dollar would not affect the
competitiveness of our products, gross profits realized, and results of
operations. Further, we incur expenses in Japan, Korea and Taiwan and other
countries that are denominated in currencies other than U.S. dollars. We cannot
estimate the effect that an immediate 10% change in foreign currency exchange
rates would have on our future operating results or cash flows as a direct
result of changes in exchange rates. However, we do not believe that we
currently have any significant direct foreign currency exchange rate risk and
have not hedged exposures denominated in foreign currencies or any other
derivative financial instruments.
INFLATION
The impact of inflation on our business has not been material since our
inception.
RECENTLY ISSUE ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards, or SFAS, No. 133, Accounting For Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. SFAS No. 133 requires that all
derivatives be recognized in the balance sheet at their fair market value, and
the corresponding derivative gains or losses be either reported in the statement
of operations or as a deferred item depending on the type of hedge relationship
that exists with respect to such derivative. SFAS No. 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. We do not
expect the adoption of SFAS No. 133 to have a material impact on our results of
operations.
YEAR 2000
No significant Year 2000 problems arose. No significant expenditures related
to the Year 2000 are expected.
37
<PAGE>
BUSINESS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS
DISCUSSED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS."
OVERVIEW
We design, develop and market semiconductors and software that enable the
visual display of broadband content through a wide variety of electronic
devices. Broadband content includes video, computer graphics and data delivered
at high speeds via cable and telecommunication lines to our homes and offices.
Our products integrate a microprocessor, memory and image processing circuits
that function as a computer on a single chip, or system-on-a-chip.
Initially, we introduced products for use in the most technically demanding
display devices including advanced multimedia projectors, flat panel computer
monitors and high-definition televisions. We have recently extended our product
offerings into lower cost flat panel monitors with features and prices designed
for consumer markets. In the future, we intend to develop products for emerging
markets including Internet appliances, electronic devices designed solely for
accessing and displaying Web content.
Our system-on-a-chip semiconductors and feature-rich software help our
customers to simplify their product design, reduce time to market, lower
development costs and increase product performance. In addition, our customers
can use a common design across multiple products.
To date, we have announced that our semiconductors are used in products
marketed by Compaq, Sony and ViewSonic. We have more than 45 customers,
including seven out of the top 10 computer monitor brands and 10 out of the top
15 television brands. Our customers have more than 75 products in development or
production using our system-on-a-chip semiconductors.
INDUSTRY BACKGROUND
The increasing availability of high-speed access to broadband content is
transforming the way we see and use information. The amount of information that
can be transmitted at high speeds over long distances is increasing
dramatically. At the same time, new technologies are allowing end users to
receive data at significantly increased transmission speeds in the "last mile,"
the distance between the telephone and cable company and the user's home or
office. According to IDC, broadband access is expected to grow at a compounded
annual growth rate of approximately 78% from 1999 to 2003. In order to take full
advantage of the large amounts of visual information arriving at the "last
meter," the point where the information is processed and displayed, users are
demanding more sophisticated display devices capable of showing text, graphics
and full motion video simultaneously. These products include flat panel
monitors, high definition televisions, or HDTVs, multimedia projectors, and
Internet appliances. Independent research firms are projecting significant
growth for these devices over the next several years. The following data has
been gathered from published sources which were not specifically prepared or
approved for use in this prospectus.
- DisplaySearch estimates that the market for flat panel monitors will grow
from 4.5 million units in 1999 to 23.2 million units in 2004, a compound
annual growth rate of 39%.
- Stanford Resources estimates that the market for HDTVs will grow from 1.5
million units in 1999 to 2.9 million units in 2004, a compound annual
growth rate of 14%.
- Pacific Media Associates estimates that the market for multimedia
projectors will grow from 750,000 units in 1999 to 1.5 million units in
2003, a compound annual growth rate of 19%.
- IDC estimates that an emerging category of devices including netTVs,
screenphones and other Internet appliances will grow from 7.3 million
units in 1999 to 32.5 million units in 2004, a compound annual growth rate
of 35%.
38
<PAGE>
Today, the convergence of television and computer applications is creating
new development opportunities for products that integrate the ability to display
full motion video and support interactive capabilities such as browsing the Web
while watching television. This convergence requires an increase in transmission
capacity and makes the interpretion and display of information more complex.
While significant growth is forecasted for display devices, the increasing need
to rapidly process large amounts of information delivered in a multitude of
broadcast and Web transmission formats could constrain this growth. This
bottleneck limits access to the full visual potential of broadband content.
Developing the technology to cost effectively meet the breadth and
complexity of new display devices poses several technical challenges. First, the
signals delivering content to these devices include analog, digital and video
information that has been encoded using a combination of standard and
non-standard industry formats. This information must be translated and optimized
at very high speeds to match the functionality and display characteristics of
different display devices. Second, these new devices require visual information
to be displayed in a wide variety of sizes and formats. Each signal, whether
analog or digital, must be manipulated to properly display the appropriate image
in the correct format on the device. Third, all of these differing signals and
formats need to be processed without compromising the visual quality of the
information displayed.
The rapid development of high resolution display technologies has created
another challenge. The quality of a display device largely depends on its
resolution. Resolution is defined by the number of picture elements, or pixels,
that can be displayed. Pixels on a display are arranged in a matrix made up of a
series of rows and columns. With higher resolution, more information can be
displayed resulting in a crisper and cleaner image. In order to meet end users'
expectations for higher quality images, new display technologies are frequently
introduced with higher resolutions. Today's mainstream computer monitors use an
Extended Graphics Array, or XGA, display consisting of a matrix of 1,024 by 768
pixels. Higher computer resolution formats are emerging such as Super Extended
Graphics Array, or SXGA, with 1,280 by 1,024 pixels, and Ultra Extended Graphics
Array, or UXGA, with 1,600 by 1,200 pixels. In addition, 18 definition
television formats have been created to support HDTV video content.
The industry is seeking to address some of this complexity and to accelerate
the acceptance of flat panel displays through the development of new standards
such as the Digital Visual Interface, or DVI, specification, a new digital
standard for attaching a flat panel monitor to a computer. However, even with
development of these standards, today's technology is reaching its physical
limit of transmitting and receiving image data. New standards are required to
increase the available transmission capacity, or bandwidth, in the last meter.
Without new standards, the adoption of advanced high-resolution,
high-performance display products may be impeded.
Furthermore, the traditional design approach of creating "hard-wired"
solutions for specific technical challenges results in single-purpose
semiconductors that are difficult to re-configure for new products. The
resulting fixed functionality combined with the lengthy design cycles for new
products has made it difficult for developers to quickly design
high-performance, flexible, multi-featured, and affordable new display products.
PIXELWORKS SOLUTION
Our solution, the highly integrated ImageProcessor semiconductor coupled
with our software, breaks through the bottleneck which has been limiting access
to broadband content. Our products are capable of translating and optimizing
high-speed video, computer graphics and Web information in real time. Our
products also process signals ranging from low-resolution computer graphics to
the latest high-definition television standards. We enable our customers to
quickly integrate our products into their own advanced display product
development programs with our system-on-a-chip semiconductors and software. We
provide our customers with a new design approach that lets them develop all of
their
39
<PAGE>
display solutions products using a consistent design method that is software
compatible across product lines.
We have embraced a systems design process rather than requiring our
customers to design their products using many individual electronic components.
Our semiconductors integrate a microprocessor, memory and image processing
circuits. This approach enables our customers to substantially increase
functionality, reduce time to market, and lower overall development costs in
highly efficient designs that allow miniaturization. Our highly integrated
products enable our customers to get their products into the market more rapidly
by significantly reducing the selection, sourcing, testing, integration,
debugging, and design of separate components.
The following diagram illustrates the high level of integration of our
semiconductors which results in reduced complexity, cost and time to market for
our customers.
Description of graphics on page :
This graphic is entitled "Pixelworks ImageProcessor System-on-a-Chip
Integration." The subtitle of this graph reads as follows: "Block Diagram
Representation for SXGA-Resolution, Multimedia LCD Monitor." A further subtitle,
positioned just above the graphic, reads: "Pixelworks Integrates Up to 10 Chips
onto a Single Chip." Two discrete diagrams are positioned side by side. The left
diagram shows an arrow pointing downward toward a group of 10 boxes connected by
black lines with a second downward-pointing arrow at the bottom. All components
of the diagram are shaded by black lines with a second downward-pointing arrow
at the bottom. All components of the diagram are shaded gray and are represented
as three-dimensional. Text inside the top arrow reads "Input Source." Reading
from top to bottom, left to right, the individual boxes are labeled as follows:
"Microprocessor," "Scaler," "Video Processor," "Frame Rate Conversion," "Auto
Image Optimization," "Color Compensation," "On-Screen Display," and three
individual boxes labeled "Frame Buffer Memory." Lines connect all of the boxes
with arrowheads pointing at each of the boxes. The bottom downward-pointing
arrow is labeled "Output to Display." The diagram on the right side shows an
arrow pointing downward to a single box comprised of small, sub-sections and
another downward-pointing arrow at the bottom. All components of the diagram are
shaded gray and are represented as three-dimensional. The top arrow is labeled
"Input Source." Within the single box, there is one large box containing smaller
boxes. This large box is shaded in black with white letters reading "Pixelworks
Software." A slightly smaller, gray box is positioned within the larger box and
is labeled "ImageProcessor IC." Within this smaller gray box are eight smaller
boxes which read as follows from top to bottom, left to right: "Microprocessor,"
"Scaler," "Video Processor," "Frame Rate Conversion," "Auto Image Optimization,"
"Color Compensation," "On-Screen Display," and "Frame Buffer Memory." Below the
box is an arrow labeled "Output to Display." Five semi-transparent, gray
trapezoids link the left and right diagrams with the first top trapezoid
connecting the top row of blocks of the left diagram to the top row of smaller
blocks in the right diagram. The second trapezoid connects the second row of
blocks in the left diagram to the second row of smaller blocks in the right
diagram with this pattern continuing for rows three through five in each
diagram.
Key benefits of our semiconductors and software include:
CONSISTENT DESIGN ACROSS MULTIPLE PRODUCTS. Our products, comprised of both
system-on-a-chip semiconductors and software, can be easily implemented across
multiple product models and categories. Customers can significantly reduce
development investments by leveraging a single effort to create a line of
products, a benefit we believe to be unique to our design. Many of our customers
are taking
40
<PAGE>
advantage of this capability. For example, Compaq is using our products in both
flat panel display monitors and a multimedia projector, all leveraged from the
same development effort.
BROAD COMPATIBILITY. Our products work with a broad range of video, Web and
computer graphics signals and display technologies. Our products instantly
recognize, interpret, and optimize video and computer graphics for display on a
wide variety of devices used in the home and office. This allows our customers
to use our system-on-a-chip semiconductors in display products that address
multiple market segments and applications. For example, ViewSonic has used our
products to design flat panel monitors that have five data connectors--two
analog, two digital, and one video--handling resolutions up to UXGA, or 1600 by
1200 pixels.
NUMEROUS INNOVATIVE FEATURES. Our semiconductors and software give our
customers a large variety of features required for the most demanding
applications. These features include picture-in-picture, video rotation,
projected image correction, and digital zoom. Our software also allows our
customers to rapidly develop unique features that differentiate their end
products.
RAPID TIME TO MARKET WITH LOWER DEVELOPMENT COSTS. Our customers leverage
our designs from one project to the next, lowering their overall development
costs and promoting efficient design processes.
PIXELWORKS STRATEGY
Our objective is to be a leading provider of system-on-a-chip semiconductors
and software enabling universal access to broadband content through a wide array
of electronic devices in consumer and business markets. The key elements of this
strategy are:
DESIGN AND SELL INCREASINGLY INTEGRATED SEMICONDUCTORS. We intend to
continue to combine more and more of the functionality required to open up the
last meter of broadband content delivery. Our semiconductors include an
integrated microprocessor, memory, and image processing circuits capable of
processing high-resolution images.
DELIVER HIGHLY FLEXIBLE SOFTWARE-DRIVEN PRODUCTS. Unlike component
semiconductor suppliers, our products include both highly integrated
semiconductors and software. Our ready-to-implement software modules shorten our
customers' development time by giving them the option to reduce or eliminate
their own custom development. Our strategy is to continuously provide our
customers with new software, driving higher levels of performance and
functionality.
EXPAND FROM HIGH-END MARKETS INTO MASS MARKETS. We targeted our initial
products at the most challenging segments of the market: high-resolution
flat-panel monitors and multimedia projectors. These technically demanding
products were and continue to be a proving ground for our design approach and
products. Our products have been widely accepted in these markets. Our strategy
is to leverage our technology advantage and market acceptance by offering many
of the same capabilities in system-on-a-chip semiconductors specifically
designed for higher volume flat panel monitor markets by helping to drive down
product costs while providing superior performance. We also expect these markets
to include emerging applications, including Internet appliances, screenphones
and netTVs.
SUPPORT AND DEFINE INDUSTRY STANDARDS. Development and broad industry
support of standards is critical to the continued adoption of flat panel
displays and future broadband appliances. The current generation of standards is
inadequate for the processing and display of next-generation broadband content.
Future standards will have to address new device requirements such as higher
resolutions, larger formats, multiple displays and high speed bandwidth. Our
philosophy has been to support accepted industry standards including the DVI
standard developed by the Digital Display Working Group. Moving forward we
expect to be more proactive in the definition of new standards to drive the
adoption of advanced display products.
41
<PAGE>
In support of this strategy, concurrent with the closing of our Series D
preferred stock offering, we began collaborating with Intel Corporation to
develop a new standard for next generation digital displays. Pixelworks intends
to develop a new semiconductor that embodies that new standard, which we
anticipate will incorporate functionality included in the current DVI standard
as well as additional features useful for driving next generation displays. We
have committed to offer the specification to the Digital Display Working Group
for inclusion in future widely available specifications.
BUILD STRATEGIC RELATIONSHIPS. We intend to continue to work closely with
strategically important partners to develop widely useful products as our
next-generation products. Those strategically important partners may be our
customers, our suppliers, or participants in the industry whose own strategic
interests led them to work with us. In February 2000, we invited a select list
of strategic investors to participate in our Series D investment round based on
their ability to offer competitive advantages to us as market channels, or as
suppliers, or as technology collaborators, in areas of strategic importance to
us including monitors and televisions for mass markets, next-generation high
performance displays, and broadband appliances. Participants in the Series D
offering include: Analog Devices, Compaq, Sanyo, Seiko Epson, Toshiba, ViewSonic
and a major semiconductor company.
We are pioneering the development of ultra high-resolution display
technology. We have provided IBM with semiconductors that drive the world's
first commercially available super high-resolution display panel. With a
resolution that approaches the quality of printed text at 123 pixels per inch,
the 3.15 million pixels display the equivalent of four XGA-resolution monitors
on a single screen.
PRODUCTS
Our ImageProcessor products combine system-on-a-chip semiconductors,
software and software development tools which enable our customers to quickly
integrate our system-on-a-chip semiconductors into their end products. Designs
using our products are portable across different product lines and models. All
of our products are manufactured using state-of-the-art manufacturing processes.
In December 1998, we began shipping the PW364 ImageProcessor semiconductor,
which we believe to be the world's first single-chip flat panel display
controller. Additional semiconductors were introduced in 1999--the PW264
ImageProcessor semiconductor in April and the PW164 ImageProcessor semiconductor
in August. These semiconductors extended the product line into new markets by
providing new features for specific display applications at lower price points.
In December 1999, the Society for Information Display, or SID, recognized
our PW364 and PW264 ImageProcessor semiconductors with the "Display Material or
Component of the Year Gold Award," a distinguished technical recognition in the
advanced display industry. The winners of the SID INFORMATION DISPLAY MAGAZINE
Display of the Year Awards are selected by a committee of display technologists
and leading editors who cover the display industry.
All of our ImageProcessor semiconductors include the following features:
- INTELLIGENT IMAGE PROCESSING--interprets and resizes incoming image
signals to match the resolution and aspect ratio, or the relation of the
width to the height of the specific display used in the product
- ADAPTIVE IMAGE OPTIMIZATION--identifies the incoming computer or video
signals and adjusts the display to produce the best possible image
- ADVANCED VIDEO SUPPORT--recognizes and optimizes incoming video signals,
including HDTV, for a wide variety of display resolutions
- SOFTWARE COMPATIBILITY--allows customers to rapidly create products across
product lines and categories
42
<PAGE>
Other features of our ImageProcessor semiconductors include:
- SUPPORT FOR A RANGE OF RESOLUTIONS--the ability to handle a full range of
resolution standards from 640 by 480 pixels to 2,048 by 1,536 pixels.
- PICTURE-IN-PICTURE--the ability to overlay and view one image source
simultaneously with another image source in a resizable and movable window
- KEYSTONE CORRECTION--a feature designed for projectors that allows users
to adjust the image electronically to compensate for optical distortions
in a projected image so it appears square.
Our current ImageProcessor semiconductors are:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
MARKET OTHER MODULAR FEATURES
<CAPTION>
ADVANCED
TELEVAPPLICATIONSUTING
<S> <C><C>
- --------------------------------------------------------------------------------------------------------------------------
PW364 X X UXGA UXGA X
- --------------------------------------------------------------------------------------------------------------------------
PW364D X UXGA UXGA X X
- --------------------------------------------------------------------------------------------------------------------------
PW264 X X SXGA XGA X
- --------------------------------------------------------------------------------------------------------------------------
PW264-K X X SXGA XGA X X
- --------------------------------------------------------------------------------------------------------------------------
PW164W-20 X X UXGA SXGA X
- --------------------------------------------------------------------------------------------------------------------------
PW164-10R X SXGA XGA
- --------------------------------------------------------------------------------------------------------------------------
PW164-20R X UXGA SXGA
- --------------------------------------------------------------------------------------------------------------------------
PW164-10RK X X SXGA XGA X
- --------------------------------------------------------------------------------------------------------------------------
PW164-20RK X X UXGA SXGA X
- --------------------------------------------------------------------------------------------------------------------------
PWSR-01 X QXGA QXGA X
Chip Set
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C>
- --------------------------------------------------------
PW364 Full-featured
SXGA, UXGA
Multimedia
Monitors and TVs
- -------------------------------------------------------------------------
PW364D Full-featured
SXGA, UXGA
Multimedia
Projection
- ------------------------------------------------------------------------------------------
PW264 Full-featured
XGA
Monitors
- -----------------------------------------------------------------------------------------------------------
PW264-K Mainstream XGA
Projection
- --------------------------------------------------------------------------------------------------------------------------
PW164W-20 Low Cost XGA
Projection
- --------------------------------------------------------------------------------------------------------------------------
PW164-10R 15 in. XGA
Multimedia
Monitors
- --------------------------------------------------------------------------------------------------------------------------
PW164-20R 17-18 in. SXGA
Multimedia
Monitors
- --------------------------------------------------------------------------------------------------------------------------
PW164-10RK Low cost
XGA/SVGA
Projection
- --------------------------------------------------------------------------------------------------------------------------
PW164-20RK Low cost
SXGA Projection
- --------------------------------------------------------------------------------------------------------------------------
PWSR-01 Super Resolution
Chip Set Monitors
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(1) Resolution standards:
XGA 1,024 X 768 pixels UXGA 1,600 X 1,200 pixels
SXGA 1,280 X 1,024 pixels QXGA 2,048 X 1,536 pixels
</TABLE>
43
<PAGE>
OUR SOFTWARE
We provide a complete software development environment that helps customers
reduce their time to market by providing an embedded operating system, computer
programming code and tools necessary to customize display devices. Our Software
Development Kit enables product differentiation through rapid customization of
features, performance, and device "look and feel" with fast time to market and
reduced development costs. Our software provides a consistent development
platform that is portable across product lines and product categories.
The Software Development Kit includes:
- An operating system, computer programming code and programming tools;
- Software that provides automatic image optimization which is compatible
with a wide range of analog, digital, and video formats;
- Application programming interfaces that allow the customer to address our
software and hardware functionality at a high level;
- Support for a wide range of hardware devices; and
- Windows-based utilities:
- GUIBuilder--allows the customer to build graphical on-screen user
interfaces
- Display Configurator--allows the customer to configure timing for
particular display panels
- FlashUpgrader--allows the customer to download software into memory for
use by our system-on-a-chip semiconductors
- PW Debug--gives the customer the capability for interactive debugging
of the system over a serial interface
FUTURE PRODUCT DEVELOPMENT
We plan to develop new system-on-a-chip semiconductors which address
customer demand and are logical extensions of our design architecture. Higher
levels of integration may include adding analog to digital converters, video
decoders and DVI compliant digital receivers. These higher levels of integration
will further reduce the number of components on circuit boards and help to lower
overall system costs. Future products may incorporate functionality targeted at
Internet appliance and advanced video applications.
TECHNOLOGY
Our core competency in semiconductor design involves an innovative
methodology for developing complex system-on-a-chip designs. Our designs are
based on self-contained modules that can be reassembled and reused in new
development programs. We extensively simulate and test our designs using the
best available simulation and synthesis tools and internally developed
proprietary validation tools. We work closely with our foundry partners to use
state-of-the-art manufacturing process technology.
IMAGEPROCESSOR SEMICONDUCTOR TECHNOLOGY
UNIQUE ON-CHIP INTEGRATION OF MICROPROCESSOR, MEMORY AND DIGITAL SIGNAL
PROCESSOR. Our ImageProcessor semiconductor is a complete, integrated display
controller on a single chip, which includes automatic image optimization,
automatic image resizing and an onboard microprocessor. This single chip
replaces all of the individual components of the traditional display controller.
44
<PAGE>
The technical specifications of our system-on-a-chip semiconductors include
an embedded x86-compatible microprocessor and peripherals, 4 megabytes of
memory, and a high performance digital signal processing, or DSP, core. Our
proprietary memory system architecture enables up to 33.2 gigabits per second of
bandwidth, and our DSP enables processing of image resolutions as high as Quad
Extended Graphics Array, or 2,048 by 1,536 pixels, which requires more than 5
gigabits per second of transmission capacity. By integrating the microprocessor
and peripherals, memory, and DSP our products provide a complete solution to the
core electronics of a display device.
BROAD INTERFACE FLEXIBILITY. Our ImageProcessor semiconductors work with
analog or digital signals, ranging from low resolution computer graphics to the
latest high-definition television formats.
COMPLETE SOFTWARE DEVELOPMENT ENVIRONMENT. We provide an embedded operating
system, source code, and software tools necessary to customize display devices.
Our software development environment includes a proprietary Windows based user
interface creation tool, GUI Builder, that enables customers to create finished
products with a distinct "look and feel." The GUI Builder also allows our
customers to easily create multiple differentiated products. In addition to
controlling the user interface our software forms the heart of the real time
system at the core of any modern display product. Our software provides a
consistent development platform that is portable across product lines and
product categories. For example, a customer that develops a projector product
that uses our software can easily port that software to a monitor. This benefits
the customer by dramatically reducing time to market and providing a unique
"look and feel" that delivers a consistent customer experience across an entire
product portfolio.
INTELLIGENT IMAGE PROCESSING TECHNOLOGY
Our technology supports multi-standard analog and digital video, including
digital television or DTV, HDTV, National Television Standards Committee, or
NTSC, and other international video standards. Our intelligent image processing
products simplifies the use and development of display devices. Features of our
technology include the following:
IMAGE SCALING AND SHAPING. Our image processing technology incorporates a
proprietary programmable two-dimensional image scaler capable of resizing images
to fit a wide variety of aspect ratios, which is the ratio of width to height of
display screens, and resolutions. With our scaler, images can be adapted to
aspect ratios ranging from traditional 4:3 aspect ratios of conventional
computer monitors and televisions to the 16:9 format used in wide screen HDTVs.
In addition, content designed for a specific resolution can be intelligently
stretched or reduced in real time to fit a new resolution for a specific display
without degrading the image. For example low-resolution images are processed by
intelligently adding information, so that when the new image is displayed, it
looks smooth without any jagged image areas. High-resolution content can be
displayed on lower resolution displays by intelligently removing information
without degrading image quality.
Our technology allows the shape of an image to be changed in multiple
dimensions. This is useful in compensating for optical distortions in products
including front projection systems and rear projection televisions. For example,
standard resolution videotapes designed for conventional television display can
be resized and formatted for display on a high-resolution wide-screen flat panel
television without degrading the image. This capability is increasingly
important as HDTV becomes more prevalent. HDTV content can be delivered in as
many as 18 different combinations of resolutions and aspect ratios.
ADAPTIVE IMAGE OPTIMIZATION. Our products must translate a broad range of
signals in standard and non-standard formats. We use a proprietary image
processing technique to identify the characteristics of a signal and configure
the system to produce the best possible image. Our adaptive image optimization
technology automatically adjusts incoming signals to achieve the highest
possible image quality. The
45
<PAGE>
display adjusts itself when it is turned on and continuously adjusts with every
change of the incoming signals to display an optimal image.
ADVANCED VIDEO PROCESSING. Flat panel displays are progressive scan devices.
Images are built and displayed sequentially one row or line at time. Typically,
video signals are interlaced or built using every other row. First the odd rows
are displayed and then the image is updated with the even rows. Our image
processing technology converts the incoming interlaced video signals for display
on flat panels by doubling the incoming signals to match the progressive scan
capabilities of flat panel displays. This is an especially difficult challenge.
Simply merging the odd and even fields results in very jagged image edges. Our
intelligent approach uses a sophisticated video digital signal processing
technique to display the best possible image.
COLOR COMPENSATION TECHNOLOGY. Our sophisticated custom color compensation
technology makes it possible to display consistent color images from video and
computer graphics, which use very different color palettes, on different display
devices. Our color processing technology compensates for variations in the color
performance of a display. Using our unique approach any color can be addressed
independently and adjusted without impacting other colors. Our customers can use
our color compensation technology to compensate for non-uniform color in a
specific display and to provide consistent color performance across multiple
products using different display technologies. It can also be used to compensate
for color variations in display components provided by different vendors.
Our non-linear color compensation technology allows precise color matching
and may enable products which can precisely represent the color of the original
source. The applications of this technology include graphic design where colors
on a display using an ImageProcessor semiconductor can be accurately matched to
a print output. Another application is for improving end-user satisfaction when
using Internet e-commerce shopping sites by enabling exact color representation
of products to be shown on a display.
FULLY CUSTOMIZABLE ON-SCREEN DISPLAY
Our technology couples an integrated on-screen display controller with a
unique Windows-based application that allows customers who are designing
ImageProcessor semiconductors into their display products to quickly develop and
implement their own unique user interfaces that can incorporate graphics and
colorful icons in start-up displays and menus.
CUSTOMIZABLE FEATURE SUPPORT FOR SPECIFIC DEVICE FUNCTIONALITY
This allows developers to add unique features for specific devices.
Customizable features currently include:
- Picture-in-picture for products in the consumer multimedia, high-end
desktop monitors and business presentation markets;
- Image shaping for keystone correction in business presentation products;
and
- Digital zoom to enlarge images electronically.
MIXED ANALOG AND DIGITAL SIGNAL SUPPORT
Our ImageProcessor semiconductors can support as many as four different
sources of computer and video content to be displayed on a single device through
integrated and add-on analog and digital receivers and connectors. Analog
computer graphics, digital graphics supporting the DVI standard and video
through a variety of sources that can be captured, decoded and optimized.
46
<PAGE>
CUSTOMERS, SALES AND MARKETING
We have achieved design wins with global leaders in the business computing
and consumer electronics markets. We have announced products in production with
Compaq, Sony and ViewSonic and have more than 45 customers who are using our
system-on-a-chip semiconductors in over 75 products. Customers that use our
products include seven out of the top 10 monitor brands and 10 out of the top 15
television brands.
The key elements of our sales and marketing strategy are to achieve design
wins with industry leading branded manufacturers in targeted markets and to
continue building strong customer-supplier relationships. Once a design win has
been achieved, sales and marketing efforts are focused on building long-term
mutually beneficial business relationships with our customers by providing
superior technology which complements their product development objectives and
meets their expectations for price-performance and time to market. Marketing
efforts are focused on building market-leading brand awareness and preference
for our system-on-a-chip semiconductors.
Our global distribution channel is multi-tiered and involves:
- Manufacturers Representatives--Independent sales agents who represent us
in local markets and provide pre- and post-sales support and do not carry
inventory
- Distributors--Resellers in local markets who provide pre- and post-sales
support and stock our ImageProcessor semiconductors in direct relation to
specific manufacturing customer orders
- Integrators--OEM customers who build display devices based on
specifications provided by branded manufacturers
- Branded Manufacturers--Globally recognized manufacturers who develop
display device specifications, manufacture, market and distribute display
devices either directly or through resellers to end-users
In Japan, our products are sold through our distributor, Tokyo Electron
Device who represented 54.9% and 64.1% of our total revenue for 1999 and the
three months ended March 31, 2000, respectively. Sales through Tokyo Electron
Device to our customer Seiko Epson represented 23.3% and 25.3% of our total
revenue for 1999 and the three months ended March 31, 2000, respectively. Sales
through Tokyo Electron Device to our customer Hitachi represented 11.2% and
12.4% of our total revenue for 1999 and the three months ended March 31, 2000,
respectively. In Taiwan, we sell through our distributor MicroMax International
who represented 24.4% and 13.1% of our total revenue for 1999 and the three
months ended March 31, 2000, respectively. Sales through MicroMax to our
customer Optoma, formerly known as CTX Opto-Electronics, an integrator for
Compaq, represented 13.5% and 9.4% of our total revenue for 1999 and the three
months ended March 31, 2000, respectively. We support our European and Korean
customers through direct sales supported by manufacturer representatives. We
sell our products to and support our U.S. customers directly.
Our sales and marketing team included 36 employees as of March 31, 2000. The
sales and marketing team includes the architecture support team of 20
application engineers who provide technical expertise and assistance to
manufacturing customers on final product development. In February 2000, we
established sales and marketing offices in Japan and Taiwan.
RESEARCH AND DEVELOPMENT
At our inception, our internal research and development efforts were focused
on the development of our PW364 ImageProcessor semiconductor for the high-end
multimedia projection and flat panel monitor markets. In 1998, our development
efforts for the PW264 ImageProcessor semiconductor were focused on extending our
technology into new markets. In 1999, our development efforts for the
47
<PAGE>
PW164 ImageProcessor semiconductor product series were focused on developing
highly efficient designs while maintaining product performance and features.
We are now pursuing higher levels of integration of new features in order to
extend our system-on-a-chip semiconductors into new market segments. These
higher levels of integration will further reduce components on circuit boards
and help to lower final systems costs for our customers. Future development
efforts include system-on-a-chip technologies required for Internet appliance
and advanced video applications.
In addition to our 20 applications engineers we have 37 engineers,
technologists and scientists who are organized into the following functional
groups: Integrated Circuit Design, Software engineering, Systems Engineering and
Product and Test Engineering. Software engineers constitute 40% of our
engineering resources and 21% are systems engineers. This concentration of
systems and software engineering reflects our system-on-a-chip focus.
We have invested and expect that we will continue to invest significant
resources in research and development activities. Our research and development
expenses were $215,000, $1.4 million and $4.8 million in 1997, 1998 and 1999,
respectively.
MANUFACTURING
Our products require advanced semiconductor processes and packaging
technologies. Within the semiconductor industry we are known as a "fabless"
company, meaning that we do not fabricate the semiconductors that we design and
develop, but instead rely on third parties to manufacture our products. We have
established strategic technology relationships with our fab partners Toshiba and
Taiwan Semiconductor Manufacturing Corporation, or TSMC. This approach allows us
to concentrate our resources on product design and development where we believe
we have greater competitive advantages. All of our current products are
manufactured by Toshiba on an application specific integrated circuit, or ASIC,
turnkey basis. On this basis, Toshiba manufactures wafers, performs all assembly
and test operations and is responsible for the quality and reliability testing
of our products.
Our current products are manufactured by Toshiba using a standard 0.25
micron embedded memory process. We plan to have our future products manufactured
by Toshiba and TSMC using 0.25 micron and 0.18 micron embedded memory and
standard complementary metal-oxide semiconductor, or CMOS, processes. We intend
to build some future products on a customer owned tooling, or COT, basis,
directly contracting the manufacture of wafers and the assembly and testing of
our products. While this COT manufacturing model adds greater responsibility and
risk for our production, it provides us with the manufacturing flexibility
required for future products and may reduce our manufacturing costs.
INTELLECTUAL PROPERTY
We rely on a combination of nondisclosure agreements and copyright,
trademark and trade secret laws to protect the algorithms, design and
architecture of our system-on-a-chip technology. We currently have six patent
applications pending with the U.S. Patent and Trademark Office, which relate
generally to image scaling, auto image optimization and improving the DVI
interface standard. We intend to seek patent protection for other significant
technologies that we have already developed and expect to seek patent protection
for future products as necessary. Any future patents may not be granted and if
granted may be invalidated, circumvented, challenged or licensed to others.
To supplement the technologies that we develop internally, we have licensed
rights to use intellectual properties held by third parties, and we may license
additional technology rights in the future. In November, 1997 we entered into a
license agreement with VAutomation Incorporated pursuant to which, among other
things, we licensed rights relating to VAutomation's soft core technology. In
March, 1999 we entered into another agreement with VAutomation pursuant to
which, among other things, we sublicensed certain rights related to x86
semiconductor core technology. That
48
<PAGE>
agreement terminates on November 6, 2006. We have also recently obtained a
license from InFocus for the use of its proprietary automatic pixel clock phase
and frequency correction technology specified in two patents held by InFocus. We
acquired this technology in connection with the settlement of a claim by InFocus
that we were infringing on its patents relating to this technology. We obtained
this license to avoid any uncertainty which this claim might create for our
customers and our business. The license gives us the right to use this
technology without payment of royalty in our products. If any of these
agreements terminate, we would be required to exclude the licensed technology
from our existing and future product lines.
The semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights. We have indemnification
obligations with respect to the infringement of third party intellectual
property rights. There is no intellectual property litigation currently pending
against us. However, we may from time to time receive notifications of claims
that we may be infringing patents or other intellectual property rights owned by
third parties. If it is necessary or desirable, we may seek licenses under those
patents or intellectual property rights. However, we cannot be sure that
licenses will be offered or that the terms of any offered licenses will be
acceptable to us.
COMPETITION
In general, the market for semiconductors is intensely competitive. Our
market is characterized by rapid technological change, evolving industry
standards, compressed product life cycles and declining average selling prices.
We believe the principle factors impacting competition in our markets are levels
of product integration, functional versatility provided by software, compliance
with industry standards, time to market, cost, product performance, system
design costs, intellectual property, customer relationships and reputation.
Our current products face competition from specialized display controller
developers and in-house display control chips designed by our customers and
potential customers. Additionally, new, alternative display processing
technologies and industry standards may emerge that directly compete with
technologies that we offer.
We compete with specialized and diversified electronics and semiconductor
companies that offer display processors or scaler components. Some of these
include Genesis Microchip, Macronix, Sage, Silicon Image, SmartASIC,
STMicroelectronics and Trident Microsystems.
Potential competitors may include diversified semiconductor manufacturers
including Broadcom Corporation, National Semiconductor and Texas Instruments. In
addition, start-up companies may seek to compete in our markets.
EMPLOYEES
As of March 31, 2000, we had a total of 88 employees--37 in engineering, 36
in sales and marketing, 5 in operations and 10 in finance and administration. Of
these employees, 85 are in the United States. None of our employees are
represented by a collective bargaining agreement, nor have we experienced any
work stoppage. We consider our relationship with our employees to be good. We
depend on the continued service of our key technical, sales and senior
management personnel and our ability to attract and retain additional qualified
personnel. If we are unable to hire and retain qualified personnel in the
future, our business could be seriously harmed.
FACILITIES
Our 23,400 square foot headquarters located in Tualatin, Oregon includes our
engineering, marketing and administrative facilities. We have leased this space
through May 2004.
49
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding our directors
and executive officers, as of March 31, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------------------------
<S> <C> <C>
Allen H. Alley................. 45 Chairman, President and Chief Executive Officer
Hans H. Olsen.................. 51 Vice President, Operations
Michael G. West................ 43 Vice President, Technology
Robert Y. Greenberg............ 38 Vice President, Product Development and Customer Support
Bradley A. Zenger.............. 38 Vice President, Marketing
Michael E. Barton.............. 59 Vice President, Sales
Jeffrey B. Bouchard............ 39 Vice President, Finance and Chief Financial Officer
Oliver D. Curme................ 46 Director
Frank Gill..................... 56 Director
Mark A. Stevens................ 39 Director
Michael D. Yonker.............. 42 Director
</TABLE>
ALLEN H. ALLEY co-founded Pixelworks and has served as our President, Chief
Executive Officer and Chairman since our inception. From 1992 to 1996,
Mr. Alley served as the Vice President, Corporate Development, Engineering and
Product Marketing for In Focus Systems, a leading electronic display company.
While at InFocus, Mr. Alley also was the co-CEO of a joint venture with
Motorola, Inc. called Motif. From 1986 to 1992, Mr. Alley was a General Partner
of Battery Ventures, a venture capital investment firm. From 1983 to 1986,
Mr. Alley was the Director of Mechanical Computer Aided Engineering of
Computervision Corporation, a computer-aided design software developer. From
1979 to 1983, Mr. Alley was a Lead Mechanical Engineer at Boeing Commercial
Airplane Division. From 1976 to 1979, Mr. Alley served as a Product Design
Engineer for the Ford Motor Company. Mr. Alley holds a B.S. in Mechanical
Engineering from Purdue University.
HANS H. OLSEN has served as Vice President, Operations since joining us in
July 1998. From 1997 to 1998, Mr. Olsen held the positions of Vice President,
Graphics Marketing and Vice President, North American Sales at Trident
Microsystems, a graphics controller semiconductor company. From 1996 to 1997,
Mr. Olsen served as Vice President Marketing at Paradigm Technology, Inc. which
acquired IChips Corporation, a personal computer chipset and embedded memory
technology provider, that he founded and was CEO of from 1993 to 1996. From 1982
to 1993, Mr. Olsen held the position of CEO of Electronic Designs, Inc., a
semiconductor memory company he co-founded. From 1973 to 1982, Mr. Olsen held
engineering and management positions at Christian Rovsing A/S in Copenhagen,
Denmark. Mr. Olsen holds a B.S.E.E. from Copenhagen Technical University and a
M.S.E.E. from the University of Copenhagen.
MICHAEL G. WEST co-founded Pixelworks and has served as our Vice President,
Technology since our inception. From 1988 to 1996, Mr. West led the
semiconductor engineering efforts on advanced display products at InFocus
Systems where he served as Chief Scientist and in other senior engineering
capacities. From 1986 to 1987, Mr. West led design for a VLSI design of a
full-custom bipolar integrated circuit and a microsequencer as an Integrated
Circuit Design Engineer for Bipolar Integrated Technology, a semiconductor
developer and manufacturer. From 1982 to 1986, Mr. West held semiconductor
design positions, including leading system architecture development for a VLIW
super computer at Floating Point Systems, a super-computer company. Mr. West
holds a B.S. in Electronic Engineering and a B.S. in Mathematics from Oregon
State University and a M.S.E.E. from the University of Illinois.
50
<PAGE>
ROBERT Y. GREENBERG co-founded Pixelworks and has served as our Vice
President, Product Development and Customer Support since our inception. From
1988 to 1996, Mr. Greenberg designed system architectures, high-speed
board-level hardware, integrated circuits and simulation and embedded system
software for InFocus Systems. From 1987 to 1988, Mr. Greenberg developed a
high-speed CMOS application specific semiconductor verification system for
Integrated Measurement Systems, Inc., a manufacturer of performance engineering
test stations. Mr. Greenberg has also held electrical engineering positions at
Floating Point Systems, Inc. and Sperry Corporation. Mr. Greenberg holds a
B.S.E.E. and a B.S.C.E. from the University of Michigan.
BRADLEY A. ZENGER co-founded Pixelworks and has served as our Vice
President, Marketing since our inception. From 1995 to 1996, Mr. Zenger served
as the Director, Marketing Services at In Focus Systems where he developed and
implemented worldwide demand creation programs. He also held management-level
marketing positions at InFocus Systems from 1992 to 1995. From 1989 to 1992,
Mr. Zenger was a Technical Support Manager (1990 to 1992) and held supervisory
positions (1989 to 1991) at KLA Instruments, a semiconductor manufacturing
equipment manufacturer, where he led installations and product support. From
1984 to 1989, Mr. Zenger served as a decorated officer in the U.S. Navy on-board
a nuclear attack submarine. Mr. Zenger holds a B.S. in Mechanical Engineering
from the University of Notre Dame and an M.B.A. from Santa Clara University.
MICHAEL E. BARTON has served as Vice President, Sales since January 1999.
From 1996 to 1998, Mr. Barton was the Senior Vice President of Sales at
Evergreen Technologies, Inc., a PC processor subsystem manufacturer. From 1991
to 1996, Mr. Barton served as Vice President of Sales, Americas of Cyrix
Corporation, a microprocessor semiconductor company. From 1975 to 1991,
Mr. Barton was employed at Intel Corporation, holding senior sales management
positions including Worldwide Sales Manager, Automotive and Corporate Major
Accounts Manager.
JEFFREY B. BOUCHARD has served as Vice President, Finance and Chief
Financial Officer since December 1999. During 1999, Mr. Bouchard served as Chief
Financial Officer at eVineyard, a start-up online retailer of premium wines.
From 1993 to 1999, Mr. Bouchard held senior financial management positions at
InFocus Systems, including Director of Investor Relations and Treasury (1998 to
1999) and Director of Finance (1995 to 1998) where he was responsible for the
company's financial management and planning. From 1988 to 1992, Mr. Bouchard
held a variety of senior financial positions including Worldwide Operations
Financial Planning and Analysis Manager at Sun Microsystems, an enterprise
network computing company. Prior to joining Sun Microsystems, Mr. Bouchard held
finance and accounting positions at several high-technology companies from 1983
to 1988. Mr. Bouchard holds a B.S. in Business Administration--Finance from San
Jose State University and an M.B.A. from Santa Clara University.
OLIVER D. CURME has served as a director of Pixelworks since April 1997.
Since 1988, Mr. Curme has been a General Partner of funds related to Battery
Ventures, a venture capital firm located in Wellesley, Massachusetts. Mr. Curme
sits on the board of directors of Chordiant Software, Inc. and several privately
held companies. Mr. Curme holds a B.S. in Biochemistry from Brown University and
an M.B.A. from Harvard Graduate School of Business Administration.
FRANK GILL has served as a director of Pixelworks since December 1998. From
1975 to 1998, Mr. Gill was employed at Intel Corporation in a variety of sales,
marketing, product development and manufacturing positions and retired from
Intel as an Executive Vice President. In 1989, he served as the Senior Vice
President in charge of worldwide sales and marketing operations and became
General Manager of the Intel Systems Group in 1990 and the Internet and
Communications Group in 1995. Mr. Gill serves as a director of Inktomi
Corporation, McAfee.com Corporation, Tektronix, Inc., Logitech International
S.A. and Telecom Semi, Inc. Mr. Gill holds a B.S.E.E. degree from the University
of California at Davis.
51
<PAGE>
MARK A. STEVENS has served as a director of Pixelworks since April 1998.
Since 1993, Mr. Stevens has been a General Partner of Sequoia Capital, a venture
capital investment firm. From 1989 to 1993, Mr. Stevens was an Associate with
Sequoia Capital. From 1982 to 1987, Mr. Stevens held technical sales and
marketing positions at Intel Corporation. Mr. Stevens currently serves on the
Board of Directors of NVIDIA, Corp., a 3D graphics processor semiconductor
company, Terayon Communications Systems, Inc., MedicaLogic, Inc., an Internet
healthcare information company, MP3.com, Inc., an online music service provider,
Medibuy.com, a business-to-business exchange for healthcare supplies procurment,
and several privately held companies. Mr. Stevens holds a B.S.E.E. degree, a
B.A. degree in Economics, an M.S. degree in Computer Engineering from the
University of Southern California and an M.B.A. degree from Harvard Business
School.
MICHAEL D. YONKER was appointed as a director of Pixelworks in April 2000.
Since July 1998, Mr. Yonker has been the Chief Financial Officer of Wieden &
Kennedy, a global advertising agency serving companies such as Nike, ESPN,
Coca-Cola and Microsoft. From 1993 to 1998, Mr. Yonker served as the Chief
Financial Officer of InFocus Systems, having responsibility for investor
relations and information technology in addition to the finance and accounting
functions. From 1980 to 1993, Mr. Yonker held numerous positions with Arthur
Andersen including partner in charge of the Northwest Manufacturing Practice.
Mr. Yonker holds a B.A. degree in accounting and finance from Linfield College.
BOARD OF DIRECTORS
We currently have five directors. Our directors hold office until the next
annual meeting of shareholders or until their successor are duly elected or
appointed. Pursuant to the Company's Fifth Amended and Restated Articles of
Incorporation, one director has been elected by the holders of our shares of
common stock, one director has been elected by the holders of our Series A
preferred shares, one director has been elected by the holders of our Series B
preferred shares and one director has been elected by the holders of our shares
of common stock, Series A preferred shares, Series B preferred shares and
Series C preferred shares, each voting separately. Following the effective date
of our initial public offering, there will no longer be class voting in the
election of directors. Our Fifth Amended and Restated Articles of Incorporation
provide that if the number of directors is fixed at six or more, our directors
will be divided into three classes and, after a transitional period, will serve
for terms of three years, with one class being elected by the shareholders each
year.
BOARD COMMITTEES
The compensation committee currently consists of Messrs. Curme, Stevens and
Gill. The compensation committee reviews and makes recommendations regarding our
compensation policies and all forms of compensation to be provided to our
executive officers and directors, including annual salaries, bonuses, stock
options and other incentive compensation agreements. The compensation committee
also administers our 1997 stock incentive plan and our 2000 employee stock
purchase plan.
The audit committee currently consists of Messrs. Curme, Stevens and Gill.
The audit committee reviews and monitors our corporate financial reporting and
external audits, including our internal control functions, the results and scope
of the annual audit and other services provided by our independent auditors and
our compliance with legal matters that have a significant impact on our
financial reports. The audit committee also consults with our management and our
independent auditors prior to the presentation of financial statements to
shareholders and, as appropriate, initiates inquiries into aspects of our
financial affairs.
52
<PAGE>
DIRECTOR COMPENSATION
Our non-employee directors currently receive no compensation for service on
our board of directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee is currently, or has been
at any time since the beginning of our last fiscal year, one of our officers or
employees. During the fiscal year ended December 31, 1999, none of our executive
officers served as a member of the board of directors or compensation committee
of any entity that has one or more officers serving as a member of our board of
directors or compensation committee.
EXECUTIVE OFFICERS
Our executive officers are elected by, and serve at the discretion of, our
board of directors. There are no family relationships among our directors or
officers.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth compensation awarded to, earned by, or paid
to our Chief Executive Officer and the other five most highly compensated
executive officers, each of whose total cash compensation exceeded $100,000
during the year ended December 31, 1999 (the "named executives"):
<TABLE>
<CAPTION>
ANNUAL COMPENSATION STOCK ALL
------------------- OPTIONS OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS GRANTED(#) COMPENSATION
- --------------------------- -------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Allen H. Alley
President and Chief Executive Officer..... 1999 $160,714 $40,000 33,750 --
Hans H. Olsen
Vice President, Operations................ 1999 133,429 45,000 -- $134,441(1)
Robert Y. Greenberg
Vice President, Product Development....... 1999 118,899 30,000 15,000 --
Michael G. West
Vice President, Technology................ 1999 118,899 30,000 15,000 --
Bradley A. Zenger
Vice President, Marketing................. 1999 118,928 30,000 15,000 --
Michael E. Barton
Vice President, Sales..................... 1999 120,248 40,000 -- --
</TABLE>
- ------------------------
(1) Represents the difference between the fair market value and the purchase
price of 305,937 shares of common stock purchased pursuant to a restricted
stock purchase award under our 1997 stock incentive plan.
53
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to options granted
during the year ended December 31, 1999 to the named executives:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
------------------------------------------------ REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES PRICE EXPIRATION ---------------------
NAME GRANTED(1) IN 1999 PER SHARE DATE 5% 10%
- ---- ---------- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Allen H. Alley..................... 33,750 1.5% $.257 01/20/09 $5,455 $13,824
Hans H. Olsen...................... -- -- -- -- -- --
Robert Y. Greenberg................ 15,000 .7 .23 01/20/09 2,170 5,498
Michael G. West.................... 15,000 .7 .23 01/20/09 2,170 5,498
Bradley A. Zenger.................. 15,000 .7 .23 01/20/09 2,170 5,498
Michael E. Barton.................. -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Options granted in 1999 became exercisable starting 12 months after the
grant date, with one-fourth of the options becoming exercisable at that time
and with an additional 1/36th of the options becoming exercisable on each of
the next thirty-six months thereafter.
(2) In accordance with the rules of the SEC, the above shows the potential
realizable value over the term of the option (the period from the grant date
to the expiration date) based on assumed rates of share price appreciation
of 5% and 10%, compounded annually. These amounts do not represent our
estimate of future share price. Actual gains, if any, on option exercises
will depend on the future performance of our shares of common stock.
OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
The following table sets forth information for our named executives relating
to the number and value of securities underlying exercisable and unexercisable
options held at December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1999 AT DECEMBER 31, 1999(2)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Allen H. Alley......... -- -- 0 33,750 -- $ 430,076
Hans H. Olsen.......... 69,063 $42,359 -- -- -- --
Robert Y. Greenberg.... -- -- 0 15,000 -- 191,550
Michael G. West........ -- -- 0 15,000 -- 191,550
Bradley A. Zenger...... -- -- 0 15,000 -- 191,550
Michael E. Barton...... -- -- 63,750 191,250 $817,913 2,453,738
</TABLE>
- ------------------------
(1) The value realized is based on the difference between the market price at
the time of exercise of the options and the applicable exercise price.
(2) The value of unexercised in-the-money options represents the difference
between the fair market value of the underlying shares of common stock using
an assumed initial public offering price of $13.00 per share and the
exercise price of the option, multiplied by the number of shares underlying
the option.
54
<PAGE>
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Jeffrey B. Bouchard, our Vice
President, Finance and Chief Financial Officer. In consideration for his
services we agreed to pay Mr. Bouchard an annual salary of $140,000, plus our
standard employee benefits, and granted him 225,000 options under our incentive
stock option plan. If he is terminated without cause, which is defined as
termination for other than committing a criminal, fraudulent or grossly
negligent act, misappropriation of our assets or willful failure to perform his
duties, then he is entitled to severance pay of three months salary. If we
substantially sell all of our assets or are merged into another company which
our shareholders do not control, then under his stock option grant,
Mr. Bouchard is entitled to his options which have already vested as well as an
automatic vesting of the options he would have been entitled to receive over the
twelve months following a merger or sale. As a condition of his employment,
Mr. Bouchard entered into our standard employee nondisclosure and developments
agreement pursuant to which he may not divulge any of our proprietary
information other than as permitted as part of his employment with us.
EMPLOYEE BENEFIT PLANS
1997 STOCK INCENTIVE PLAN
Our 1997 Stock Incentive Plan, the 1997 Plan, which was approved by our
shareholders on January 16, 1997, provides for grants of both "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code") and "nonqualified stock options" which are not qualified
for treatment under Section 422 of the Code, and for direct stock grants and
sales to employees or consultants of the Company. The purposes of the 1997 Plan
are to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentives to our employees
and consultants and to promote the success of our business. The 1997 Plan is
administered by the compensation committee of the board of directors.
The term of each incentive option granted under the 1997 Plan will generally
be ten years from the date of grant, or a shorter period as may be established
at the time of the grant. An option granted under the 1997 Plan may be exercised
at the times and under the conditions as determined by the compensation
committee. If a person who has been granted an incentive stock option ceases to
be employed by or on a consulting basis with us, that person may exercise that
option only during the exercise period established by the compensation committee
at the time the options were granted, which shall not exceed 90 days after the
date of termination, and only to the extent that the option was exercisable on
the date of termination. Nonqualified stock options may be exercised during a
period determined by the compensation committee. If a person who has been
granted an option ceases to be an employee or consultant as a result of the
person's total and permanent disability, the person may exercise that option at
any time within twelve months after the date of termination, but only to the
extent that the option was exercisable on the date of termination. No option
granted under the 1997 Plan is transferable other than at death, and each option
is exercisable during the life of the optionee only by the optionee. In the
event of the death of a person who has received an option, the option generally
may be exercised by a person who acquired the option by bequest or inheritance
during the twelve month period after the date of death to the extent that such
option was exercisable at the date of death.
The exercise price of incentive stock options granted under the 1997 Plan
may not be less than the fair market value of a share of common stock on the
last market trading day prior to the date of grant of the option. Nonqualified
stock options may not be granted for less than 85% of fair market value and
options granted to greater than 10% shareholders may not be granted for less
than 110% of fair market value. The consideration to be paid upon exercise of an
option, including the method of payment, will be determined by the compensation
committee and may consist entirely of cash, check,
55
<PAGE>
shares of common stock or any combination of these methods of payment as
permitted by the compensation committee.
The 1997 Plan will continue in effect until January 16, 2007, unless earlier
terminated by the board of directors, but termination will not affect the terms
of any options outstanding at that time. The Board of Directors may amend,
terminate or suspend the 1997 Plan at any time, provided that no amendment
regarding amount, price or timing of the grants may be made more than once every
six months other than to conform with changes in certain Internal Revenue Code
requirements. Amendments that would materially increase the number of shares
that may be issued, materially modify the requirements as to eligibility for
Plan participation, or materially increase the benefits to Plan participants
must be approved by our shareholders.
From the end of the prior year through March 31, 2000, options to purchase
267,000 shares of common stock were granted to our employees under the 1997 Plan
at exercise prices ranging from $2.43 to $6.75 per share. None of our named
executives were granted options under the 1997 Plan since the end of the last
fiscal year.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our 2000 Employee Stock Purchase Plan, the 2000 Plan, was adopted by the
board in February 2000 and will be submitted to our shareholders for their
approval prior to the date of this offering, to become effective on the date of
this offering. A total of 1,500,000 of our shares of common stock have been
reserved for issuance under the 2000 Plan. Beginning in 2005 the number of
shares reserved for issuance under the 2000 Plan will be increased annually by
the lesser of the number of shares issued under the plan during the preceding
year, 2% of the outstanding shares of common stock on the first day of our
fiscal year in which the increase is being made or a lesser amount determined by
the board of directors.
The compensation committee of the board of directors will administer the
2000 Plan and will have full and exclusive authority to interpret the terms of
the plan and determine eligibility.
The 2000 Plan contains 24 month offering periods, with each offering period
being divided into four six-month purchase periods. The offering periods
generally start on the first trading day on or after February 1 and August 1 of
each year, except for the first offering period, which commences on the date of
this offering and ends on the last trading day on or before January 31, 2002.
Employees are eligible to participate in our 2000 Plan if they are
customarily employed by us or any participating subsidiary for at least
20 hours per week and more than five months in any calendar year, although any
employee who could own shares representing 5% or more of the total combined
voting power or value of all classes of our capital shares may not participate
in the plan. In addition, no employee of ours may be granted an option to
purchase shares under the plan if that person's right to purchase shares under
all of our employee stock purchase plans accrues at a rate that exceeds $25,000
worth of shares for each calendar year. Furthermore, no employee is permitted to
purchase more than 2,500 shares during a six month purchase period. The 2000
Plan permits participants to purchase shares of common stock through payroll
deductions in 1% increments not less than 2% or greater than 10% of the
participant's compensation, which includes the participant's base straight time
gross earnings and commissions, but excludes payments for overtime, profit
sharing payments, shift premium payments, incentive compensation, incentive
payments and bonuses.
Amounts deducted and accumulated under the 2000 Plan are used to purchase
shares of common stock at the end of each six-month purchase period. The price
of shares purchased under the plan is 85% of the lower of the fair market value
of the shares of common stock at the beginning of the offering period or after a
purchase period ends. If the offering period commences on the date of this
offering, the price of the shares purchased shall be the lower of 85% the price
to the public of the shares offered in this offering or 85% of the fair market
value of the shares of common stock after the
56
<PAGE>
purchase period ends. In the event the fair market value at the end of a
purchase period is less than the fair market value at the beginning of the
offering period, participants will be withdrawn from the current offering period
following their purchase of shares on the purchase date and will be
automatically re-enrolled in a new offering period. In addition, in the event
the fair market value at the end of a purchase period is less than the fair
market value at the beginning of the offering period, a participant is limited
to purchasing no more than 200% of the number of shares that the participant
would have purchased at 85% of the fair market value at the beginning of the
offering period. Participants may end their participation at any time during an
offering period and will be paid their payroll deductions to date. Participation
ends automatically upon termination of employment with us. Rights granted under
the 2000 Plan are not transferable by a participant other than by will, the laws
of descent and distribution, or as otherwise provided under the plan.
The 2000 Plan provides that, in the event that we merge with or into another
corporation or sell substantially all of our assets, each outstanding right to
purchase shares under the plan during the offering period then in progress may
be assumed or substituted for by the successor corporation. If the successor
corporation refuses to assume or substitute, the offering period then in
progress will be shortened and a new purchase date will be set at or prior to
the closing of that transaction after which time the 2000 Plan will terminate.
The 2000 Plan will terminate in February 2010. The board has the authority
to amend or terminate the plan, except that no amendment or termination may
adversely affect any outstanding rights to purchase shares under the plan.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
As an Oregon corporation, we are subject to the Oregon Business Corporation
Act ("OBCA") and the exculpation from liability and indemnification provisions
contained therein. Pursuant to Section 60.047(2)(d) of the OBCA, Article IV of
our Second Restated Articles of Incorporation (the "Restated Articles")
eliminates the liability of our directors to us or our shareholders, except for
any liability related to breach of the duty of loyalty, actions not in good
faith and certain other liabilities.
Section 60.387 et seq. of the OBCA allows corporations to indemnify their
directors and officers against liability where the director or officer has acted
in good faith and with a reasonable belief that actions taken were in the best
interests of the corporation or at least not adverse to the corporation's best
interests and, if in a criminal proceeding, the individual had no reasonable
cause to believe the conduct in question was unlawful. Under the OBCA,
corporations may not indemnify against liability in connection with a claim by
or in the right of the corporation but may indemnify against the reasonable
expenses associated with claims. Corporations may not indemnify against breaches
of the duty of loyalty. The OBCA provides for mandatory indemnification of
directors against all reasonable expenses incurred in the successful defense of
any claim made or threatened whether or not the claim was by or in the right of
the corporation. Finally, a court may order indemnification if it determines
that the director or officer is fairly and reasonably entitled to
indemnification in view of all the relevant circumstances whether or not the
director or officer met the good faith and reasonable belief standards of
conduct set out in the statute. Article IV of the Restated Articles requires us
to indemnify our directors and officers to the fullest extent not prohibited by
law.
The OBCA also provides that the statutory indemnification provisions are not
deemed exclusive of any other rights to which directors or officers may be
entitled under a corporation's articles of incorporation or bylaws, any
agreement, general or specific action of the board of directors, vote of
shareholders or otherwise.
We also have entered into indemnity agreements with each of our executive
officers and each member of our Board of Directors. These indemnity agreements
provide for indemnification of the indemnitee to the fullest extent allowed by
law.
57
<PAGE>
CERTAIN TRANSACTIONS
COMPANY FORMATION
On January 16, 1997, in connection with our formation, we issued 2,549,880
shares of common stock to Allen H. Alley, our President and Chief Executive
Officer, 1,425,060 shares of common stock to Robert Y. Greenberg, our Vice
President, Product Development and Customer Support, 1,425,060 shares of common
stock to Michael G. West, our Vice President, Technology and 1,125,000 shares of
common stock to Bradley A. Zenger, our Vice President, Marketing, in each case
at a purchase price of $0.0013 per share.
SERIES A PREFERRED FINANCING
On April 25, 1997, we raised approximately $1,250,000 through the sale of
Series A Preferred Stock and Common Stock Purchase Warrants which entitled the
holders to acquire shares of our common stock at $0.675 per share. Battery
Ventures received 2,325,581 Series A preferred shares and warrants to purchase
1,482,559 common shares and Enterprise Development Fund received 581,395
Series A preferred shares and warrants to purchase 370,640 common shares.
Oliver D. Curme, one of our directors, is affiliated with Battery Ventures.
SERIES B PREFERRED FINANCING
On April 29, 1998, we raised approximately $6,600,000 through the sale of
5,500,005 shares of our Series B preferred stock. Battery Ventures purchased
1,833,345 shares, Enterprise Development Fund purchased 458,335 shares and
Sequoia Capital purchased 3,095,825 shares. Oliver D. Curme, one of our
directors, is affiliated with Battery Ventures and Mark A. Stevens, another of
our directors, is affiliated with Sequoia Capital.
GILL OPTION
On December 17, 1998, Frank Gill, one of our directors, was awarded an
option to purchase 75,000 shares of our common stock at an exercise price of
$0.167 per share. This option vests over four years, with 25% vesting on the
first anniversary of the grant and 1/36th of the remainder vesting at the end of
each of the following 36 months.
EXERCISE OF COMMON STOCK PURCHASE WARRANTS
In April 1999, Battery Ventures and Enterprise Development Fund fully
exercised the Common Stock Purchase Warrants acquired in connection with our
Series A financing. Battery Ventures acquired 1,482,559 common shares at a price
of $0.675 per share and Enterprise Development Fund acquired 370,640 common
shares at a price of $0.675 per share. Oliver D. Curme, one of our directors, is
affiliated with Battery Ventures.
SERIES C PREFERRED FINANCING
On May 28, 1999, we raised approximately $11,667,000 through the sale of
2,493,026 shares of our Series C Preferred Stock. Battery Ventures purchased
750,000 shares, Enterprise Development Fund purchased 32,000 shares and Sequoia
Capital purchased 1,070,000 shares. Oliver D. Curme, one of our directors, is
affiliated with Battery Ventures and Mark A. Stevens, another of our directors,
is affiliated with Sequoia Capital.
TRANSACTIONS WITH HANS H. OLSEN
On August 31, 1999, Hans H. Olsen, our Vice President, Operations exercised
stock options to acquire 69,063 shares of our common stock at an aggregate
exercise price of $11,511 and agreed to
58
<PAGE>
cancel options to acquire 185,937 shares of common stock at $0.167 per share,
options to acquire 45,000 shares of common stock at $0.327 per share and options
to acquire 75,000 shares of common stock at $0.78 per share. On the same date,
pursuant to restricted stock awards, Mr. Olsen purchased 185,937 shares of
common stock at $0.167 per share, 45,000 shares of common stock at $0.327 per
share and 75,000 shares of common stock at $0.78 per share. Mr. Olsen paid the
aggregate exercise price for the options exercised and the aggregate purchase
price for the additional shares purchased, $115,700, by delivering to us a
recourse promissory note. In addition, we advanced Mr. Olsen an additional
$82,826 under the note to cover any tax liability arising from his purchase of
shares pursuant to his restricted stock award. The note bears interest at an
annual rate of 6.02% payable annually. The principal amount of the note must be
repaid on the earlier of August 31, 2008 or termination of Mr. Olsen's
employment voluntary or for cause. Upon termination of Mr. Olsen's employment we
have the right to re-purchase any of these shares which are unvested for an
amount equal to the price paid. Of the 305,937 restricted shares purchased by
Mr. Olsen, 268,746 remain unvested as of March 31, 2000.
59
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our shares of common stock as of March 31, 2000 and as
adjusted to reflect the sale of shares of common stock offered in this
prospectus by:
- each shareholder known by us to own beneficially more than 5% of our
shares of common stock, as explained below;
- each of named executives;
- each of our directors; and
- all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, the shares of common stock subject to
options held by that person that are currently exercisable or will become
exercisable within 60 days after March 31, 2000, are deemed outstanding, while
the shares are not deemed outstanding for purposes of computing percentage
ownership of any other person.
Unless otherwise indicated below, the address for each shareholder on this
table is c/o Pixelworks, Inc., 7700 SW Mohawk, Tualatin, Oregon 97062. Unless
otherwise indicated below, the persons and entities named in the table have sole
voting or investment power with respect to all shares beneficially owned,
subject to community property laws where applicable.
The information presented below is based on:
- 29,753,563 shares of common stock outstanding as of March 31, 2000,
assuming the automatic conversion of all currently outstanding preferred
shares into 19,708,829 shares of common stock immediately prior to the
completion of this offering; and
- 5,750,000 shares of common stock issued in this offering. Assumes no
exercise of underwriters' over-allotment option. Percentage ownership
figures after the offering do not include shares that may be purchased by
each person in the offering.
<TABLE>
<CAPTION>
SHARES PERCENT PERCENT
BENEFICIAL OWNERS BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
- ----------------- ------------------ --------------- --------------
<S> <C> <C> <C>
Battery Ventures IV, L.P.(1)...................... 8,845,949 29.7% 24.9%
20 Williams Street
Wellesley, MA 02181
Sequoia Capital VII(2)............................ 6,248,739 21.0 17.6
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Enterprise Development Fund II, Limited 1,978,236 6.6 5.6
Partnership.....................................
425 N. Main Street
Ann Arbor, MI 48104
Oliver D. Curme(3)................................ 8,845,949 29.7 24.9
Mark A. Stevens(4)................................ 6,248,739 21.0 17.6
Frank Gill(5)..................................... 26,565 * *
Allen H. Alley(6)................................. 2,561,132 8.6 7.2
Hans H. Olsen..................................... 375,000 1.3 1.1
Robert Y. Greenberg(7)............................ 1,430,064 4.8 4.0
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENT PERCENT
BENEFICIAL OWNERS BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
- ----------------- ------------------ --------------- --------------
<S> <C> <C> <C>
Michael G. West(8)................................ 1,430,064 4.8 4.0
Bradley A. Zenger(9).............................. 1,130,004 3.8 3.2
Michael E. Barton(10)............................. 159,378 * *
Directors and Executive Officers as a group
(10 persons).................................... 22,263,145 74.8% 62.4%
</TABLE>
- ------------------------
* Less than one percent (1%).
(1) Includes (a) 8,718,886 shares held by Battery Ventures IV, L.P. and
(b) 127,063 shares held by Battery Investment Partners IV, LLC.
(2) Includes (a) 4,835,570 shares held by Sequoia Capital VII, (b) 819,378
shares held by Sequoia Capital Franchise Fund, (c) 211,392 shares held by
Sequoia Technology Partners VII, (d) 144,597 shares held by Sequoia Capital
Franchise Partners, (e) 98,073 shares held by SQP 1997, (f) 84,557 shares
held Sequoia International Partners and (g) 55,172 shares held by
Sequoia1997 LLC.
(3) Includes (a) 8,718,886 shares held by Battery Ventures IV, L.P. and
(b) 127,063 shares held by Battery Investment Partners IV, LLC. Mr. Curme
is a General Partner of Battery Ventures. Mr. Curme disclaims beneficial
ownership of all such shares except to the extent of his individual
pecuniary interest therein.
(4) Includes (a) 4,835,570 shares held by Sequoia Capital VII, (b) 819,378
shares held by Sequoia Capital Franchise Fund, (c) 211,392 shares held by
Sequoia Technology Partners VII, (d) 144,597 shares held by Sequoia Capital
Franchise Partners, (e) 98,073 shares held by SQP 1997, (f) 84,557 shares
held Sequoia International Partners and (g) 55,172 shares held by
Sequoia1997 LLC. Mr. Stevens is a General Partner of Sequoia Capital.
Mr. Stevens disclaims beneficial ownership of all such shares except to the
extent of his individual pecuniary interest therein.
(5) Represents shares issuable upon the exercise of stock options held by
Mr. Gill.
(6) Includes (a) 2,549,880 outstanding shares and (b) 11,252 shares issuable
upon exercise of stock options held by Mr. Alley.
(7) Includes (a) 1,425,060 outstanding shares and (b) 5,004 shares issuable
upon exercise of stock options held by Mr. Greenberg.
(8) Includes (a) 1,425,060 outstanding shares and (b) 5,004 shares issuable
upon exercise of stock options held by Mr. West.
(9) Includes (a) 1,125,000 outstanding shares and (b) 5,004 shares issuable
upon exercise of stock options held by Mr. Zenger.
(10) Includes (a) 69,063 outstanding shares and (b) 90,315 shares issuable upon
exercise of stock options held by Mr. Barton.
61
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
After this offering, we will be authorized to issue up to 250,000,000 of
common stock, par value $0.001 per share, and 50,000,000 shares of preferred
stock, par value, $0.001 per share. Immediately after this offering, we estimate
there will be approximately 35,503,563 shares of common stock outstanding,
3,010,832 shares of common stock issuable on exercise of outstanding options and
no preferred shares. The weighted average exercise price of the outstanding
options is $1.30. The following description of our capital stock is not
complete. You should carefully read our Fifth Amended and Restated Articles of
Incorporation and First Restated Bylaws, which have been filed as exhibits to
the Registration Statement, of which this Prospectus is a part. Additionally,
certain provisions of Oregon law may impact our capital stock.
COMMON STOCK
Holders of common stock are entitled to receive such dividends as may from
time to time be declared by our board of directors out of funds legally
available for that purpose. See "Dividend Policy." Holders of common stock are
entitled to one vote per share on all matters on which they are entitled to
vote. They do not have any cumulative voting rights. There are no preemptive,
conversion, redemption or sinking fund rights applicable to the common stock. In
the event of a liquidation, dissolution or winding up of Pixelworks, holders of
common stock are entitled to share equally and ratably in all assets remaining
after the payment of all debts and liabilities as well as the liquidation
preference of any outstanding class or series of preferred stock. The
outstanding shares of common stock, including those offered through this
prospectus, are fully paid and nonassessable. The rights, preferences and
privileges of holders of common stock are subject to any series of preferred
stock which we may issue in the future as described below.
PREFERRED STOCK
The board of directors has the authority, without action by the
shareholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, any or all
of which may be greater than the rights of the common stock. It is not possible
to state the actual effect of the issuance of any shares of preferred stock upon
the rights of holders of the common stock until the board of directors
determines the specific rights of the holders of such preferred stock. However,
the effects might include restricting dividends on the common stock diluting the
voting power of the common stock, impairing the liquidation rights of the common
stock and delaying or preventing a change in control of Pixelworks without
further action by the shareholders. There are no agreements or understandings
for the issuance of preferred stock, and the board of directors has no present
intention of issuing any shares of preferred stock, except as contemplated by
the shareholder rights plan described below.
REGISTRATION RIGHTS
Certain shareholders holding an aggregate of 27,208,829 shares are entitled
to rights with respect to registration of these shares under the securities act.
The rights are provided under the terms of an agreement between us and the
holders of registrable securities. Beginning six months following the completion
of this offering, certain holders of then outstanding registrable securities may
require on up to two occasions that we register their shares for public resale.
We are obligated to register these shares only if the outstanding registrable
securities have an anticipated public offering price of at least $5,000,000.
Also, holders of registrable securities may require, on one occasion in any
12 month period that shares for public resale on Form S-3 or similar short form
registration if the value of the securities to be registered is at least
$500,000. Furthermore, in the event we determine to register any of our
62
<PAGE>
securities under the Securities Act of 1933, either for our own account or for
the account of other security holders exercising their registration rights, the
holder of registrable securities are entitled to include their shares of common
stock in the registration. The registration rights are subject to conditions and
limitations, among them our right to limit the number of shares included in the
registration which may reduce the number of shares proposed to be registered in
view of market conditions. These registration rights are triggered by this
offering, but we have obtained waivers of these registration rights from all
holders of registrable securities in connection with the offering. All expenses
in connection with any registration, other than underwriting discounts and
commissions, will be borne by us. All registration rights will terminate five
years following the consummation of this offering.
The rights agreement may be amended by the board of directors in any way
prior to the distribution date. After the distribution date, the provisions of
the rights agreement may only be amended by the board in order to cure any
ambiguity, defect or inconsistency or to make any other changes which do not
adversely affect the interests of holders of preferred stock purchase rights
(excluding the interests of any acquiring person).
Until a preferred stock purchase right is exercised, the holder has no
rights as a shareholder of Pixelworks, including the right to vote or to receive
dividends.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OREGON LAW, THE RESTATED ARTICLES
AND BYLAWS
Upon completion of the offering, we will become subject to the Oregon
Control Share Act. The Oregon Control Share Act generally provides that a person
who acquires voting stock of an Oregon corporation, in a transaction that
results in the acquiror holding more than 20%, 33 1/3% or 50% of the total
voting power of the corporation, cannot vote the shares its acquires in the
acquisition. An acquiror is broadly defined to include companies or persons
acting as a group to acquire the shares of the Oregon corporation. This
restriction does not apply if voting rights are given to the control shares by:
- a majority of each voting group entitled to vote; and
- the holders of a majority of the outstanding voting shares, excluding the
control shares held by the acquiror and shares held by the company's
officers and employee directors.
The acquiror may, but is not required to, submit to the target company a
statement including specific information about the acquiror and its plans for
the company. The statement may also request that the company call a special
meeting of shareholders to determine whether the control shares will be allowed
to have voting rights. If the acquiror does not request a special meeting of
shareholders, the issue of voting rights of control shares will be considered at
the next annual or special meeting of shareholders. If the acquiror's control
shares are allowed to have voting rights and represent a majority or more of all
voting power, shareholders who do not vote in favor of voting rights for the
control shares will have the right to receive the appraised fair value for their
shares, which may not be less than the highest price paid per share by the
acquiror for the control shares.
We are also subject to the Oregon Business Combination Act. The Business
Combination Act generally provides that in the event a person or entity acquires
15% or more of the voting stock of an Oregon corporation, thereby becoming an
"interested shareholder," the corporation and the interested shareholder, or any
affiliated entity, may not engage in certain business combination transactions
for a period of three years following the date the person became an interested
shareholder. Business combination transactions for this purpose include:
- a merger or plan of share exchange;
63
<PAGE>
- any sale, lease, mortgage or other disposition of the assets of the
corporation where the assets have an aggregate market value equal to 10%
or more of the aggregate market value of the corporation's assets or
outstanding capital stock; or
- certain transactions that result in the issuance of capital stock of the
corporation to the interested shareholder.
These restrictions are not applicable if:
- as a result of the transaction in which a person became an interested
shareholder, they will own at least 85% of the outstanding voting stock of
the corporation (excluding shares owned by directors who are also
officers, and certain employee benefit plans);
- the board of directors approves the share acquisition or business
combination before the interested shareholder acquires 15% or more of the
corporation's voting stock; or
- the board of directors and the holders of at least two-thirds of the
outstanding voting stock of the corporation (excluding shares owned by the
interested shareholder) approve the transaction after the interested
shareholder has acquired 15% or more of the corporation's voting stock.
Our Fifth Amended and Restated Articles provide that (i) if the number of
directors is fixed at six or more, our directors will be divided into three
classes, each of which serves for a three-year term with one class elected each
year, (ii) provide that directors may be removed by shareholders only for cause
and only upon the vote of 75% of the outstanding shares of common stock, and
(iii) permit the board of directors to issue preferred stock in one or more
series and to fix the number of shares constituting any such series, the voting
powers and all other rights and preferences of any such series, without any
further vote or action by our shareholders.
The staggered terms for directors, the provisions allowing the removal of
directors only for cause and the availability of preferred stock for issuance
without shareholder approval may have the effect of lengthening the time
required for a person to acquire control of our company through a proxy contest
or the election of a majority of the board of directors and may deter any
potential unfriendly offers or other efforts to obtain control. This could
deprive our shareholders of opportunities to realize a premium for their common
stock and could make removal of incumbent directors more difficult. At the same
time, these provisions may have the effect of inducing any persons seeking
control of our company to negotiate terms acceptable to the board of directors.
NASDAQ NATIONAL MARKET LISTING
We have applied to have our shares of common stock included for quotation on
the Nasdaq National Market under the symbol "PXLW."
TRANSFER AGENT
The transfer agent and registrar for the shares of common stock is
ChaseMellon Shareholder Services, LLC. ChaseMellon's telephone number for
shareholder inquiries is 800-522-6645.
64
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
We cannot provide any assurance that after this offering has been completed
a significant public market for our shares of common stock will develop or be
sustained. The sale of substantial numbers of our shares of common stock in the
public market, or the possibility of a sale, could adversely affect prevailing
market prices for our shares of common stock. Furthermore, only a limited number
of our shares of common stock currently held by our shareholders will be
available for sale shortly after this offering because of contractual and legal
restrictions on resale described below. Future sales of substantial amounts of
our shares in the public market after these restrictions lapse could adversely
affect the prevailing market price and our ability to raid equity capital in the
future.
Upon completion of this offering and assuming no exercise after that date of
the underwriters' over-allotment option or any outstanding options, we expect to
have 35,503,563 shares of common stock outstanding based on shares outstanding
as of March 31, 2000.
Of the shares of common stock, the 5,750,000 shares that we expect to sell
in the offering, and any shares of common stock sold upon exercise of the
underwriters' over-allotment option, will be freely tradable without restriction
under the securities act. However, there will be trading restrictions imposed on
"affiliates" and "control persons" as defined under Rule 144. The remaining
shares of common stock held by existing shareholders are restricted securities
as that term is defined in Rule 144 of the securities act. Restricted securities
may be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144 promulgated under the securities act,
which rules are summarized below. As a result of the contractual restrictions
described below and the provisions of Rule 144, the restricted securities will
be eligible for sale in the public market immediately following the offering
subject to the expiration of 180-day lock-up agreements with representatives of
the underwriters and to volume limitations and other conditions under Rule 144.
Following this offering, the holders of an aggregate of 27,208,829 of the
outstanding shares of common stock have the right to require us to register
their shares for sale upon meeting requirements to which the parties have
previously agreed. See "Description of Share Capital--Registration Rights" for
additional information regarding registration rights.
The following table indicates approximately when the 29,753,563 of our
shares of common stock, held by existing shareholders, that are not being sold
in the offering but which will be outstanding at the time the offering is
complete will be eligible for sale into the public market:
<TABLE>
<CAPTION>
ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN PUBLIC MARKET
- ----------------------------------------------------------
<S> <C>
At effective date........................................... 0
90 days after effective date................................ 0
180 days after effective date............................... 26,394,745
At February 22, 2001........................................ 3,358,818
</TABLE>
The shares eligible for sale includes shares outstanding as of March 31,
2000 and assumes the automatic conversion of all outstanding preferred shares
into shares of common stock upon completion of the offering.
LOCK-UP AGREEMENTS
Our officers, directors and all of our other shareholders have signed
lock-up agreements under which they agree not to dispose of or hedge any shares
of common stock or securities convertible into or exchangeable for shares of
common stock for a period of 180 days from the date of this prospectus.
Dispositions can be made sooner with the prior written consent of Salomon Smith
Barney Inc.
65
<PAGE>
OPTIONS AND WARRANTS
As of March 31, 2000, 2,637,741 and 1,500,000 of the shares of common stock
are reserved for future issuance pursuant to our 1997 stock incentive plan and
2000 employee stock purchase plan, respectively. We intend to file, shortly
after effectiveness of this offering, a registration statement on Form S-8 under
the securities act covering all shares of common stock reserved for issuance
under the share plans. Substantially all of the shares of common stock issuable
upon exercise of outstanding options are subject to 180-day lock-up agreements
with the representatives of the underwriters.
RULE 144
In general, under Rule 144, as in effect on the date of this prospectus, any
person who has beneficially owned restricted securities for at least one year
will be entitled to sell in any three-month period a number of shares that does
not exceed the greater of:
- 1% of the then outstanding shares of common stock which are approximately
355,036 shares immediately after the offering; or
- the average weekly trading volume of our shares of common stock on the
Nasdaq National Market during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the SEC.
Sales of restricted securities pursuant to Rule 144 are subject to certain
requirements relating to manner of sale, notice and availability of
current public information about us. Our affiliates must also comply with
the restrictions and requirements of Rule 144, other than the one-year
holding period requirement, in order to sell shares of common stock which
are not restricted securities.
RULE 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
generally including the holding period of any prior owner other than an
"affiliate," is entitled to sell those shares without complying with the manner
of sale, notice filing, volume limitation or notice provisions of Rule 144(k).
Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately
upon the completion of this offering.
RULE 701
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from us by employees, directors,
officers, consultants or advisers prior to the date we become subject to the
reporting requirements of the securities exchange act, pursuant to written
compensatory benefit plans or written contracts relating to the compensation of
such persons. In addition, the SEC has indicated that Rule 701 will apply to
typical stock options granted by an issuer before it becomes subject to the
reporting requirements of the exchange act, along with the shares acquired upon
exercise of options. Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this prospectus, these securities may be
sold.
- by persons other than our affiliates, subject only to the manner of sale
provisions of Rule 144; and
- by our affiliates under Rule 144 without compliance with its one-year
minimum holding period requirements.
66
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each of the underwriters named below has severally agreed
to purchase, and we have agreed to sell to the underwriters, the respective
number of shares of common stock set forth opposite the name of each underwriter
below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---- ---------
<S> <C>
Salomon Smith Barney Inc....................................
Deutsche Bank Securities Inc................................
SG Cowen Securities Corporation.............................
E*OFFERING Corp.............................................
---------
Total..................................................... 5,750,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock included in this offering
are subject to the approval of legal matters by counsel and to other conditions.
The underwriters are obligated to purchase all of the shares of common stock
offered hereby other than those covered by the over-allotment option described
below if they purchase any of the shares of common stock.
The underwriters, for whom Salomon Smith Barney Inc., Deutsche Bank
Securities Inc., SG Cowen Securities Corporation and E*OFFERING Corp. are acting
as representatives, initially propose to offer some of the shares of common
stock directly to the public at the public offering price set forth on the cover
page of this prospectus and some of the shares of common stock to various
securities dealers at the public offering price less a concession not exceeding
$ per common share. The underwriters may allow, and these dealers may
reallow, a concession not exceeding $ per common share to certain
brokers and dealers. After the initial offering of the shares of common stock to
the public, the public offering price and other selling terms may from time to
time be varied by the representatives. The representatives have advised us that
the underwriters do not intend to confirm any sales to any accounts over which
they exercise discretionary authority.
We have granted the underwriters an option, exercisable for 30 days after
the date of this prospectus, to purchase up to an aggregate of additional
shares of common stock at the public offering price less the underwriting
discount. The underwriters may exercise this option solely to cover
over-allotments, if any, in connection with this offering. To the extent that
the underwriters exercise this option, each of them will be obligated, subject
to certain conditions, to purchase a number of additional shares approximately
proportionate to the underwriters' initial commitment.
Pixelworks, each of our officers and directors and our other shareholders
have agreed with the representatives that, for a period of 180 days after the
date of this prospectus, they will not, without the prior written consent of
Salomon Smith Barney Inc. dispose of or hedge any shares of common stock or any
of our securities convertible into or exchangeable for shares of common stock
other than, in the case of Pixelworks, shares pursuant to any employee stock
option plan, stock ownership plan or dividend reinvestment plan of Pixelworks in
effect at the time the underwriting agreement is signed and common stock
issuable upon the conversion of securities or the exercise of warrants
outstanding at the time the underwriting agreement is signed, and in the case of
the officers, directors and shareholders, shares of common stock disposed of as
bona fide gifts approved by Salomon Smith Barney Inc. Salomon Smith Barney Inc.
in its sole discretion may release any of the securities subject to the lock-up
agreements at any time without notice. The release of any lock-up is considered
on a case by case basis. Factors in deciding whether to release shares may
include the length of time before the lock-up expires, the trading price of the
common stock and whether the person seeking the release is an officer,
67
<PAGE>
director or affiliate of Pixelworks. Salomon Smith Barney Inc. has no current
intention to release shares subject to the lock-up agreements.
The underwriters have reserved for sale, at the initial public offering
price, up to 250,000 shares of common stock for customers, directors, employees
and other persons associated with us who have expressed an interest in
purchasing shares of common stock in the offering. The number of shares
available for sale to the general public in the offering will be reduced to the
extent these persons purchase these reserved shares. Any reserved shares not so
purchased will be offered by the underwriters to the general public on the same
terms as the other shares.
Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the initial public offering price for the shares of
common stock was determined by negotiations between us and the representatives.
Among the factors considered in determining the initial public offering price
were our record of operations, our current financial condition, our future
prospects, our markets, the economic conditions in and future prospects for the
industry in which we compete, our management, and currently prevailing general
conditions in the equity securities markets, including current market valuations
of publicly traded companies considered comparable to us. We cannot assure you,
however, that the prices at which the shares will sell in the public market
after this offering will not be lower than the price at which they are sold by
the underwriters or that an active trading market in the shares of common stock
will develop and continue after the offering.
We have applied to have our shares of common stock included for quotation on
the Nasdaq Stock Market's National Market under the symbol "PXLW."
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
PAID BY PIXELWORKS
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share............................................
Total................................................
</TABLE>
The expense of the offering, exclusive of the underwriting discounts and
commissions, are estimated to be $900,000 and are payable entirely by us.
In connection with the offering, Salomon Smith Barney Inc. on behalf of the
underwriters, may over-allot, or engage in syndicate covering transactions,
stabilizing transactions and penalty bids. Over-allotment involves syndicate
sales of shares of common stock in excess of the number of shares to be
purchased by the underwriters in the offering, which creates a syndicate short
position. Syndicate covering transactions involve purchases of the shares of
common stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Stabilizing transactions consist of
certain bids or purchases of shares of common stock made for the purpose of
preventing or retarding a decline in the market price of the shares of common
stock while the offering is in progress. Penalty bids permit the underwriters to
reclaim a selling concession from a syndicate member when Salomon Smith
Barney Inc., in covering syndicate short positions or making stabilizing
purchases, repurchases shares originally sold by that syndicate member. These
activities may cause the price of the shares of common stock to be higher than
the price that otherwise would exist in the open market in the absence of such
transactions. These transactions may be effected on the Nasdaq National Market
or in the over-the-counter market, or otherwise and, if commenced, may be
discontinued at any time.
E*OFFERING Corp. will allocate for distribution by E*TRADE Securities, Inc.
a portion of the shares that E*OFFERING Corp. is underwriting. Copies of the
prospectus in electronic format will be made available on Internet websites
maintained by E*OFFERING Corp. and E*TRADE Securities, Inc. Customers of E*TRADE
Securities, Inc. who complete and pass an online eligibility profile may place
conditional offers to purchase shares in this offering through E*TRADE
68
<PAGE>
Securities, Inc.'s Internet website. Additionally, a prospectus in electronic
format will be made available on the Web sites maintained by one or more of the
other underwriters. The representatives may agree to allocate a number of shares
to underwriters for sale to their on line brokerage account holders. The
representatives will allocate shares to the underwriters that make Internet
distributions on the same basis as other allocations.
The prospectus may be used by underwriters and dealers in connection with
offers and sales of the shares of common stock, including shares of common stock
initially sold outside the United States, to persons located in the United
States.
We have agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the securities act, or to contribute to
payments the underwriters may be required to make with respect to any of those
liabilities.
LEGAL MATTERS
The validity of the shares of common stock offered hereby and certain other
legal matters relating to the offering are being passed upon for us by Ater
Wynne LLP, Portland, Oregon. Certain legal matters relating to the offering are
being passed upon for the underwriters by Brown & Wood LLP, San Francisco,
California. Brown & Wood LLP may rely on Ater Wynne LLP as to matters of Oregon
law.
EXPERTS
The financial statements of Pixelworks, Inc. as of December 31, 1998 and
1999, and for the period from January 16, 1997 (date of inception) through
December 31, 1997 and for each of the years in the two-year period ended
December 31, 1999, have been included in this prospectus and elsewhere in the
registration statement in reliance upon the report of KPMG LLP, independent
auditors, appearing elsewhere herein and upon the authority of KPMG LLP as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1. This Prospectus, which forms a part of the Registration
Statement, does not contain all the information included in the Registration
Statement. Certain information is omitted and you should refer to the
Registration Statement and its exhibits. With respect to references made in this
Prospectus to any of our contracts or other documents, the references are not
necessarily complete and you should refer to the exhibits attached to the
Registration Statement for copies of the actual contract or document. You may
review a copy of the Registration Statement, including exhibits and schedules
filed therewith that we have filed at the Securities and Exchange Commission's
public reference facilities in Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Securities and Exchange Commission located at 7 World Trade Center, Suite 1300,
New York, New York 10048, and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. You may also obtain copies of these
materials from the Public Reference Section of the Securities and Exchange
Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Securities and Exchange
Commission maintains a Web site at HTTP://WWW.SEC.GOV.
69
<PAGE>
PIXELWORKS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of KPMG LLP.......................................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Redeemable Convertible Preferred Stock and
Shareholders' Equity (Deficit)............................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pixelworks, Inc.:
We have audited the accompanying balance sheets of Pixelworks, Inc. as of
December 31, 1998 and 1999, and the related statements of operations, redeemable
convertible preferred stock and shareholders' equity (deficit), and cash flows
for the period from January 16, 1997 (date of inception) through December 31,
1997 and for each of the years in the two-year period ended December 31, 1999.
These financial statements are the responsibility of Pixelworks' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pixelworks, Inc. as of
December 31, 1998 and 1999, and the results of its operations, and its cash
flows for the period from January 16, 1997 (date of inception) through
December 31, 1997 and for each of the years in the two-year period ended
December 31, 1999 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Portland, Oregon
January 26, 2000
F-2
<PAGE>
PIXELWORKS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------- -------------------------
1998 1999 2000 2000
-------- -------- ----------- -----------
(UNAUDITED) (PROFORMA)
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $6,119 $12,199 $ 35,410
Accounts receivable, net........................... 83 2,537 2,268
Inventories........................................ 43 1,404 2,641
Prepaid expenses and other current assets.......... 11 21 343
------ ------- --------
Total current assets............................. 6,256 16,161 40,662
Property and equipment, net.......................... 1,120 1,730 1,972
Other assets, net.................................... 300 503 1,762
------ ------- --------
$7,676 $18,394 $ 44,396
====== ======= ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................... $ 257 $ 712 $ 1,323
Accrued liabilities................................ 241 1,518 4,059
Line of credit..................................... 1,331 669 --
Current portion of long-term obligations........... -- 492 --
------ ------- --------
Total current liabilities........................ 1,829 3,391 5,382
Long-term obligations, less current portion.......... -- 591 --
Other long-term liabilities.......................... -- 6 6
------ ------- --------
Total liabilities................................ 1,829 3,988 5,388
------ ------- --------
Redeemable convertible preferred stock, $.001 par
value. Authorized 16,100,000 shares; 8,406,981,
10,900,007, and 13,139,219 (unaudited) at
December 31, 1998, 1999 and March 31, 2000,
respectively; (liquidation preference of $19,517 at
December 31, 1999)................................. 7,755 23,701 53,183
Commitments and contingencies........................ -- -- --
Shareholders' equity (deficit):
Common stock, $.001 par value. Authorized
35,000,000 shares; 7,500,000, 9,874,310 and
10,044,734 (unaudited) shares issued and
outstanding at December 31, 1998, 1999 and
March 31, 2000, respectively, (pro forma
29,753,563)...................................... -- -- -- $53,183
Warrants........................................... 71 -- -- --
Deferred stock compensation........................ -- (2,230) (2,807) (2,807)
Note receivable for common stock................... -- (199) (199) (199)
Accumulated deficit................................ (1,979) (6,866) (11,169) (11,169)
------ ------- -------- -------
Total shareholders' equity (deficit)............. (1,908) (9,295) (14,175) $39,008
------ ------- -------- -------
$7,676 $18,394 $ 44,396
====== ======= ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
PIXELWORKS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 16,
1997 (DATE OF THREE MONTHS ENDED
INCEPTION) TO YEARS ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------- -----------------------
1997 1998 1999 1999 2000
------------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue, net............ $ 25 $ 105 $ 12,647 $ 451 $ 7,064
Commissions..................... 375 373 65 65 --
Licensing and development
fees.......................... -- 500 100 100 --
-------- ---------- ---------- ---------- ----------
Total revenue................. 400 978 12,812 616 7,064
-------- ---------- ---------- ---------- ----------
Cost of revenue(1)................ 24 22 8,369 163 4,495
-------- ---------- ---------- ---------- ----------
Gross profit.................. 376 956 4,443 453 2,569
Operating expenses:
Research and development(2)..... 215 1,446 4,805 823 1,690
Selling, general and
administrative(3)............. 590 1,314 4,366 604 1,784
Amortization of deferred stock
compensation.................. -- -- 565 4 340
-------- ---------- ---------- ---------- ----------
Total operating expenses...... 805 2,760 9,736 1,431 3,814
-------- ---------- ---------- ---------- ----------
Loss from operations.......... (429) (1,804) (5,293) (978) (1,245)
-------- ---------- ---------- ---------- ----------
Interest and other:
Interest income................. 14 238 519 64 295
Interest expense................ -- (23) (110) (28) (38)
Miscellaneous income
(expense)..................... 39 -- -- -- (3,315)
-------- ---------- ---------- ---------- ----------
Interest and other income
(expense), net.............. 53 215 409 36 (3,058)
-------- ---------- ---------- ---------- ----------
Loss before income taxes...... (376) (1,589) (4,884) (942) (4,303)
Income taxes...................... -- 14 3 3 --
-------- ---------- ---------- ---------- ----------
Net loss...................... (376) (1,603) (4,887) (945) (4,303)
Accretion of preferred stock
redemption preference........... -- (10) (4,278) (98) (954)
-------- ---------- ---------- ---------- ----------
Net loss attributable to
common shareholders......... $ (376) $ (1,613) $ (9,165) $ (1,043) $ (5,257)
======== ========== ========== ========== ==========
Historical loss per share:
Basic and diluted............... $ (0.45) $ (0.61) $ (1.53) $ (0.27) $ (0.67)
======== ========== ========== ========== ==========
Weighted average shares--basic
and diluted................... 828,263 2,660,327 5,970,785 3,828,138 7,887,063
- ------------------------
Amount excludes amortization of
deferred stock compensation of:
(1) Cost of revenue............ $ -- $ -- $ 7 $ -- $ 6
(2) Research and development... -- -- 233 3 139
(3) Selling, general and
administrative............. -- -- 325 1 195
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PIXELWORKS, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE NOTE
PREFERRED STOCK COMMON STOCK DEFERRED RECEIVABLE
--------------------- --------------------- STOCK FOR
SHARES AMOUNT SHARES AMOUNT WARRANTS COMPENSATION COMMON STOCK
---------- -------- ---------- -------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of January 16, 1997.... -- $ -- -- $ -- $ -- $ -- $ --
Sale of common stock............... -- -- 7,500,000 10 -- -- --
Issuance of Series A redeemable
convertible preferred stock and
warrants, net.................... 2,906,976 1,145 -- -- 71 -- --
Net loss........................... -- -- -- -- -- -- --
---------- ------- ---------- ------- ---- ------- -----
Balances as of December 31, 1997... 2,906,976 1,145 7,500,000 10 71 -- --
Issuance of Series B redeemable
convertible preferred stock...... 5,500,005 6,600 -- -- -- -- --
Accretion of preferred stock
redemption preference............ -- 10 -- (10) -- -- --
Net loss........................... -- -- -- -- -- -- --
---------- ------- ---------- ------- ---- ------- -----
Balances as of December 31, 1998... 8,406,981 7,755 7,500,000 -- 71 -- --
Issuance of Series C redeemable
convertible preferred stock...... 2,493,026 11,668 -- -- -- -- --
Exercise of stock options and
issuance of common stock......... -- -- 521,112 162 -- -- (199)
Exercise of warrants............... -- -- 1,853,198 1,321 (71) -- --
Deferred compensation related to
stock options.................... -- -- -- 2,795 -- (2,795) --
Amortization of deferred stock
compensation..................... -- -- -- -- -- 565 --
Accretion of preferred stock
redemption preference............ -- 4,278 -- (4,278) -- -- --
Net loss........................... -- -- -- -- -- -- --
---------- ------- ---------- ------- ---- ------- -----
Balances as of December 31, 1999... 10,900,007 23,701 9,874,310 -- -- (2,230) (199)
Issuance of Series D convertible
preferred stock (unaudited)...... 2,239,212 28,528 -- -- -- -- --
Exercise of stock options
(unaudited)...................... -- -- 170,424 37 -- -- --
Deferred compensation related to
stock options (unaudited)........ -- -- -- 917 -- (917) --
Amortization of deferred stock
compensation (unaudited)......... -- -- -- -- -- 340 --
Accretion of preferred stock
redemption preference
(unaudited)...................... -- 954 -- (954) -- -- --
Net loss (unaudited)............... -- -- -- -- -- -- --
---------- ------- ---------- ------- ---- ------- -----
Balances as of March 31, 2000
(unaudited)...................... 13,139,219 $53,183 10,044,734 $ -- $ -- $(2,807) $(199)
========== ======= ========== ======= ==== ======= =====
<CAPTION>
TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY (DEFICIT)
------------ ----------------
<S> <C> <C>
Balances as of January 16, 1997.... $ -- $ --
Sale of common stock............... -- 10
Issuance of Series A redeemable
convertible preferred stock and
warrants, net.................... -- 71
Net loss........................... (376) (376)
-------- --------
Balances as of December 31, 1997... (376) (295)
Issuance of Series B redeemable
convertible preferred stock...... -- --
Accretion of preferred stock
redemption preference............ -- (10)
Net loss........................... (1,603) (1,603)
-------- --------
Balances as of December 31, 1998... (1,979) (1,908)
Issuance of Series C redeemable
convertible preferred stock...... -- --
Exercise of stock options and
issuance of common stock......... -- (37)
Exercise of warrants............... -- 1,250
Deferred compensation related to
stock options.................... -- --
Amortization of deferred stock
compensation..................... -- 565
Accretion of preferred stock
redemption preference............ -- (4,278)
Net loss........................... (4,887) (4,887)
-------- --------
Balances as of December 31, 1999... (6,866) (9,295)
Issuance of Series D convertible
preferred stock (unaudited)...... -- --
Exercise of stock options
(unaudited)...................... -- 37
Deferred compensation related to
stock options (unaudited)........ -- --
Amortization of deferred stock
compensation (unaudited)......... -- 340
Accretion of preferred stock
redemption preference
(unaudited)...................... -- (954)
Net loss (unaudited)............... (4,303) (4,303)
-------- --------
Balances as of March 31, 2000
(unaudited)...................... $(11,169) $(14,175)
======== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
PIXELWORKS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 16,
1997 (DATE OF YEARS ENDED THREE MONTH
INCEPTION) THROUGH DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, ------------------- -------------------
1997 1998 1999 1999 2000
------------------ -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(376) $(1,603) $(4,887) $ (945) $(4,303)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 55 431 1,303 229 506
Write-off of property and equipment and other assets.... -- -- 74 11 --
Provision for doubtful accounts......................... -- 10 160 9 58
Amortization of deferred stock compensation............. -- -- 565 4 340
Patent settlement expenses.............................. -- -- -- -- 3,325
Changes in operating assets and liabilities:
Accounts receivable................................... (58) (35) (2,614) (390) 211
Inventories........................................... -- (43) (1,361) (228) (1,237)
Prepaid expenses and other current assets............. (8) (3) (10) 4 (322)
Accounts payable...................................... 77 180 455 224 611
Accrued liabilities................................... 4 162 1,277 179 741
Other long-term liabilities........................... -- -- 6 -- --
----- ------- ------- ------ -------
Net cash used in operating activities............... (306) (901) (5,032) (903) (70)
----- ------- ------- ------ -------
Cash flows from investing activities:
Purchase of property and equipment........................ (256) (1,275) (1,710) (335) (666)
Other assets.............................................. (5) (295) (480) -- (866)
Purchase of investments................................... (838) -- -- -- --
Proceeds from maturities of investments................... 546 292 -- -- --
----- ------- ------- ------ -------
Net cash used in investing activities............... (553) (1,278) (2,190) (335) (1,532)
----- ------- ------- ------ -------
Cash flows from financing activities:
Proceeds from lines of credit............................. -- 1,331 669 127 (669)
Payments on long-term debt................................ -- -- (248) -- (1,083)
Issuance of preferred stock and common stock warrants..... 1,216 6,600 11,668 -- 26,528
Issuance of common stock.................................. 10 -- 1,213 -- 37
----- ------- ------- ------ -------
Net cash provided by financing activities........... 1,226 7,931 13,302 127 24,813
----- ------- ------- ------ -------
Net increase (decrease) in cash and cash
equivalents......................................... 367 5,752 6,080 (1,111) 23,211
Cash and cash equivalents at beginning of period............ -- 367 6,119 6,119 12,199
----- ------- ------- ------ -------
Cash and cash equivalents at end of period.................. $ 367 $ 6,119 $12,199 $5,008 $35,410
===== ======= ======= ====== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............ $ -- $ 23 $ 110 $ 28 $ 38
Supplemental disclosure of non-cash investing and financing
activities:
Accrued liabilities for the purchase of property and
equipment, other assets and settlement.................. $ 75 $ -- $ -- $ -- $ 1,800
Stock issued for the purchase of other assets and
settlement.............................................. -- -- -- -- 2,000
Warrants issued in connection with preferred stock
issuance................................................ 71 -- -- -- --
Conversion of line of credit to term note................. -- -- 1,331 -- --
Accretion of preferred stock redemption preference........ -- 10 4,278 98 954
Note receivable for issuance of common stock.............. -- -- 199 -- --
Warrants exercised for common stock....................... -- -- 71 -- --
===== ======= ======= ====== =======
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
PIXELWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF BUSINESS
Pixelworks, Inc. (Pixelworks) designs and develops complete system-on-a-chip
solutions that enable the visual display of broadband content. Pixelworks'
technology interprets and optimizes video, computer graphics, and visual Web
information for display on a wide variety of devices.
(b) CASH AND CASH EQUIVALENTS
Pixelworks considers all highly liquid investments having an original
maturity of three months or less to be cash equivalents.
(c) ACCOUNTS RECEIVABLE
Accounts receivable is net of an allowance for doubtful accounts of $10 and
$155 as of December 31, 1998 and 1999, respectively. The following table
presents a rollforward of the allowance for doubtful accounts for the indicated
periods:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Balance as of beginning of period............... $-- $ 10
Provision....................................... 10 160
Charge offs..................................... -- (15)
--- ----
Balance as of end of period..................... $10 $155
=== ====
</TABLE>
(d) INVENTORIES
Inventories consist of finished goods and are stated at the lower of
standard cost (approximates actual cost on a first-in, first-out basis) or
market (net realizable value).
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The cost of repairs and
maintenance is expensed as incurred.
Depreciation on computer equipment and software, tooling and leasehold
improvements is calculated on a straight-line basis over the estimated useful
lives of the assets, two years for computer equipment and software and the
estimated life of the product for tooling, generally two years. Amortization of
leasehold improvements is recognized over the shorter of the life of the
improvement or the remaining life of the lease.
As required by Statement of Financial Accounting Standards No. 121 (SFAS),
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF, management reviews long-lived assets and the related intangible
assets for impairment whenever events or changes in circumstances indicate the
carrying amount of the assets may not be recoverable. Recoverability of these
assets is determined by comparing the forecasted undiscounted net cash flows of
the operation to which the assets relate, to the carrying amount including
associated intangible assets of the operation.
F-7
<PAGE>
PIXELWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
If the operation is determined to be unable to recover the carrying amount of
its assets, then intangible assets are written down first, followed by the other
long-lived assets of the operation, to fair value. Fair value is determined
based on discounted cash flows or appraised values, depending upon the nature of
the assets.
(f) STOCK-BASED COMPENSATION
SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, defines a fair value
based method of accounting for an employee stock option or similar instrument.
Under the fair value based method, compensation cost is measured at the grant
date based on the value of the award and is recognized over the service period,
which is usually the vesting period. However, SFAS 123 also allows an entity to
continue to measure compensation cost using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25 (Opinion 25), ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES. Under the intrinsic value based method, compensation cost
is the excess, if any, of the quoted market price of the stock at grant date or
other measurement date over the amount an employee must pay to acquire the
stock. Entities electing to remain with the accounting in Opinion 25 must make
pro forma disclosures of net income and, if presented, earnings per share, as if
the fair value based method had been applied. Pixelworks has elected to continue
to apply the prescribed accounting in Opinion 25 and make the required
disclosures under SFAS 123.
Pixelworks accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123 and Emerging Issues Task Force
consensus on Issue No. 96-18, ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED
TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING GOODS OR
SERVICES. There have been no equity instruments issued to non-employees during
the periods presented.
(g) REVENUE RECOGNITION
Pixelworks recognizes revenue for product sales to direct customers and
commissions on third party sales upon shipment of the underlying merchandise.
Revenue from product sales to distributors is recognized upon shipment if the
distributor has a firm sales commitment from an end customer. A reserve for
sales returns and allowances is recorded at the time of shipment. As of
December 31, 1998 and 1999, the reserve for sales returns and allowances was $3
and $236, respectively.
Pixelworks accrues a liability for the estimated future repair and
replacement costs to be incurred under the provisions of Pixelworks' warranty
agreements. As of December 31, 1998 and 1999, the reserve for warranty repairs
was $1 and $133, respectively.
Licensing and development fees represent revenue earned for the development
of certain technology and limited license granted to a third party.
(h) RESEARCH AND DEVELOPMENT
Research and development are charged to expense as incurred. However,
software development costs are capitalized beginning when a product's
technological feasibility has been established by completion of a working model
and ending when a product is available for general release to
F-8
<PAGE>
PIXELWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
customers. Completion of a working model and general release has substantially
coincided. As a result, all such costs have been charged to research and
development as incurred.
(i) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is established when necessary to reduce
deferred tax assets to the amount expected to be realized.
(j) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to the short-term nature of these
instruments. The carrying amount of amounts due under the line of credit
approximates fair value since the interest rate approximates current rates
available to Pixelworks.
(k) NET LOSS PER SHARE
Pixelworks reports net loss per share in accordance with SFAS 128, EARNINGS
PER SHARE, and SEC Staff Accounting Bulletin No. 98 (SAB 98), which requires the
presentation of both basic and diluted earnings per share. Basic earnings per
share is computed using the weighted average number of common shares outstanding
and diluted earnings per share is computed using the weighted average number of
common shares outstanding and dilutive potential common shares assumed to be
outstanding during the period using the treasury stock method. The following
weighted-average potential common shares have been excluded from the computation
of diluted loss per share for all periods presented because the effect would
have been anti-dilutive:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------- -----------------------
1997 1998 1999 1999 2000
--------- --------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Shares issuable under stock
options............................ -- -- 1,696,175 948,946 2,556,996
Shares of restricted stock subject to
repurchase......................... 6,689,208 4,853,586 3,093,572 3,710,924 1,914,674
Shares of convertible preferred stock
on an as converted basis........... 3,108,857 9,955,293 15,012,882 12,750,588 17,752,594
</TABLE>
(l) COMPREHENSIVE INCOME
Pixelworks has had no items of comprehensive income.
F-9
<PAGE>
PIXELWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(m) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingencies at the date of the financial statements and the
reported amounts of revenues and expense during the reporting period. Actual
results could differ from those estimates.
(n) CONCENTRATION OF SUPPLIERS
Pixelworks does not own or operate a semiconductor fabrication facility and
does not have the resources to manufacture its products internally. Pixelworks
relies on two, third party foundries to produce all its products. In light of
these dependencies, it is reasonably possible that failure to perform by one of
these suppliers could have a severe impact on Pixelworks growth and results of
operations.
(o) RISK OF TECHNOLOGICAL CHANGE
The markets in which Pixelworks competes or seeks to compete are subject to
rapid technological change, frequent new product introductions, changing
customer requirements for new products and features, and evolving industry
standards. The introduction of new technologies and the emergence of new
industry standards could render Pixelworks' products less desirable or obsolete
which could harm its business.
(p) CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject Pixelworks to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. Pixelworks limits its exposure to credit risk associated with cash
and cash equivalents by placing its cash and cash equivalents with various high
credit quality financial institutions. Cash and cash equivalents consist of
deposits and money market funds. As of December 31, 1999, Pixelworks had
accounts receivable from two customers representing approximately 75% of
accounts receivable. Loss or non-performance by these significant customers
could adversely affect Pixelworks financial position or results from operations.
(q) PRO FORMA SHAREHOLDERS EQUITY (UNAUDITED)
Upon consummation of Pixelworks' initial public offering, all of the
convertible preferred stock outstanding as of the closing date will
automatically be converted into an aggregate of 19,708,829 shares of common
stock based on the shares of convertible preferred stock outstanding as of March
31, 2000. Unaudited pro forma shareholders' equity as of March 31, 2000, as
adjusted for the conversion of the redeemable convertible preferred stock, is
disclosed on the balance sheet.
(r) UNAUDITED QUARTERLY INFORMATION
The financial information included herein as of March 31, 2000 and for the
three-month periods ended March 31, 1999 and 2000 is unaudited. However, such
information reflects all adjustments, consisting 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 period.
F-10
<PAGE>
PIXELWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The unaudited interim financial statements should be read together with the
financial statements and the notes included in the financial statements. The
results of operations for the interim period presented are not necessarily
indicative of the results to be expected for the full year.
(s) COSTS OF SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
Internal use software development costs are accounted for in accordance with
Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE. Costs incurred in the preliminary
project stage are expensed as incurred and costs incurred in the application and
development stage, which meet the capitalized criteria, are capitalized and
amortized on a straightline basis over three years, the estimated useful life of
the asset.
(2) BALANCE SHEET COMPONENTS
(a) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------- -----------
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Software......................................... $ 808 $1,658 $1,964
Computer equipment............................... 371 981 1,197
Tooling.......................................... 427 576 720
Leasehold improvements........................... -- 91 91
------ ------ ------
1,606 3,306 3,972
Less accumulated depreciation and amortization... 486 1,576 2,000
------ ------ ------
$1,120 $1,730 $1,972
====== ====== ======
</TABLE>
(b) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------- -----------
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Payroll and related liabilities.................... $166 $ 751 $ 854
Reserve for sales returns.......................... 3 236 212
Royalties.......................................... -- 197 234
Other.............................................. 72 334 2,759
---- ------ ------
$241 $1,518 $4,059
==== ====== ======
</TABLE>
F-11
<PAGE>
PIXELWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(3) LINE OF CREDIT
Pixelworks has a line of credit for cash borrowings and letters of credit up
to $3,000. Pixelworks may borrow up to 80% of eligible accounts receivable and
as of December 31, 1999, approximately $1,485 was available for borrowing. The
line of credit bears interest at prime (8.5% at December 31, 1999) plus .25%,
which is payable monthly. The line of credit expires March 2000, when the
principal balance outstanding becomes due and payable. The line of credit is
secured by substantially all assets of Pixelworks.
Under the agreement, Pixelworks is required to maintain certain financial
covenants. Pixelworks was in compliance with the covenants as of December 31,
1999.
(4) LONG-TERM DEBT
Long-term debt consists of a line of credit converted into a term loan after
a six month draw-down period. The loan is payable in monthly principal
installments of approximately $41, plus interest at prime (8.5% as of
December 31, 1999) plus .5%. Scheduled repayments on long-term debt are:
2000--$492; 2001--$492; 2002--$99. Long-term debt is secured by substantially
all assets of Pixelworks.
(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK
Pixelworks has designated shares of authorized preferred stock as redeemable
convertible preferred stock. The title and number of shares issued and
outstanding are as follows:
<TABLE>
<CAPTION>
SHARES ISSUED AND
OUTSTANDING
----------------------
DECEMBER 31,
DESIGNATED ----------------------
SHARES DATE ISSUED 1998 1999
---------- -------------- --------- ----------
<S> <C> <C> <C> <C>
Series C redeemable convertible preferred
stock, $4.68 per share liquidation
preference................................ 2,493,026 May 28, 1999 -- 2,493,026
Series B redeemable convertible preferred
stock, $1.20 per share liquidation
preference................................ 5,500,005 April 29, 1998 5,500,005 5,500,005
Series A redeemable convertible preferred
stock, $0.43 per share liquidation
preference................................ 3,000,000 April 25, 1997 2,906,976 2,906,976
---------- --------- ----------
10,993,031 8,406,981 10,900,007
========== ========= ==========
</TABLE>
(a) VOTING
The Series A, Series B and Series C redeemable convertible preferred stock
(Series A, Series B and Series C) vote together with all other classes and
series of stock of Pixelworks as a single class on all actions to be taken by
the shareholders of Pixelworks. The Series A, Series B and Series C, voting as a
separate series, each have the right to elect one member to the Board of
Directors.
(b) LIQUIDATION PREFERENCES
Upon liquidation, dissolution or winding up of Pixelworks, whether voluntary
or involuntary, the holders of the shares of Series C shall be paid an amount
equal to the issue price for that series plus, in the case of each share, an
amount equal to any dividends accrued but unpaid thereon, computed to
F-12
<PAGE>
PIXELWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
the date payments thereof is made available, before any payment shall be made to
the holders of Series B and Series A and common stock.
(c) REDEMPTION
With the approval of the holders of the majority of the then outstanding
shares of preferred stock of a particular series, one or more holders of shares
of Series A, Series B and Series C may, by giving notice to Pixelworks at any
time after March 1, 2002, 2003 and 2004, respectively, require Pixelworks to
redeem all of the outstanding preferred stock of that series in two
installments, with up to one-half of the shares redeemed sixty days after
receipt of notice stating the number of shares of preferred stock of the series
being redeemed. The second installment is due on the first anniversary of the
first installment. The preferred stock to be redeemed shall be redeemed by
paying for each share in cash an amount equal to the greater of (i) the then
fair market value per share or (ii) $0.43 per share, $1.20 per share and $4.68
per share for Series A, Series B and Series C, respectively, plus, in the case
of each share, an amount equal to all dividends accrued and unpaid thereon.
On or after March 1, 2005, 2006 and 2007, Pixelworks may at its option
establish a redemption date as of which Pixelworks shall redeem all, but not
less than all, of the then outstanding Series A, Series B and Series C,
respectively. The preferred stock to be redeemed shall be redeemed by paying for
each share in cash an amount equal to the greater of (i) the then fair market
value per share or (ii) $0.43 per share, $1.20 per share and $4.68 per share for
Series A, Series B and Series C, respectively, plus, in the case of each share,
an amount equal to all dividends accrued and unpaid thereon.
The carrying amount of Series A, Series B and Series C have been increased
by periodic accretions, based on the deemed fair value of the preferred stock at
the balance sheet date and using the interest method. Each increase has been
effected by charges against common stock in the absence of retained earnings.
(d) CONVERSION
The holder of any share or shares of preferred stock shall have the right,
at its option at any time, to convert any such shares of preferred stock into
such number of fully paid and nonassessable shares of common stock as is
obtained by (i) multiplying the number of shares of preferred stock of each
series so to be converted by the issue price applicable to that series and
(ii) dividing the result by the conversion price then applicable to that series.
If at any time a majority of the total number of preferred stock has been
converted into common stock, all outstanding shares of preferred stock of a
given series shall likewise automatically convert to shares of common stock. The
Series A, Series B and Series C is convertible into 4,360,464, 8,250,008 and
3,739,539 shares of common stock, respectively.
All outstanding shares of preferred stock shall automatically convert to
shares of common stock if at any time Pixelworks shall effect a firm commitment
underwritten public offering of shares of common stock in which (i) the
aggregate net proceeds from such offering to Pixelworks shall be at least
$10,000 and (ii) the price paid by the public for such shares shall be at least
$7.00 per share (appropriately adjusted to reflect the occurrence of stock
splits, combinations, common stock dividends and distributions).
F-13
<PAGE>
PIXELWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
Pixelworks is required at all times to reserve and keep available out of its
authorized common stock, solely for the purpose of issuance upon the conversion
of the preferred stock, such number of shares of common stock as shall then be
issuable upon the conversion of all outstanding shares of preferred stock.
If Pixelworks effectuates a stock split or reverse stock split of common
stock without a corresponding stock split or reverse stock split of any given
series of preferred stock, the conversion price for that series of preferred
stock in effect immediately preceding the stock split or reverse stock split of
the common stock shall be proportionately decreased or increased respectively.
If Pixelworks at any time subsequent to the effective date of its Third
Amended and Restated Articles of Incorporation issues any additional common
stock without consideration or for a consideration per share less than the
conversion price for any given series of preferred stock then in effect, the
conversion price applicable to each such series shall be adjusted or readjusted
in accordance with Pixelworks' Third Amended and Restated Articles of
Incorporation.
(e) DIVIDENDS
The Series A, B, and C shareholders are entitled to receive dividends, when
and if declared by the Board, in amounts per share not less than those paid on
common stock per share, and in preference to and before any dividends are paid
on common stock.
(6) SHAREHOLDERS' EQUITY
(a) SHAREHOLDERS' AGREEMENT
The founding common shareholders (Founders) are subject to an amended
shareholders' agreement which provides, among other things, the restriction of
the transfer of shares.
As provided in the amended shareholders' agreement, Pixelworks has the right
to buy back from the Founders, the share or shares of common stock outstanding
in the event the Founder or Founders terminates employment prior to their fourth
anniversary for the same price originally paid. This right diminishes ratably
over the four-year employment history of the respective common shareholder. This
right lapses upon an initial public offering.
As of December 31, 1999, there were 1,953,107 common shares subject to the
shareholders' agreement.
(b) WARRANTS
In connection with the Series A redeemable convertible preferred stock
offering, Pixelworks issued warrants, at a nominal value, for the purchase of up
to an aggregate of 1,853,198 shares of Pixelworks' common stock at an exercise
price of $0.674 per share. The warrants were exercised in 1999.
The fair value of the warrants issued of $71 was determined by applying the
Black-Scholes methodology using the issuance date for Series A redeemable
convertible preferred stock as the measurement date. The per share weighted
average fair market value was $0.06 on the date of grant,
F-14
<PAGE>
PIXELWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(6) SHAREHOLDERS' EQUITY (CONTINUED)
with the following weighted average assumptions: Risk-free interest rate of 6%,
expected dividend yield of -0-%, a two-year term and an expected volatility of
100%.
(c) NOTE RECEIVABLE FOR COMMON STOCK
During 1999, 305,937 of stock options were exchanged for 305,937 shares of
common stock subject to vesting in exchange for a note receivable. The note
receivable is due and payable the earlier of 1) August 31, 2008 or 2) upon
termination of the borrower's employment and bears interest at 6% per year,
payable annually. The note receivable is secured by the shares of common stock
issued thereunder. As of December 31, 1999, there were 284,691 shares of
unvested common stock.
(d) STOCK OPTIONS
Pixelworks has a stock option plan under which a total of 6,340,116 stock
options may be granted to key employees. Options granted under the plan must
generally be exercised while the individual is an employee and within ten years
of the date of grant. On the standard vesting schedule, each option shall become
exercisable at a rate of 25% on the first anniversary date of the grant and on
the last day of every month thereafter for a total of thirty-six additional
increments unless otherwise specifically stated at the time of grant. On the
alternative vesting schedule, options become exercisable monthly for a period of
four years, with 10% becoming exercisable in the first year, 20% becoming
exercisable in the second year, 30% becoming exercisable in the third year, and
40% becoming exercisable in the fourth year. Had Pixelworks accounted for its
stock-based compensation plan in accordance with SFAS 123, Pixelworks' net loss
would approximate the pro forma disclosure as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 16,
1997 (DATE OF YEARS ENDED
INCEPTION) TO DECEMBER 31,
DECEMBER 31, -------------------
1997 1998 1999
------------- -------- --------
<S> <C> <C> <C>
Net loss attributable to common shareholders:
As reported................................. $ (376) $(1,613) $ (9,165)
Pro forma................................... (379) (1,663) (10,082)
Basic and diluted net loss per share:
As reported................................. (0.45) (0.61) (1.53)
Pro forma................................... (0.46) (0.63) (1.69)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts and additional awards are anticipated in future
years.
F-15
<PAGE>
PIXELWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(6) SHAREHOLDERS' EQUITY (CONTINUED)
The fair value of compensation costs reflected in the above pro forma
amounts were determined using the Black-Scholes option pricing model and the
following weighted average assumptions for grants used in the calculation are as
follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate........... 6.3% 5.0% 5.5%
Expected dividend yield........... 0% 0% 0%
Expected life..................... 7 years 6 years 5 years
Volatility........................ 100% 100% 100%
</TABLE>
Under the Black-Scholes option pricing model the weighted-average fair value
of options granted during 1997, 1998 and 1999 was approximately $0.14, $0.13 and
$2.18, respectively.
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
<S> <C> <C>
Options outstanding as of January 16, 1997............... -- $ --
Granted.................................................. 105,750 .166
---------
Options outstanding as of December 31, 1997.............. 105,750 .166
Granted.................................................. 1,167,000 .166
Canceled................................................. (750) .166
---------
Options outstanding as of December 31, 1998.............. 1,272,000 .166
Granted.................................................. 2,181,375 1.306
Exercised................................................ (215,182) .266
Canceled................................................. (323,937) .333
---------
Options outstanding as of December 31, 1999.............. 2,914,256 .992
Granted (unaudited)...................................... 267,000 3.975
Exercised (unaudited).................................... (170,424) .22
---------
Options outstanding as of March 31, 2000 (unaudited)..... 3,010,832 $ 1.30
=========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------- -------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICE 1999 LIFE PRICE 1999 PRICE
- -------------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$.166-.326 1,111,632 8.8 $ .193 230,336 $ .166
.500-.966 724,950 9.5 .82 -- --
1.486-2.426 1,077,674 9.8 1.926 58,468 2.413
------------ --------- --- ------ ------- ------
$.166-2.426 2,914,256 9.3 $ .993 288,804 $ .62
========= =======
</TABLE>
F-16
<PAGE>
PIXELWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(6) SHAREHOLDERS' EQUITY (CONTINUED)
As of March 31, 2000, 2,637,741 (unaudited) shares were available for grant.
Pixelworks has recorded deferred stock compensation of $2,795 through
December 31, 1999. This deferred stock compensation is based on the difference
between the deemed fair market value of common stock and the exercise price of
the option or stock on the grant date. Deferred stock compensation is being
amortized on an accelerated basis over the vesting period, generally four years,
consistent with the method described in FASB Interpretation No. 28. Pixelworks
recognized compensation expense of $565 during the year ended December 31, 1999
related to these grants. Amortization of the December 31, 1999 balance of
deferred stock compensation for the years ending December 31, 2000, 2001, 2002
and 2003 would approximate $1,113, $640, $346 and $131, respectively.
(7) INCOME TAXES
Components of the provision for income taxes for the years ended
December 31, 1998 and 1999 is comprised of current foreign taxes in the amount
of $14 and $3, respectively, and none during the period from January 16, 1997
(date of inception) to December 31, 1997.
The significant differences between the U.S. federal statutory tax rate and
Pixelworks' effective tax rate for financial statement purposes are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 16, 1997 YEARS ENDED
(DATE OF INCEPTION) DECEMBER 31,
TO DECEMBER 31, -------------------
1997 1998 1999
------------------- -------- --------
<S> <C> <C> <C>
Computed "expected" income tax benefit........ (34)% (34)% (34)%
Increases (decreases) resulting from:
State income taxes, net of federal tax
benefit................................... (4) (4) (4)
Increase in valuation allowance............. 41 42 39
Research and experimentation credit......... (3) (3) (4)
Other....................................... -- -- 3
--- --- ---
Actual tax expense............................ -- % 1 % -- %
=== === ===
</TABLE>
F-17
<PAGE>
PIXELWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(7) INCOME TAXES (CONTINUED)
The tax effects of temporary differences and net operating loss
carryforwards which give rise to significant portions of deferred tax assets and
deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 665 $ 1,920
Research and experimentation credit....................... 63 273
Accrued vacation.......................................... 27 54
Allowance for doubtful accounts........................... 4 59
Depreciation and amortization............................. 52 221
Other..................................................... 3 201
----- -------
Total gross deferred tax assets......................... 814 2,728
Less valuation allowance.................................... (814) (2,728)
----- -------
Net deferred tax assets................................. $ -- $ --
===== =======
</TABLE>
The valuation allowance for the deferred tax assets as of January 16, 1997
(date of inception) was $-0-. The net change in the total valuation allowance
for the period ended December 31, 1997 and the years ended December 31, 1998 and
1999 was an increase of approximately $154, $660 and $1,914, respectively.
A provision of the Tax Reform Act of 1986 requires the utilization of net
operating losses and credits be limited when there is a change of more than 50%
in ownership of Pixelworks. Such changes occurred with the sale of preferred
stock in 1998. Accordingly, the utilization of the net operating loss and credit
carryforwards generated from periods prior to April 28, 1998 is limited; the
federal net operating loss carryforwards subject to the limitation are
approximately $351.
As of December 31, 1999, Pixelworks has net operating loss and research
credit carryforwards of approximately $5,007 and $305, respectively, which will
expire between 2012-2018.
(8) SEGMENT INFORMATION
In accordance with SFAS 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION, Pixelworks has identified a single operating segment: the
design and development of integrated circuits for electronic display devices.
(a) SIGNIFICANT CUSTOMERS
Sales to one distributor represented 51% of total revenue for the year ended
December 31, 1998. Sales to two distributors represented 55% and 24%,
separately, of total revenue for the year ended December 31, 1999. No other
customer represented more than 10% of revenue.
F-18
<PAGE>
PIXELWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(8) SEGMENT INFORMATION (CONTINUED)
(b) GEOGRAPHIC INFORMATION
Revenue by geographic region was as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 16, 1997 YEARS ENDED
(DATE OF INCEPTION) DECEMBER 31,
TO DECEMBER 31, -------------------
1997 1998 1999
------------------- -------- --------
<S> <C> <C> <C>
Japan........................................ $ -- $500 $ 7,136
Taiwan....................................... -- -- 3,126
Korea........................................ -- -- 1,230
United States................................ 400 478 923
Other........................................ -- -- 397
---- ---- -------
Total revenue........................ $400 $978 $12,812
==== ==== =======
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
(a) ROYALTIES
During 1999, Pixelworks agreed to pay certain suppliers a per unit royalty
based on a certain number of chips sold. Royalties are paid monthly and expire
through November 6, 2006. Royalties are charged to cost of goods sold in the
statement of operations. Pixelworks has recorded $383 in royalty expense for the
year ended December 31, 1999.
(b) 401(k) PLAN
Effective January 1, 1999, Pixelworks implemented a profit-sharing plan for
eligible employees under the provisions of Internal Revenue Code
Section 401(k). Participants may defer a percentage of their annual compensation
on a pre-tax basis, not to exceed the dollar limit which is set by law. A
discretionary matching contribution by Pixelworks is allowed and is equal to a
uniform percentage of the amount of salary reduction elected to be deferred,
which percentage will be determined each year by Pixelworks. Pixelworks made no
contributions to the 401(k) plan during 1999.
F-19
<PAGE>
PIXELWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(c) LEASES
Pixelworks leases office space under various operating leases which expire
at various dates through 2004. Future minimum payments under the leases are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31:
- -------------------------
<S> <C>
2000...................................................... $ 448
2001...................................................... 498
2002...................................................... 514
2003...................................................... 509
2004...................................................... 212
------
Total............................................... $2,181
======
</TABLE>
Rent expense for the period from January 16, 1997 (date of inception) to
December 31, 1997 and the years ended December 31, 1998 and 1999 was $36, $80
and $243, respectively.
During 1999, Pixelworks entered into a noncancelable sublease agreement
which expires in August 2002. Future minimum payments to be received under the
sublease are as follows: 2000--$33; 2001--$33; and 2002--$21. Sublease income
was $19 during the year ended December 31, 1999, which was included in rent
expense.
(d) CONTINGENCIES
From time to time, Pixelworks may be a party to various lawsuits and claims
incidental to its business. The Company is not currently subject to any lawsuit
or claim which it believes will have a material adverse effect on its financial
position, results of operations or liquidity.
(E) CONTRACT MANUFACTURERS
Pixelworks generally commits to purchase products from its contract
manufacturers to be delivered within the most recent 90 days covered by
forecasts with cancellation fees. As of December 31, 1999, Pixelworks had
committed to make purchases totaling $5.4 million from the contract
manufacturers in the next 90 days. In addition, in specific instances,
Pixelworks may agree to assume liability for limited quantities of specialized
components with lead times beyond this 90-day period.
(10) SUBSEQUENT EVENTS (UNAUDITED)
(a) SERIES D OFFERING
On February 22, 2000, Pixelworks issued a total of 2,239,212 at $12.75 per
share shares of Series D preferred stock.
(b) LICENSE PURCHASE
In February of 2000, Pixelworks entered into a perpetual license agreement
with InFocus Systems, Inc. for the use of its proprietary automatic pixel clock
phase and frequency correction technology specified in two patents held by
InFocus in exchange for 156,863 shares of Series D preferred stock,
F-20
<PAGE>
PIXELWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(10) SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
valued at $12.75 per share, and $2.4 million in cash, payable in four equal
quarterly installments beginning March 31, 2000. Pixelworks also received a
release of any claims InFocus may have against Pixelworks relating to these
patents.
(c) 2000 EMPLOYEE STOCK PURCHASE PLAN
The 2000 Employee Stock Purchase Plan was adopted by the board in February
2000, subject to shareholder approval. A total of 1,500,000 shares of common
stock has been reserved for issuance under the employee stock purchase plan.
(d) STOCK SPLIT
On March 16, 2000, the board of directors approved a three-for-two split of
common stock effective March 31, 2000. All share and per share data have been
restated accordingly.
F-21
<PAGE>
[PIXELWORKS
SEE THE FUTURE]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5,750,000 SHARES
PIXELWORKS, INC.
COMMON STOCK
<TABLE>
<CAPTION>
<C> <C> <S>
[LOGO]
</TABLE>
---------
PROSPECTUS
, 2000
---------
SALOMON SMITH BARNEY
DEUTSCHE BANC ALEX. BROWN
SG COWEN
E*OFFERING
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses expected to be
incurred by the Registrant in connection with the offering described in this
Registration Statement. All amounts are estimates except the SEC registration
fee.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 24,440
NASD Filing fee............................................. 8,000
Nasdaq National Market listing fee.......................... 95,000
Printing Expenses........................................... 200,000*
Accounting Fees and Expenses................................ 250,000*
Legal Fees and Expenses..................................... 275,000*
Blue sky qualification fees and expenses.................... 10,000*
Transfer Agent and Registrar Fees........................... 15,000*
Miscellaneous Expenses...................................... 22,600*
--------
Total................................................... $900,000
========
</TABLE>
- ------------------------
* Estimate.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As an Oregon corporation, we are subject to the Oregon Business Corporation
Act ("OBCA") and the exculpation from liability and indemnification provisions
contained therein. Pursuant to Section 60.047(2)(d) of the OBCA, Article IV of
our Fifth Restated Articles of Incorporation (the "Restated Articles")
eliminates the liability of our directors to us or our shareholders, except for
any liability related to breach of the duty of loyalty, actions not in good
faith and certain other liabilities.
Section 60.387 et seq. of the OBCA allows corporations to indemnify their
directors and officers against liability where the director or officer has acted
in good faith and with a reasonable belief that actions taken were in the best
interests of the corporation or at least not adverse to the corporation's best
interests and, if in a criminal proceeding, the individual had no reasonable
cause to believe the conduct in question was unlawful. Under the OBCA,
corporations may not indemnify against liability in connection with a claim by
or in the right of the corporation but may indemnify against the reasonable
expenses associated with such claims. Corporations may not indemnify against
breaches of the duty of loyalty. The OBCA provides for mandatory indemnification
of directors against all reasonable expenses incurred in the successful defense
of any claim made or threatened whether or not such claim was by or in the right
of the corporation. Finally, a court may order indemnification if it determines
that the director or officer is fairly and reasonably entitled to
indemnification in view of all the relevant circumstances whether or not the
director or officer met the good faith and reasonable belief standards of
conduct set out in the statute. Article IV of the Restated Articles requires us
to indemnify our directors and officers to the fullest extent not prohibited by
law.
The OBCA also provides that the statutory indemnification provisions are not
deemed exclusive of any other rights to which directors or officers may be
entitled under a corporation's articles of incorporation or bylaws, any
agreement, general or specific action of the board of directors, vote of
shareholders or otherwise.
II-1
<PAGE>
We also have entered into indemnity agreements with each of our executive
officers and each member of our Board of Directors. These indemnity agreements
provide for indemnification of the indemnitee to the fullest extent allowed by
law.
ITEM 15. RECENT SALE OF UNREGISTERED SECURITIES.
In the three years prior to the effective date of this Registration
Statement, we have issued and sold the following unregistered securities:
- On April 25, 1997, we issued and sold 2,906,976 shares of Series A
preferred stock to investors for an aggregate consideration of $1,250,000
in cash.
- On April 29, 1998, we issued and sold 5,500,005 shares of Series B
preferred stock to investors for an aggregate consideration of $6,000,006
in cash.
- On May 28, 1999, we issued and sold 2,493,026 shares of Series C preferred
stock to investors for an aggregate consideration of $11,667,360 in cash.
- On August 31, 1999, we granted 250,000 shares of common stock from our
stock incentive plan to an employee for an aggregate consideration of
$115,700.
- On February 22, 2000, we issued and sold 2,239,212 shares of Series D
preferred stock to investors for an aggregate consideration of $26,550,000
in cash and, in the case of one of the investors, rights under a patent
license agreement.
- In the last three years, Pixelworks has granted 3,721,125 options for
shares of common stock to our employees, consultants and other service
providers. As of March 31, 2000, 385,606 of those options have been
exercised for an aggregate consideration of $94,854.32 and 324,687 have
been canceled, leaving 3,010,832 options outstanding. This information
gives effect to 3-for-2 split of the common stock of Pixelworks effective
March 31, 2000.
Upon completion of the offering covered by this Registration Statement, all
outstanding shares of Series A, Series B, Series C and Series D preferred stock
will automatically convert into 19,708,829 shares of common stock.
The sale of the above securities was deemed to be exempt from registration
under the Securities Act of 1933 in reliance upon Section 4(2) of the Securities
Act of 1933 and/or Regulation D promulgated thereunder or Rule 701 promulgated
under Section 3(b) of the Securities Act of 1933 as transactions by an issuer
not involving any public offering or transactions pursuant to compensation
benefit plans and contracts relating to compensation as provided under
Rule 701. These sales were made without general solicitation or advertising. The
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof. Each purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate the
investment.
II-2
<PAGE>
ITEM 16. EXHIBITS.
(a) The following exhibits as filed herewith:
NO.__DESCRIPTION
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- ----------- --------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Fifth Amended and Restated Articles of Incorporation of
Pixelworks, Inc.
3.2 Sixth Amended and Restated Articles of Incorporation of
Pixelworks, Inc.
3.3 * First Restated Bylaws of Pixelworks, Inc.
4.1 * Reference is made to Exhibit 3.1.
4.2 * Third Amended Registration Rights Agreement dated February
22, 2000.
5.1 Opinion of Ater Wynne LLP as to the legality of the Common
Stock being registered.
10.1 * Form of Indemnity Agreement between Pixelworks, Inc. and
each of its Officers and Directors.
10.2 * Pixelworks, Inc. 1997 Stock Incentive Plan.
10.3 * Loan and Security Agreement dated August 14, 1998 between
Silicon Valley Bank and Pixelworks, Inc.
10.4 * Loan Modification Agreement (modification to Exhibit 10.3)
dated April 9, 1999 between Silicon Valley Bank and
Pixelworks, Inc.
10.5 * Negative Pledge Agreement dated August 14, 1998 between
Silicon Valley Bank and Pixelworks, Inc.
10.6 Pixelworks, Inc. 2000 Employee Stock Purchase Plan.
10.7 * Lease Agreement dated April 14, 1999 between
Southcenter III and IV Investors LLC and Pixelworks, Inc.
10.8 *+ VAutomation Incorporated Synthesizable Soft Core Agreement
dated November 4, 1997 between VAutomation Incorporated and
Pixelworks, Inc.
10.9 *+ Intellectual Property Sublicense Agreement dated March 30,
1999 between VAutomation Incorporated and Pixelworks, Inc.
10.10* License Agreement dated February 22, 2000 between
Pixelworks, Inc. and InFocus Systems, Inc.
10.11 Employment Agreement between Jeffrey B. Bouchard and
Pixelworks, Inc.
23.1 Consent of Ater Wynne LLP. Reference is made to Exhibit 5.1.
23.2 Consent of KPMG LLP.
24.1 * Powers of Attorney. Reference is made to the signature page
hereof.
27.1 * Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed.
+ Confidential treatment requested as to certain portions of this exhibit.
(b) Schedules have been omitted since they are not required or are not
applicable or the required information is shown in the financial statement or
related notes.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
We hereby undertake that, for the purpose of determining any liability under
the Securities Act each filing of our annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act) that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than our payment of expenses incurred or paid by
a director, officer or controlling person in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered hereunder, we will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by us is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
We hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: (i) to include any
prospectus required by section 10(a)(3) of the Securities Act; (ii) to reflect
in the prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and (iii) to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
this offering.
(4) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(5) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-1 and has duly caused this Amendment No. 1 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tualatin, State of Oregon, on April 10, 2000.
<TABLE>
<S> <C> <C>
PIXELWORKS, INC.
By: /s/ ALLEN H. ALLEY
------------------------------------
Allen H. Alley
PRESIDENT
</TABLE>
Witness our hands on the date set forth below. Pursuant to the requirements
of the Securities Act, this Amendment No. 1 to Registration Statement has been
duly signed by the following persons in the capacities indicated on April 10,
2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ ALLEN H. ALLEY
------------------------------------------- Director, President and Chief Executive
Allen H. Alley Officer (Principal Executive Officer)
/s/ JEFFREY B. BOUCHARD Vice President, Finance and Chief Financial
------------------------------------------- Officer (Principal Financial and Accounting
Jeffrey B. Bouchard Officer)
/s/ OLIVER D. CURME*
------------------------------------------- Director
Oliver D. Curme
/s/ MARK A. STEVENS*
------------------------------------------- Director
Mark A. Stevens
/s/ FRANK GILL*
------------------------------------------- Director
Frank Gill
-------------------------------------------
Michael Yonker Director
*By: /s/ ALLEN H. ALLEY
-------------------------------------------
Allen H. Alley
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- ----------- --------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Fifth Amended and Restated Articles of Incorporation of
Pixelworks, Inc.
3.2 Sixth Amended and Restated Articles of Incorporation of
Pixelworks, Inc.
3.3 * First Restated Bylaws of Pixelworks, Inc.
4.1 * Reference is made to Exhibit 3.1.
4.2 * Third Amended Registration Rights Agreement dated February
22, 2000.
5.1 Opinion of Ater Wynne LLP as to the legality of the Common
Stock being registered.
10.1 * Form of Indemnity Agreement between Pixelworks, Inc. and
each of its Officers and Directors.
10.2 * Pixelworks, Inc. 1997 Stock Incentive Plan.
10.3 * Loan and Security Agreement dated August 14, 1998 between
Silicon Valley Bank and Pixelworks, Inc.
10.4 * Loan Modification Agreement (modification to Exhibit 10.3)
dated April 9, 1999 between Silicon Valley Bank and
Pixelworks, Inc.
10.5 * Negative Pledge Agreement dated August 14, 1998 between
Silicon Valley Bank and Pixelworks, Inc.
10.6 Pixelworks, Inc. 2000 Employee Stock Purchase Plan.
10.7 * Lease Agreement dated April 14, 1999 between
Southcenter III and IV Investors LLC and Pixelworks, Inc.
10.8 *+ VAutomation Incorporated Synthesizable Soft Core Agreement
dated November 4, 1997 between VAutomation Incorporated and
Pixelworks, Inc.
10.9 *+ Intellectual Property Sublicense Agreement dated March 30,
1999 between VAutomation Incorporated and Pixelworks, Inc.
10.10* License Agreement dated February 22, 2000 between
Pixelworks, Inc. and InFocus Systems, Inc.
10.11 Employment Agreement between Jeffrey B. Bouchard and
Pixelworks, Inc.
23.1 Consent of Ater Wynne LLP. Reference is made to Exhibit 5.1.
23.2 Consent of KPMG LLP.
24.1 * Powers of Attorney. Reference is made to the signature page
hereof.
27.1 * Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed.
+ Confidential treatment requested as to certain portions of this exhibit.
<PAGE>
Exhibit 1.1
Pixelworks, Inc.
5,750,000 Shares(1)
Common Stock
($0.001 par value)
Underwriting Agreement
New York, New York
, 2000
Salomon Smith Barney Inc.
Deutsche Bank Securities Inc.
SG Cowen Securities Corporation
E*OFFERING Corp.
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Pixelworks, Inc., a corporation organized under the laws of
the State of Oregon (the "Company"), proposes to sell to the several
underwriters named in Schedule I hereto (the "Underwriters"), for whom you (the
"Representatives") are acting as representatives, 5,750,000 shares of Common
Stock, $0.001 par value ("Common Stock") of the Company (said shares to be
issued and sold by the Company being hereinafter called the "Underwritten
Securities"). The Company also proposes to grant to the Underwriters an option
to purchase up to 862,500 additional shares of Common Stock to cover
over-allotments (the "Option Securities"; the Option Securities, together with
the Underwritten Securities, being hereinafter called the "Securities"). To the
extent there are no additional Underwriters listed on Schedule I other than you,
the term Representatives as used herein shall mean you, as Underwriters, and the
terms Representatives and Underwriters shall mean either the singular or plural
as the context requires. Certain terms used herein are defined in Section 17
hereof.
As part of the offering contemplated by this Agreement,
E*OFFERING Corp. has agreed to reserve out of the Securities set forth opposite
its name on Schedule I to this Agreement, up to 250,000 shares, for sale to the
Company's customers, employees, officers, and directors and other parties
associated with the Company (collectively, "Participants"), as set forth in the
Prospectus under the heading "Underwriting" (the "Directed Share Program"). The
Securities to be sold by E*OFFERING Corp. pursuant to the Directed Share Program
(the "Directed Shares") will be sold by E*OFFERING Corp. pursuant to this
Agreement at the public offering price. Any Directed Shares not orally confirmed
for purchase by any Participants by the end of the business day on which this
Agreement is executed will be offered to the public by E*OFFERING Corp. as set
forth in the Prospectus.
1. REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to, and agrees with, each Underwriter as set forth below in this
Section 1.
(a) The Company has prepared and filed with the Commission a
registration statement (file number 333-31134) on Form S-1, including a
related preliminary prospectus, for registration under the Act of the
offering and sale of the Securities. The Company may have filed one or
more amendments thereto, including a related preliminary prospectus,
each of which has previously
__________________
(1) Plus an option to purchase from the Company, up to 862,500 additional
Securities to cover over-allotments.
<PAGE>
2
been furnished to you. The Company will next file with the
Commission either (1) prior to the Effective Date of such
registration statement, a further amendment to such registration
statement (including the form of final prospectus) or (2) after the
Effective Date of such registration statement, a final prospectus in
accordance with Rules 430A and 424(b). In the case of clause (2),
the Company has included in such registration statement, as amended
at the Effective Date, all information (other than Rule 430A
Information) required by the Act and the rules thereunder to be
included in such registration statement and the Prospectus. As
filed, such amendment and form of final prospectus, or such final
prospectus, shall contain all Rule 430A Information, together with
all other such required information, and, except to the extent the
Representatives shall agree in writing to a modification, shall be
in all substantive respects in the form furnished to you prior to
the Execution Time or, to the extent not completed at the Execution
Time, shall contain only such specific additional information and
other changes (beyond that contained in the latest Preliminary
Prospectus) as the Company has advised you, prior to the Execution
Time, will be included or made therein;
(b) On the Effective Date, the Registration Statement did or
will, and when the Prospectus is first filed (if required) in
accordance with Rule 424(b) and on the Closing Date (as defined herein)
and on any date on which Option Securities are purchased, if such date
is not the Closing Date (a "Settlement Date"), the Prospectus (and any
supplements thereto) will, comply in all material respects with the
applicable requirements of the Act and the rules thereunder; on the
Effective Date and at the Execution Time, the Registration Statement
did not or will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and,
on the Effective Date, the Prospectus, if not filed pursuant to Rule
424(b), will not, and on the date of any filing pursuant to Rule 424(b)
and on the Closing Date and any Settlement Date, the Prospectus
(together with any supplement thereto) will not, include any untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED,
HOWEVER, that the Company makes no representations or warranties as to
the information contained in or omitted from the Registration
Statement, or the Prospectus (or any supplement thereto) in reliance
upon and in conformity with information furnished in writing to the
Company by or on behalf of any Underwriter through the Representatives
specifically for inclusion in the Registration Statement or the
Prospectus (or any supplement thereto);
(c) The Company has no subsidiaries;
(d) The Company has been duly incorporated and is validly
existing as a corporation under the laws of the State of Oregon with
full corporate power and authority to own or lease, as the case may be,
and to operate its properties and conduct its business as described in
the Prospectus, and is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each jurisdiction
which requires such qualification;
(e) the Company's authorized equity capitalization is as set
forth in the Prospectus; the capital stock of the Company conforms in
all material respects to the description thereof contained in the
Prospectus; the outstanding shares of Common Stock have been duly and
validly authorized and issued and are fully paid and nonassessable; the
Securities have been duly and validly authorized, and, when issued and
delivered to and paid for by the Underwriters pursuant to this
Agreement, will be fully paid and nonassessable; the Securities are
duly listed, and admitted and authorized for trading, subject to
official notice of issuance and evidence of satisfactory distribution,
on the Nasdaq National Market; the certificates for the Securities are
in valid and sufficient form; the holders of outstanding shares of
capital stock of the Company are not entitled to preemptive or other
rights to subscribe for the Securities; and, except as set forth in the
Prospectus, no options, warrants or other rights to purchase,
agreements or other obligations to
<PAGE>
3
issue, or rights to convert any obligations into or exchange any
securities for, shares of capital stock of or ownership interests in
the Company are outstanding;
(f) There is no franchise, contract or other document of a
character required to be described in the Registration Statement or
Prospectus, or to be filed as an exhibit thereto, which is not
described or filed as required;
(g) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding obligation
of the Company enforceable in accordance with its terms.
(h) The Company is not and, after giving effect to the
offering and sale of the Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940, as amended.
(i) No consent, approval, authorization, filing with or order
of any court or governmental agency or body is required in connection
with the transactions contemplated herein, except such as have been
obtained under the Act and such as may be required under the blue sky
laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriters in the manner
contemplated herein and in the Prospectus.
(j) Neither the issue and sale of the Securities nor the
consummation of any other of the transactions herein contemplated nor
the fulfillment of the terms hereof will conflict with, result in a
breach or violation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company pursuant to, (i) the charter
or bylaws of the Company, (ii) the terms of any indenture, contract,
lease, mortgage, deed of trust, note agreement, loan agreement or other
agreement, obligation, condition, covenant or instrument to which the
Company is a party or bound or to which its property is subject, or
(iii) any statute, law, rule, regulation, judgment, order or decree
applicable to the Company of any court, regulatory body, administrative
agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or any of its properties.
(k) No holders of securities of the Company have rights to the
registration of such securities under the Registration Statement that
have not been waived by such parties.
(l) The historical financial statements and schedules of the
Company included in the Prospectus and the Registration Statement
present fairly in all material respects the financial condition,
results of operations and cash flows of the Company as of the dates and
for the periods indicated, comply as to form with the applicable
accounting requirements of the Act and have been prepared in conformity
with generally accepted accounting principles applied on a consistent
basis throughout the periods involved (except as otherwise noted
therein). The summary financial data set forth under the caption
"Summary Financial Information" in the Prospectus and Registration
Statement fairly present, on the basis stated in the Prospectus and the
Registration Statement, the information included therein. The pro forma
financial statements included in the Prospectus and the Registration
Statement include assumptions that provide a reasonable basis for
presenting the significant effects directly attributable to the
transactions and events described therein, the related pro forma
adjustments give appropriate effect to those assumptions, and the pro
forma adjustments reflect the proper application of those adjustments
to the historical financial statement amounts in the pro forma
financial statements included in the Prospectus and the Registration
Statement. The pro forma financial statements included in the
Prospectus and the Registration Statement comply as to form in all
material respects with the applicable accounting requirements of
Regulation S-X under the Act and the pro forma adjustments have been
properly applied to the historical amounts in the compilation of those
statements.
<PAGE>
4
(m) No action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the
Company or its property is pending or, to the best knowledge of the
Company, threatened that (i) could reasonably be expected to have a
material adverse effect on the performance of this Agreement or the
consummation of any of the transactions contemplated hereby or (ii)
could reasonably be expected to have a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business or
properties of the Company, whether or not arising from transactions in
the ordinary course of business, except as set forth in or contemplated
in the Prospectus (exclusive of any supplement thereto).
(n) The Company owns, licenses or leases all such properties
as are necessary to the conduct of its operations as presently
conducted.
(o) The Company is not in violation or default of (i) any
provision of its charter or bylaws, (ii) the terms of any indenture,
contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant or
instrument to which it is a party or bound or to which its property is
subject, or (iii) any statute, law, rule, regulation, judgment, order
or decree of any court, regulatory body, administrative agency,
governmental body, arbitrator or other authority having jurisdiction
over the Company or any of its properties, as applicable.
(p) KPMG LLP, who have certified certain financial statements
of the Company and delivered their report with respect to the audited
financial statements and schedules included in the Prospectus, are
independent public accountants with respect to the Company within the
meaning of the Act and the applicable published rules and regulations
thereunder.
(q) There are no transfer taxes or other similar fees or
charges under Federal law or the laws of any state, or any political
subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance by the Company
or sale by the Company of the Securities.
(r) The Company has filed all foreign, federal, state and
local tax returns that are required to be filed or has requested
extensions thereof (except in any case in which the failure so to file
would not have a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company,
whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto)) and has paid all taxes required
to be paid by it and any other assessment, fine or penalty levied
against it, to the extent that any of the foregoing is due and payable,
except for any such assessment, fine or penalty that is currently being
contested in good faith or as would not have a material adverse effect
on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company, whether or not arising from
transactions in the ordinary course of business, except as set forth in
or contemplated in the Prospectus (exclusive of any supplement
thereto).
(s) No labor problem or dispute with the employees of the
Company exists or is threatened or imminent, and the Company is not
aware of any existing or imminent labor disturbance by the employees of
any of its principal suppliers, contractors or customers, that could
have a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company,
whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).
(t) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amount as is
prudent and customary in the business in which it is engaged; all
policies of insurance and fidelity or surety bonds insuring the Company
or its
<PAGE>
5
businesses, assets, employees, officers and directors are in full
force and effect; the Company is in compliance with the terms of
such policies and instruments in all material respects; and there
are no claims by the Company under any such policy or instrument as
to which any insurance company is denying liability or defending
under a reservation of rights clause; the Company has not been
refused any insurance coverage sought or applied for; and the
Company has no reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or
to obtain similar coverage from similar insurers as may be necessary
to continue its business at a cost that would not have a material
adverse effect on the condition (financial or otherwise), prospects,
earnings, business or properties of the Company, whether or not
arising from transactions in the ordinary course of business, except
as set forth in or contemplated in the Prospectus (exclusive of any
supplement thereto).
(u) The Company possesses all licenses, certificates, permits
and other authorizations issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct its business, and
the Company has not received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or
permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a material adverse
effect on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company, whether or not arising from
transactions in the ordinary course of business, except as set forth in
or contemplated in the Prospectus (exclusive of any supplement
thereto).
(v) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability;
(iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(w) The Company has not taken, directly or indirectly, any
action that has constituted or that was designed to or might reasonably
be expected to cause or result in, under the Exchange Act or otherwise,
the stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
(x) The Company is (i) in compliance with any and all
applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment
or hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) has received and is in compliance with all
permits, licenses or other approvals required of it under applicable
Environmental Laws to conduct its business and (iii) has not received
notice of any actual or potential liability for the investigation or
remediation of any disposal or release of hazardous or toxic substances
or wastes, pollutants or contaminants, except where such non-compliance
with Environmental Laws, failure to receive required permits, licenses
or other approvals, or liability would not, individually or in the
aggregate, have a material adverse change in the condition (financial
or otherwise), prospects, earnings, business or properties of the
Company, whether or not arising from transactions in the ordinary
course of business, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto). Except as set forth
in the Prospectus, the Company has not been named as a "potentially
responsible party" under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
(y) The Company believes that the costs and liabilities of
Environmental Laws on the business, operations and properties of the
Company (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or compliance
with
<PAGE>
6
Environmental Laws, or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to
third parties). On the basis of such review, the Company has
reasonably concluded that such associated costs and liabilities
would not, singly or in the aggregate, have a material adverse
effect on the condition (financial or otherwise), prospects,
earnings, business or properties of the Company, whether or not
arising from transactions in the ordinary course of business, except
as set forth in or contemplated in the Prospectus (exclusive of any
supplement thereto).
(z) The Company has fulfilled its obligations, if any, under
the minimum funding standards of Section 302 of the United States
Employee Retirement Income Security Act of 1974 ("ERISA") and the
regulations and published interpretations thereunder with respect to
each "plan" (as defined in Section 3(3) of ERISA and such regulations
and published interpretations) in which employees of the Company are
eligible to participate and each such plan is in compliance in all
material respects with the presently applicable provisions of ERISA and
such regulations and published interpretations. The Company has not
incurred any unpaid liability to the Pension Benefit Guaranty
Corporation (other than for the payment of premiums in the ordinary
course) or to any such plan under Title IV of ERISA.
(aa) The Company owns, possesses, licenses or has other rights
to use, except as set forth in the Prospectus under the caption
"Business - Intellectual Property", all patents, patent applications,
trade and service marks, trade and service mark registrations, trade
names, copyrights, licenses, inventions, trade secrets, technology,
know-how and other intellectual property (collectively, the
"Intellectual Property") necessary for the conduct of the Company's
business as now conducted or as proposed in the Prospectus to be
conducted. (a) to the there is no material infringement by third
parties of any such Intellectual Property; (b) there is no pending or
threatened action, suit, proceeding or claim by others challenging the
Company's rights in or to any such Intellectual Property, and the
Company is unaware of any facts which would form a reasonable basis for
any such claim; (c) there is no pending or threatened action, suit,
proceeding or claim by others challenging the validity or scope of any
such Intellectual Property, and the Company is unaware of any facts
which would form a reasonable basis for any such claim; (d) there is no
pending or threatened action, suit, proceeding or claim by others that
the Company infringes or otherwise violates any patent, trademark,
copyright, trade secret or other proprietary rights of others, and the
Company is unaware of any other fact which would form a reasonable
basis for any such claim; (e) there is no U.S. patent or published U.S.
patent application which contains claims that dominate or may dominate
any Intellectual Property described in the Prospectus as being owned by
or licensed to the Company or that interferes with the issued or
pending claims of any such Intellectual Property; and (f) there is no
prior art of which the Company is aware that may render any U.S. patent
held by the Company invalid or any U.S. patent application held by the
Company unpatentable which has not been disclosed to the U.S. Patent
and Trademark Office.
(bb) The statements contained in the Prospectus under the
captions "Risk Factors - Our limited ability to protect our
intellectual property and proprietary rights could harm our competitive
position by allowing our competitors to access our proprietary
technology and to introduce similar display processor products" and
"Business - Intellectual Property," insofar as such statements
summarize legal matters, agreements, documents, or proceedings
discussed therein, are accurate and fair summaries of such legal
matters, agreements, documents or proceedings.
(cc) Except as disclosed in the Registration Statement and the
Prospectus, the Company (i) does not have any material lending or other
relationship with any bank or lending affiliate of Salomon Smith Barney
Holdings Inc. and (ii) does not intend to use any of the proceeds from
the sale of the Securities hereunder to repay any outstanding debt owed
to any affiliate of Salomon Smith Barney Holdings Inc.
<PAGE>
7
Furthermore, the Company represents and warrants to E*OFFERING
Corp. that (i) the Registration Statement, the Prospectus and any preliminary
prospectus comply, and any further amendments or supplements thereto will
comply, with any applicable laws or regulations of foreign jurisdictions in
which the Prospectus or any preliminary prospectus, as amended or supplemented,
if applicable, are distributed in connection with the Directed Share Program,
(ii) no authorization, approval, consent, license, order, registration or
qualification of or with any government, governmental instrumentality or court,
other than such as have been obtained, is necessary under the securities laws
and regulations of foreign jurisdictions in which the Directed Shares are
offered outside the United States, and that (iii) the Company has not offered,
or caused the Underwriters to offer, Securities to any person pursuant to the
Directed Share Program with the specific intent to unlawfully influence (x) a
customer or supplier of the Company to alter the customer's or supplier's level
or type of business with the Company, or (y) a trade journalist or publication
to write or publish favorable information about the Company or its products.
Any certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters in connection
with the offering of the Securities shall be deemed a representation and
warranty by the Company, as to matters covered thereby, to each Underwriter.
2. PURCHASE AND SALE. (a) Subject to the terms and conditions
and in reliance upon the representations and warranties herein set forth, the
Company agrees to sell to each Underwriter, and each Underwriter agrees,
severally and not jointly, to purchase from the Company, at a purchase price of
$_______ per share, the amount of the Underwritten Securities set forth opposite
such Underwriter's name in Schedule I hereto.
(b) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Company hereby grants
an option to the several Underwriters to purchase, severally and not jointly, up
to 862,500 Option Securities at the same purchase price per share as the
Underwriters shall pay for the Underwritten Securities. Said option may be
exercised only to cover over-allotments in the sale of the Underwritten
Securities by the Underwriters. Said option may be exercised in whole or in part
at any time (but not more than once) on or before the 30th day after the date of
the Prospectus upon written or telegraphic notice by the Representatives to the
Company setting forth the number of shares of the Option Securities as to which
the several Underwriters are exercising the option and the Settlement Date. The
number of Option Securities to be purchased by each Underwriter shall be the
same percentage of the total number of shares of the Option Securities to be
purchased by the several Underwriters as such Underwriter is purchasing of the
Underwritten Securities, subject to such adjustments as you in your absolute
discretion shall make to eliminate any fractional shares.
3. DELIVERY AND PAYMENT. Delivery of and payment for the
Underwritten Securities and the Option Securities (if the option provided for in
Section 2(b) hereof shall have been exercised on or before the third Business
Day prior to the Closing Date) shall be made at 10:00 AM, New York City time, on
_____________ __, 2000, or at such time on such later date not more than three
Business Days after the foregoing date as the Representatives shall designate,
which date and time may be postponed by agreement between the Representatives
and the Company or as provided in Section 9 hereof (such date and time of
delivery and payment for the Securities being herein called the "Closing Date").
Delivery of the Securities shall be made to the Representatives for the
respective accounts of the several Underwriters against payment by the several
Underwriters through the Representatives of the purchase price thereof to or
upon the order of the Company by wire transfer payable in same-day funds to an
account specified by the Company. Delivery of the Underwritten Securities and
the Option Securities shall be made through the facilities of The Depository
Trust Company unless the Representatives shall otherwise instruct.
If the option provided for in Section 2(b) hereof is exercised
after the third Business Day prior to the Closing Date, the Company will deliver
the Option Securities (at the expense of the Company) to the Representatives, at
388 Greenwich Street, New York, New York, on the date specified by the
Representatives (which shall be within three Business Days after exercise of
said option) for the respective
<PAGE>
8
accounts of the several Underwriters, against payment by the several
Underwriters through the Representatives of the purchase price thereof to or
upon the order of the Company by wire transfer payable in same-day funds to an
account specified by the Company. If settlement for the Option Securities occurs
after the Closing Date, the Company will deliver to the Representatives on the
Settlement Date for the Option Securities, and the obligation of the
Underwriters to purchase the Option Securities shall be conditioned upon receipt
of, supplemental opinions, certificates and letters confirming as of such date
the opinions, certificates and letters delivered on the Closing Date pursuant to
Section 6 hereof.
4. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
5. AGREEMENTS. The Company agrees with the several
Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and any
amendment thereof, to become effective. Prior to the termination of the
offering of the Securities, the Company will not file any amendment of
the Registration Statement or supplement to the Prospectus or any Rule
462(b) Registration Statement unless the Company has furnished you a
copy for your review prior to filing and will not file any such
proposed amendment or supplement to which you reasonably object.
Subject to the foregoing sentence, if the Registration Statement has
become or becomes effective pursuant to Rule 430A, or filing of the
Prospectus is otherwise required under Rule 424(b), the Company will
cause the Prospectus, properly completed, and any supplement thereto to
be filed with the Commission pursuant to the applicable paragraph of
Rule 424(b) within the time period prescribed and will provide evidence
satisfactory to the Representatives of such timely filing. The Company
will promptly advise the Representatives (1) when the Registration
Statement, if not effective at the Execution Time, shall have become
effective, (2) when the Prospectus, and any supplement thereto, shall
have been filed (if required) with the Commission pursuant to Rule
424(b) or when any Rule 462(b) Registration Statement shall have been
filed with the Commission, (3) when, prior to termination of the
offering of the Securities, any amendment to the Registration Statement
shall have been filed or become effective, (4) of any request by the
Commission or its staff for any amendment of the Registration
Statement, or any Rule 462(b) Registration Statement, or for any
supplement to the Prospectus or for any additional information, (5) of
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the institution or
threatening of any proceeding for that purpose and (6) of the receipt
by the Company of any notification with respect to the suspension of
the qualification of the Securities for sale in any jurisdiction or the
institution or threatening of any proceeding for such purpose. The
Company will use its best efforts to prevent the issuance of any such
stop order or the suspension of any such qualification and, if issued,
to obtain as soon as possible the withdrawal thereof.
(b) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs
as a result of which the Prospectus as then supplemented would include
any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it shall
be necessary to amend the Registration Statement or supplement the
Prospectus to comply with the Act or the rules thereunder, the Company
promptly will (1) notify the Representatives of any such event, (2)
prepare and file with the Commission, subject to the second sentence of
paragraph (a) of this Section 5, an amendment or supplement which will
correct such statement or omission or effect such compliance; and (3)
supply any supplemented Prospectus to you in such quantities as you may
reasonably request.
(c) As soon as practicable, the Company will make generally
available to its security holders and to the Representatives an
earnings statement or statements of the Company which will satisfy the
provisions of Section 11(a) of the Act and Rule 158 under the Act.
<PAGE>
9
(d) The Company will furnish to the Representatives and
counsel for the Underwriters signed copies of the Registration
Statement (including exhibits thereto) and to each other Underwriter a
copy of the Registration Statement (without exhibits thereto) and, so
long as delivery of a prospectus by an Underwriter or dealer may be
required by the Act, as many copies of each Preliminary Prospectus and
the Prospectus and any supplement thereto as the Representatives may
reasonably request.
(e) The Company will arrange, if necessary, for the
qualification of the Securities for sale under the laws of such
jurisdictions as the Representatives may designate and will maintain
such qualifications in effect so long as required for the distribution
of the Securities; provided that in no event shall the Company be
obligated to qualify to do business in any jurisdiction where it is not
now so qualified or to take any action that would subject it to service
of process in suits, other than those arising out of the offering or
sale of the Securities, in any jurisdiction where it is not now so
subject.
(f) The Company will not, without the prior written consent of
Salomon Smith Barney Inc., offer, sell, contract to sell, pledge, or
otherwise dispose of, (or enter into any transaction which is designed
to, or might reasonably be expected to, result in the disposition
(whether by actual disposition or effective economic disposition due to
cash settlement or otherwise) by the Company or any affiliate of the
Company or any person in privity with the Company or any affiliate of
the Company) directly or indirectly, including the filing (or
participation in the filing) of a registration statement with the
Commission in respect of, or establish or increase a put equivalent
position or liquidate or decrease a call equivalent position within the
meaning of Section 16 of the Exchange Act, any other shares of Common
Stock or any securities convertible into, or exercisable, or
exchangeable for, shares of Common Stock; or publicly announce an
intention to effect any such transaction, for a period of 180 days
after the date of the Underwriting Agreement, PROVIDED, HOWEVER, that
the Company may issue and sell Common Stock pursuant to any employee
stock option plan, stock ownership plan or dividend reinvestment plan
of the Company in effect at the Execution Time, and file registration
statements covering such securities, and the Company may issue Common
Stock issuable upon the conversion of securities or the exercise of
warrants outstanding at the Execution Time.
(g) The Company will not take, directly or indirectly, any
action designed to or which has constituted or which might reasonably
be expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
(h) The Company agrees to pay the costs and expenses relating
to the following matters: (i) the preparation, printing or reproduction
and filing with the Commission of the Registration Statement (including
financial statements and exhibits thereto), each Preliminary
Prospectus, the Prospectus, and each amendment or supplement to any of
them; (ii) the printing (or reproduction) and delivery (including
postage, air freight charges and charges for counting and packaging) of
such copies of the Registration Statement, each Preliminary Prospectus,
the Prospectus, and all amendments or supplements to any of them, as
may, in each case, be reasonably requested for use in connection with
the offering and sale of the Securities; (iii) the preparation,
printing, authentication, issuance and delivery of certificates for the
Securities, including any stamp or transfer taxes in connection with
the original issuance and sale of the Securities; (iv) the printing (or
reproduction) and delivery of this Agreement, any blue sky memorandum
and all other agreements or documents printed (or reproduced) and
delivered in connection with the offering of the Securities; (v) the
registration of the Securities under the Exchange Act and the listing
of the Securities on the Nasdaq National Market; (vi) any registration
or qualification of the Securities for offer and sale under the
securities or blue sky laws of the several states (including filing
fees and the reasonable fees and expenses of counsel for the
Underwriters relating to such registration and qualification); (vii)
any filings required to be made with the National Association of
Securities
<PAGE>
10
Dealers, Inc. (including filing fees and the reasonable fees and
expenses of counsel for the Underwriters relating to such filings);
(viii) the transportation and other expenses incurred by or on
behalf of Company representatives in connection with presentations
to prospective purchasers of the Securities; (ix) the fees and
expenses of the Company's accountants and the fees and expenses of
counsel (including local and special counsel, if any) for the
Company; and (x) all other costs and expenses incident to the
performance by the Company of its obligations hereunder.
(i) In connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent
required by the National Association of Securities Dealers, Inc. (the
"NASD") or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement. E*OFFERING Corp. will
notify the Company as to which Participants will need to be so
restricted. The Company will direct the removal of such transfer
restrictions upon the expiration of such period of time.
(j) The Company will pay all fees and disbursements of counsel
incurred by the Underwriters in connection with the Directed Share
Program and stamp duties, similar taxes or duties or other taxes, if
any, incurred by the Underwriters in connection with the Directed Share
Program.
Furthermore, the Company agrees with E*OFFERING Corp. that the
Company will comply with all applicable securities and other applicable laws,
rules and regulations in each foreign jurisdiction in which the Directed Shares
are offered in connection with the Directed Share Program.
6. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the Underwriters to purchase the Underwritten Securities and the
Option Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company contained herein as of
the Execution Time, the Closing Date and any Settlement Date pursuant to Section
3 hereof, to the accuracy of the statements of the Company made in any
certificates pursuant to the provisions hereof, to the performance by the
Company of its obligations hereunder and to the following additional conditions:
(a) If the Registration Statement has not become effective
prior to the Execution Time, unless the Representatives agree in
writing to a later time, the Registration Statement will become
effective not later than (i) 6:00 PM New York City time on the date of
determination of the public offering price, if such determination
occurred at or prior to 3:00 PM New York City time on such date or (ii)
9:30 AM on the Business Day following the day on which the public
offering price was determined, if such determination occurred after
3:00 PM New York City time on such date; if filing of the Prospectus,
or any supplement thereto, is required pursuant to Rule 424(b), the
Prospectus, and any such supplement, will be filed in the manner and
within the time period required by Rule 424(b); and no stop order
suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been
instituted or threatened.
(b) The Company shall have requested and caused Ater Wynne
LLP, counsel for the Company, to have furnished to the Representatives
their opinion, dated the Closing Date and addressed to the
Representatives, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation under the laws of the State
of Oregon, with full corporate power and authority to own or
lease, as the case may be, and to operate its properties and
conduct its business as described in the Prospectus, and is
duly qualified to do business as a foreign corporation and is
in good standing under the laws of each jurisdiction which
requires such qualification;
<PAGE>
11
(ii) the Company's authorized equity capitalization
is as set forth in the Prospectus; the capital stock of the
Company conforms in all material respects to the description
thereof contained in the Prospectus; the outstanding shares of
Common Stock have been duly and validly authorized and issued
and are fully paid and nonassessable; the Securities have been
duly and validly authorized, and, when issued and delivered to
and paid for by the Underwriters pursuant to this Agreement,
will be fully paid and nonassessable; the Securities are duly
listed, and admitted and authorized for trading, subject to
official notice of issuance and evidence of satisfactory
distribution, on the Nasdaq National Market; the certificates
for the Securities are in valid and sufficient form; the
holders of outstanding shares of capital stock of the Company
are not entitled to statutory preemptive or other rights to
subscribe for the Securities; and, except as set forth in the
Prospectus, no options, warrants or other rights to purchase,
agreements or other obligations to issue, or rights to convert
any obligations into or exchange any securities for, shares of
capital stock of or ownership interests in the Company are
outstanding;
(iii) to the knowledge of such counsel, the Company
has no subsidiaries;
(iv) to the knowledge of such counsel, there is no
pending or threatened action, suit or proceeding by or before
any court or governmental agency, authority or body or any
arbitrator involving the Company or its property of a
character required to be disclosed in the Registration
Statement which is not adequately disclosed in the Prospectus,
and there is no franchise, contract or other document of a
character required to be described in the Registration
Statement or Prospectus, or to be filed as an exhibit thereto,
which is not described or filed as required;
(v) the Registration Statement has become effective
under the Act; any required filing of the Prospectus, and any
supplements thereto, pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b);
to the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued,
no proceedings for that purpose have been instituted or
threatened and the Registration Statement and the Prospectus
(other than the financial statements and other financial
information contained therein, as to which such counsel need
express no opinion) comply as to form in all material respects
with the applicable requirements of the Act and the rules
thereunder; and such counsel has no reason to believe that on
the Effective Date or the date the Registration Statement was
last deemed amended the Registration Statement contained any
untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading or that the
Prospectus as of its date and on the Closing Date included or
includes any untrue statement of a material fact or omitted or
omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under
which they were made, not misleading (in each case, other than
the financial statements and other financial information
contained therein, as to which such counsel need express no
opinion);
(vi) this Agreement has been duly authorized,
executed and delivered by the Company;
(vii) the Company is not and, after giving effect to
the offering and sale of the Securities and the application of
the proceeds thereof as described in the Prospectus, will not
be, an "investment company" as defined in the Investment
Company Act of 1940, as amended;
<PAGE>
12
(viii) no consent, approval, authorization, filing
with or order of any court or governmental agency or body is
required in connection with the transactions contemplated
herein, except such as have been obtained under the Act and
such as may be required under the blue sky laws of any
jurisdiction in connection with the purchase and distribution
of the Securities by the Underwriters in the manner
contemplated in this Agreement and in the Prospectus and such
other approvals (specified in such opinion) as have been
obtained;
(ix) neither the issue and sale of the Securities,
nor the consummation of any other of the transactions herein
contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation of or
imposition of any lien, charge or encumbrance upon any
property or assets of the Company pursuant to, (i) the charter
or bylaws of the Company, (ii) the terms of any indenture,
contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant
or instrument to which the Company is a party or bound or to
which its property is subject, or (iii) any statute, law,
rule, regulation, judgment, order or decree applicable to the
Company of any court, regulatory body, administrative agency,
governmental body, arbitrator or other authority having
jurisdiction over the Company or any of its properties; and
(x) no holders of securities of the Company have
rights to the registration of such securities under the
Registration Statement that have not been waived by such
parties..
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the
State of Oregon or the Federal laws of the United States, to the extent
they deem proper and specified in such opinion, upon the opinion of
other counsel of good standing whom they believe to be reliable and who
are satisfactory to counsel for the Underwriters and (B) as to matters
of fact, to the extent they deem proper, on certificates of responsible
officers of the Company and public officials. References to the
Prospectus in this paragraph (b) include any supplements thereto at the
Closing Date.
(c) The Representatives shall have received from Brown & Wood
LLP, counsel for the Underwriters, such opinion or opinions, dated the
Closing Date and addressed to the Representatives, with respect to the
issuance and sale of the Securities, the Registration Statement, the
Prospectus (together with any supplement thereto) and other related
matters as the Representatives may reasonably require, and the Company
shall have furnished to such counsel such documents as they request for
the purpose of enabling them to pass upon such matters. Brown & Wood
LLP may rely as to matters involving the application of the laws of the
State of Oregon upon the opinion of Ater Wynne LLP.
(d) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chairman of the Board or the
President and the principal financial or accounting officer of the
Company, dated the Closing Date, to the effect that the signers of such
certificate have carefully examined the Registration Statement, the
Prospectus, any supplements to the Prospectus and this Agreement and
that:
(i) the representations and warranties of the Company
in this Agreement are true and correct in all material
respects on and as of the Closing Date with the same effect as
if made on the Closing Date and the Company has complied with
all the agreements and satisfied all the conditions on its
part to be performed or satisfied at or prior to the Closing
Date;
<PAGE>
13
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings
for that purpose have been instituted or, to the Company's
knowledge, threatened; and
(iii) since the date of the most recent financial
statements included in the Prospectus (exclusive of any
supplement thereto), there has been no material adverse effect
on the condition (financial or otherwise), prospects,
earnings, business or properties of the Company, whether or
not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto).
(e) The Company shall have requested and caused KPMG LLP to
have furnished to the Representatives, at the Execution Time and at the
Closing Date, letters, dated respectively as of the Execution Time and
as of the Closing Date, in form and substance satisfactory to the
Representatives, confirming that they are independent accountants
within the meaning of the Act and the applicable rules and regulations
adopted by the Commission thereunder and Rule 101 of the Code of
Professional Conduct of the American Institute of Certified Public
Accountants and that they have performed a review of the unaudited
interim financial information of the Company for the three-month period
ended March 31, 2000, and as at March 31, 2000, in accordance with
Statement on Auditing Standards No. 71 and stating in effect that:
(i) in their opinion the audited financial statements
and financial statement schedules and pro forma financial
statements included in the Registration Statement and the
Prospectus and reported on by them comply as to form in all
material respects with the applicable accounting requirements
of the Act and the related rules and regulations adopted by
the Commission;
(ii) on the basis of a reading of the latest
unaudited financial statements made available by the Company;
their limited review, in accordance with standards established
under Statement on Auditing Standards No. 71, of the unaudited
interim financial information for the three-month period ended
March 31, 2000, and as at March 31, 2000, as indicated in
their report dated , 2000 ; carrying out certain specified
procedures (but not an examination in accordance with
generally accepted auditing standards) which would not
necessarily reveal matters of significance with respect to the
comments set forth in such letter; a reading of the minutes of
the meetings of the stockholders, directors and committees of
the Company; and inquiries of certain officials of the Company
who have responsibility for financial and accounting matters
of the Company as to transactions and events subsequent to
December 31, 1999, nothing came to their attention which
caused them to believe that:
(1) any unaudited financial statements
included in the Registration Statement and the
Prospectus do not comply as to form in all material
respects with applicable accounting requirements of
the Act and with the related rules and regulations
adopted by the Commission with respect to
registration statements on Form S-1; and said
unaudited financial statements are not in conformity
with generally accepted accounting principles applied
on a basis substantially consistent with that of the
audited financial statements included in the
Registration Statement and the Prospectus;
(2) with respect to the period subsequent to
March 31, 2000 there were any changes, at a specified
date not more than five days prior to the date of the
letter, in the long-term obligations, less current
portion and other long-term liabilities of the
Company or capital stock of the Company or increases
in the shareholder's equity (deficit) of the Company
as compared with the amounts
<PAGE>
14
shown on the March 31, 2000 balance sheet included
in the Registration Statement and the Prospectus,
or for the period from April 1, 2000 to such
specified date there were any decreases, as
compared with the period ended March 31, 1999 in
total revenue or in total or per share amounts of
net loss of the Company, except in all instances
for changes or decreases set forth in such letter,
in which case the letter shall be accompanied by
an explanation by the Company as to the
significance thereof unless said explanation is
not deemed necessary by the Representatives;
(3) the information included in the
Registration Statement and Prospectus in response to
Regulation S-K, Item 301 (Selected Financial Data),
Item 302 (Supplementary Financial Information), Item
402 (Executive Compensation) and Item 503(d) (Ratio
of Earnings to Fixed Charges) is not in conformity
with the applicable disclosure requirements of
Regulation S-K;
(iii) they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature
(which is limited to accounting, financial or statistical
information derived from the general accounting records of the
Company) set forth in the Registration Statement and the
Prospectus, including the information set forth under the
captions "Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Selected Financial
Data", "Prospectus Summary--Summary Financial Information ",
"Capitalization", "Dilution", "Business" and "Risk Factors" in
the Prospectus, agrees with the accounting records of the
Company, excluding any questions of legal interpretation
The Company shall have received from KPMG LLP (and furnished
to the Representatives) a report with respect to a review of unaudited
interim financial information of the Company for the five quarters
ending March 31, 2000, in accordance with Statement on Auditing
Standards No. 71.
The Company shall have received from KPMG LLP (and furnished
to the Representatives) an examination report with respect to
Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company for the three fiscal years ending December
31, 1999, and a review report with respect to Management's Discussion
and Analysis of Financial Condition and Results of Operations of the
Company for the three-month period ending March 31, 1999, and the
corresponding period for the prior fiscal year, each in accordance with
Statement on Standards for Attestation Engagements No. 8 issued by the
Auditing Standards Board of the American Institute of Certified Public
Accountants, and such examination report shall be included in the
Registration Statement.
(f) Subsequent to the Execution Time or, if earlier, the dates
as of which information is given in the Registration Statement
(exclusive of any amendment thereof) and the Prospectus (exclusive of
any supplement thereto), there shall not have been (i) any change or
decrease specified in the letter or letters referred to in paragraph
(e) of this Section 6 or (ii) any change, or any development involving
a prospective change, in or affecting the condition (financial or
otherwise), earnings, business or properties of the Company, whether or
not arising from transactions in the ordinary course of business,
except as set forth in or contemplated in the Prospectus (exclusive of
any supplement thereto) the effect of which, in any case referred to in
clause (i) or (ii) above, is, in the sole judgment of the
Representatives, so material and adverse as to make it impractical or
inadvisable to proceed with the offering or delivery of the Securities
as contemplated by the Registration Statement (exclusive of any
amendment thereof) and the Prospectus (exclusive of any supplement
thereto).
<PAGE>
15
(g) Prior to the Closing Date, the Company shall have
furnished to the Representatives such further information, certificates
and documents as the Representatives may reasonably request.
(h) The Securities shall have been listed and admitted and
authorized for trading on the Nasdaq National Market, and satisfactory
evidence of such actions shall have been provided to the
Representatives.
(i) At the Execution Time, the Company shall have furnished to
the Representatives a letter substantially in the form of Exhibit A
hereto from each officer and director of the Company and ____ addressed
to the Representatives.
If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to the Representatives and counsel for the
Underwriters, this Agreement and all obligations of the Underwriters hereunder
may be canceled at, or at any time prior to, the Closing Date by the
Representatives. Notice of such cancellation shall be given to the Company in
writing or by telephone or facsimile confirmed in writing.
The documents required to be delivered by this Section 6 shall
be delivered at the office of Brown & Wood LLP, counsel for the Underwriters, at
One World Trade Center, New York, New York, 10048-0557, on the Closing Date.
7. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 6 hereof is not satisfied,
because of any termination pursuant to Section 10 hereof or because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein or comply with any provision hereof other than by reason of a
default by any of the Underwriters, the Company will reimburse the Underwriters
severally through Salomon Smith Barney on demand for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
incurred by them in connection with the proposed purchase and sale of the
Securities.
8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each Underwriter, the directors, officers, employees
and agents of each Underwriter and each person who controls any Underwriter
within the meaning of either the Act or the Exchange Act against any and all
losses, claims, damages or liabilities, joint or several, to which they or any
of them may become subject under the Act, the Exchange Act or other Federal or
state statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the registration statement for the registration of
the Securities as originally filed or in any amendment thereof, or in any
Preliminary Prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and agrees to reimburse
each such indemnified party, as incurred, for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information furnished to
the Company by or on behalf of any Underwriter through the Representatives
specifically for inclusion therein; and PROVIDED, FURTHER, that the Company will
not be liable to any Underwriter or any person controlling such Underwriter with
respect to any untrue statement or omission or alleged untrue statement or
omission made in any preliminary prospectus which is corrected in the Prospectus
(or any amendment or supplement thereto) if the Company sustains the burden of
proving that such Underwriter
<PAGE>
16
sold Underwritten Securities to the person asserting any such loss, claim,
damage or liability without sending or giving, at or prior to the written
confirmation of the sale of such Underwritten Securities to such person, a
copy of the Prospectus (or any amendment or supplement thereto), if the
Company had previously furnished copies thereof to such Underwriter. This
indemnity agreement will be in addition to any liability which the Company
may otherwise have.
(b) The Company agrees to indemnify and hold harmless
E*OFFERING Corp., the directors, officers, employees and agents of E*OFFERING
Corp. and each person, who controls E*OFFERING Corp. within the meaning of
either the Act or the Exchange Act ("E*OFFERING Corp. Entities"), from and
against any and all losses, claims, damages and liabilities to which they may
become subject under the Act, the Exchange Act or other Federal or state
statutory law or regulation, at common law or otherwise (including, without
limitation, any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim), insofar as such losses,
claims damages or liabilities (or actions in respect thereof) (i) arise out of
or are based upon any untrue statement or alleged untrue statement of a material
fact contained in the prospectus wrapper material prepared by or with the
consent of the Company for distribution in foreign jurisdictions in connection
with the Directed Share Program attached to the Prospectus or any preliminary
prospectus, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statement therein, when considered in conjunction with the Prospectus
or any applicable preliminary prospectus, not misleading; (ii) caused by the
failure of any Participant to pay for and accept delivery of the securities
which immediately following the Effective Date of the Registration Statement,
were subject to a properly confirmed agreement to purchase; or (iii) related to,
arising out of, or in connection with the Directed Share Program, provided that,
the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information furnished to
the Company by or on behalf of E*OFFERING Corp. specifically for inclusion
therein.
(c) Each Underwriter severally and not jointly agrees to
indemnify and hold harmless the Company, each of its directors, each of its
officers who signs the Registration Statement, and each person who controls the
Company within the meaning of either the Act or the Exchange Act, to the same
extent as the foregoing indemnity from the Company to each Underwriter, but only
with reference to written information relating to such Underwriter furnished to
the Company by or on behalf of such Underwriter through the Representatives
specifically for inclusion in the documents referred to in the foregoing
indemnity. This indemnity agreement will be in addition to any liability which
any Underwriter may otherwise have. The Company acknowledges that the statements
set forth in the last paragraph of the cover page regarding delivery of the
Securities and, under the heading "Underwriting", (i) the list of Underwriters
and their respective participation in the sale of the Securities, (ii) the
sentences related to concessions and reallowances and (iii) the paragraph
related to stabilization, syndicate covering transactions and penalty bids in
any Preliminary Prospectus and the Prospectus constitute the only information
furnished in writing by or on behalf of the several Underwriters for inclusion
in any Preliminary Prospectus or the Prospectus.
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will not relieve it from liability under paragraph (a) or (b) above unless and
to the extent it did not otherwise learn of such action and such failure results
in the forfeiture by the indemnifying party of substantial rights and defenses
and (ii) will not, in any event, relieve the indemnifying party from any
obligations to any indemnified party other than the indemnification obligation
provided in paragraph (a) or (b) above. The indemnifying party shall be entitled
to appoint counsel of the indemnifying party's choice at the indemnifying
party's expense to represent the indemnified party in any action for which
indemnification is sought (in which case the indemnifying party shall not
thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
PROVIDED, HOWEVER, that such
<PAGE>
17
counsel shall be reasonably satisfactory to the indemnified party.
Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party shall
have the right to employ separate counsel (including local counsel), and the
indemnifying party shall bear the reasonable fees, costs and expenses of such
separate counsel if (i) the use of counsel chosen by the indemnifying party
to represent the indemnified party would present such counsel with a conflict
of interest, (ii) the actual or potential defendants in, or targets of, any
such action include both the indemnified party and the indemnifying party and
the indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, (iii) the
indemnifying party shall not have employed counsel reasonably satisfactory to
the indemnified party to represent the indemnified party within a reasonable
time after notice of the institution of such action or (iv) the indemnifying
party shall authorize the indemnified party to employ separate counsel at the
expense of the indemnifying party. Notwithstanding anything contained herein
to the contrary, if indemnity may be sought pursuant to Section 8(b) hereof
in respect of such action or proceeding, then in addition to such separate
firm for the indemnified parties, the indemnifying party shall be liable for
the reasonable fees and expenses of not more than one separate firm (in
addition to any local counsel) for E*OFFERING Corp., the directors, officers,
employees and agents of E*OFFERING Corp., and all persons, if any, who
control E*OFFERING Corp. within the meaning of either the Act or the Exchange
Act for the defense of any losses, claims, damages and liabilities arising
out of the Directed Share Program. An indemnifying party will not, without
the prior written consent of the indemnified parties, settle or compromise or
consent to the entry of any judgment with respect to any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional
release of each indemnified party from all liability arising out of such
claim, action, suit or proceeding.
(e) In the event that the indemnity provided in paragraph (a)
or (b) of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and the Underwriters severally
agree to contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection with
investigating or defending same) (collectively "Losses") to which the Company
and one or more of the Underwriters may be subject in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and by the Underwriters on the other from the offering of the Securities;
PROVIDED, HOWEVER, that in no case shall any Underwriter (except as may be
provided in any agreement among underwriters relating to the offering of the
Securities) be responsible for any amount in excess of the underwriting discount
or commission applicable to the Securities purchased by such Underwriter
hereunder. If the allocation provided by the immediately preceding sentence is
unavailable for any reason, the Company and the Underwriters severally shall
contribute in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
of the Underwriters on the other in connection with the statements or omissions
which resulted in such Losses as well as any other relevant equitable
considerations. Benefits received by the Company shall be deemed to be equal to
the total net proceeds from the offering (before deducting expenses) received by
it, and benefits received by the Underwriters shall be deemed to be equal to the
total underwriting discounts and commissions, in each case as set forth on the
cover page of the Prospectus. Relative fault shall be determined by reference
to, among other things, whether any untrue or any alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information provided by the Company on the one hand or the
Underwriters on the other, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The Company and the Underwriters agree that it
would not be just and equitable if contribution were determined by pro rata
allocation or any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this Section 8, each person who controls an Underwriter within the meaning of
either the Act or the Exchange Act and each director, officer, employee and
agent of an Underwriter shall have the same rights to contribution as such
Underwriter, and
<PAGE>
18
each person who controls the Company within the meaning of either the Act or
the Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to the applicable
terms and conditions of this paragraph (e).
9. DEFAULT BY AN UNDERWRITER. If any one or more Underwriters
shall fail to purchase and pay for any of the Securities agreed to be purchased
by such Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Securities set
forth opposite their names in Schedule I hereto bears to the aggregate amount of
Securities set forth opposite the names of all the remaining Underwriters) the
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase; PROVIDED, HOWEVER, that in the event that the aggregate amount of
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase shall exceed 10% of the aggregate amount of Securities set forth in
Schedule I hereto, the remaining Underwriters shall have the right to purchase
all, but shall not be under any obligation to purchase any, of the Securities,
and if such nondefaulting Underwriters do not purchase all the Securities, this
Agreement will terminate without liability to any nondefaulting Underwriter or
the Company. In the event of a default by any Underwriter as set forth in this
Section 9, the Closing Date shall be postponed for such period, not exceeding
five Business Days, as the Representatives shall determine in order that the
required changes in the Registration Statement and the Prospectus or in any
other documents or arrangements may be effected. Nothing contained in this
Agreement shall relieve any defaulting Underwriter of its liability, if any, to
the Company and any nondefaulting Underwriter for damages occasioned by its
default hereunder.
10. TERMINATION. This Agreement shall be subject to
termination in the absolute discretion of the Representatives, by notice given
to the Company prior to delivery of and payment for the Securities, if at any
time prior to such time (i) trading in the Company's Common Stock shall have
been suspended by the Commission or the Nasdaq National Market or trading in
securities generally on the New York Stock Exchange or the Nasdaq National
Market shall have been suspended or limited or minimum prices shall have been
established on such Exchange or the Nasdaq National Market, (ii) a banking
moratorium shall have been declared either by Federal or New York State
authorities or (iii) there shall have occurred any outbreak or escalation of
hostilities, declaration by the United States of a national emergency or war, or
other calamity or crisis the effect of which on financial markets is such as to
make it, in the sole judgment of the Representatives, impractical or inadvisable
to proceed with the offering or delivery of the Securities as contemplated by
the Prospectus (exclusive of any supplement thereto).
11. REPRESENTATIONS AND INDEMNITIES TO SURVIVE. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers and of the Underwriters set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of
the officers, directors, employees, agents or controlling persons referred to in
Section 8 hereof, and will survive delivery of and payment for the Securities.
The provisions of Sections 7 and 8 hereof shall survive the termination or
cancellation of this Agreement.
12. NOTICES. All communications hereunder will be in writing
and effective only on receipt, and, if sent to the Representatives, will be
mailed, delivered or telefaxed to the Salomon Smith Barney Inc. General Counsel
(fax no.: (212) 816-7912) and confirmed to the General Counsel, Salomon Smith
Barney Inc., at 388 Greenwich Street, New York, New York, 10013, Attention:
General Counsel; or, if sent to the Company, will be mailed, delivered or
telefaxed to Alen H. Alley, President (fax no.: (503) 612-6713) and confirmed to
it at 7700 SW Mohawk, Tualatin, Oregon, 97062, attention Allen H. Alley,
President.
<PAGE>
19
13. SUCCESSORS. This Agreement will inure to the benefit of
and be binding upon the parties hereto and their respective successors and the
officers, directors, employees, agents and controlling persons referred to in
Section 8 hereof, and no other person will have any right or obligation
hereunder.
14. APPLICABLE LAW. This Agreement will be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
15. COUNTERPARTS. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. HEADINGS. The section headings used herein are for
convenience only and shall not affect the construction hereof.
17. DEFINITIONS. The terms which follow, when used in this
Agreement, shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a
Sunday or a legal holiday or a day on which banking institutions or
trust companies are authorized or obligated by law to close in New York
City or Portland, Oregon.
"Commission" shall mean the Securities and Exchange
Commission.
"Effective Date" shall mean each date and time that the
Registration Statement, any post-effective amendment or amendments
thereto and any Rule 462(b) Registration Statement became or become
effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the Commission promulgated
thereunder.
"Execution Time" shall mean the date and time that this
Agreement is executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus
referred to in paragraph 1(a) above and any preliminary prospectus
included in the Registration Statement at the Effective Date that omits
Rule 430A Information.
"Prospectus" shall mean the prospectus relating to the
Securities that is first filed pursuant to Rule 424(b) after the
Execution Time or, if no filing pursuant to Rule 424(b) is required,
shall mean the form of final prospectus relating to the Securities
included in the Registration Statement at the Effective Date.
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(a) above, including exhibits and financial
statements, as amended at the Execution Time (or, if not effective at
the Execution Time, in the form in which it shall become effective)
and, in the event any post-effective amendment thereto or any Rule
462(b) Registration Statement becomes effective prior to the Closing
Date, shall also mean such registration statement as so amended or such
Rule 462(b) Registration Statement, as the case may be. Such term shall
include any Rule 430A Information deemed to be included therein at the
Effective Date as provided by Rule 430A.
<PAGE>
20
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules
under the Act.
"Rule 430A Information" shall mean information with respect to
the Securities and the offering thereof permitted to be omitted from
the Registration Statement when it becomes effective pursuant to Rule
430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b)
relating to the offering covered by the registration statement referred
to in Section 1(a) hereof.
<PAGE>
21
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicate hereof,
whereupon this letter and your acceptance shall represent a binding agreement
among the Company and the several Underwriters.
Very truly yours,
Pixelworks, Inc.
By: ......................
Name:
Title:
<PAGE>
22
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Salomon Smith Barney Inc.
Deutsche Bank Securities Inc.
SG Cowen Securities Corporation
E*OFFERING Corp.
By: Salomon Smith Barney Inc.
By:
.............................
Name:
Title:
For themselves and the other
several Underwriters named in
Schedule I to the foregoing
Agreement.
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF UNDERWRITTEN
UNDERWRITERS SECURITIES TO BE PURCHASED
- ------------ --------------------------
<S> <C>
Salomon Smith Barney Inc...........................
Deutsche Bank Securities Inc.......................
SG Cowen Securities Corporation....................
E*OFFERING Corp....................................
-------------------
Total...........................
-------------------
5,750,000
-------------------
</TABLE>
<PAGE>
[FORM OF LOCK-UP AGREEMENT] EXHIBIT A
[LETTERHEAD OF OFFICER, DIRECTOR OR MAJOR SHAREHOLDER OF
PIXELWORKS, INC.]
PIXELWORKS, INC.
PUBLIC OFFERING OF COMMON STOCK
____________ __, 2000
Salomon Smith Barney Inc.
Deutsche Bank Securities Inc.
SG Cowen Securities Corporation
E*OFFERING Corp.
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
This letter is being delivered to you in connection with the
proposed Underwriting Agreement (the "Underwriting Agreement"), between
Pixelworks, Inc., a corporation organized under the laws of the State of Oregon
(the "Company"), and each of you as representatives of a group of Underwriters
named therein, relating to an underwritten public offering of Common Stock,
$0.001 par value (the "Common Stock"), of the Company.
In order to induce you and the other Underwriters to enter
into the Underwriting Agreement, the undersigned will not, without the prior
written consent of Salomon Smith Barney Inc., offer, sell, contract to sell,
pledge or otherwise dispose of, (or enter into any transaction which is designed
to, or might reasonably be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, including the filing (or participation in the filing of) a
registration statement with the Securities and Exchange Commission in respect
of, or establish or increase a put equivalent position or liquidate or decrease
a call equivalent position within the meaning of Section 16 of the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder with respect to, any
shares of capital stock of the Company or any securities convertible into, or
exercisable or exchangeable for such capital stock, or publicly announce an
intention to effect any such transaction, for a period of 180 days after the
date of this Agreement, other than shares of Common Stock disposed of as bona
fide gifts approved by Salomon Smith Barney Inc.
If for any reason the Underwriting Agreement shall be
terminated prior to the Closing Date (as defined in the Underwriting Agreement),
the agreement set forth above shall likewise be terminated.
Yours very truly,
[SIGNATURE OF OFFICER, DIRECTOR OR
MAJOR STOCKHOLDER]
[NAME AND ADDRESS OF OFFICER, DIRECTOR
OR MAJOR STOCKHOLDER]
<PAGE>
EXHIBIT 3.1
FIFTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
PIXELWORKS, INC.
Pursuant to the Oregon Business Corporation Act (ORS Chapter 60),
PixelWorks, Inc. hereby adopts the following Fifth Amended and Restated
Articles of Incorporation, which shall supersede the heretofore existing
Fourth Restated Articles of Incorporation and all previous amendment and
restatements thereof.
ARTICLE 1.
NAME.
The name of the Corporation is Pixelworks, Inc.
ARTICLE 2.
SHARES AND RIGHTS THEREOF GENERALLY.
2.1 AUTHORIZED STOCK. The aggregate number of shares which the
corporation shall have authority to issue is 250,000,000 shares of common
stock with a par value of $0.001 per share ("Common Stock") , and 50,000,000
shares of preferred stock with a par value of $0.001 per share (Preferred
Stock").
2.2 RIGHTS OF COMMON STOCK. The shares of common stock have
unlimited voting rights and are entitled to receive the net assets of the
Corporation on dissolution, subject to rights of the Preferred Stock.
2.3 AUTHORITY TO DESIGNATE SERIES PREFERRED. The Board of Directors
is hereby authorized to fix or alter the rights, preferences, privileges and
restrictions granted to or imposed upon additional series of Preferred Stock,
and the number of shares constituting any such series and the designation
thereof, or of any of them. Subject to compliance with applicable protective
voting rights or consent rights which have been or may be granted to the
Preferred Stock or any series thereof herein, by law, or in Articles of
Amendment adopted by the Board of Directors ("Protective Provisions"), but
notwithstanding any other rights of the Preferred Stock or any series
thereof, the rights, privileges, preferences and restrictions of any such
additional series may be subordinated to, made PARI PASSU with (including,
without limitation, inclusion in provisions with respect to liquidation and
acquisition preferences, redemption and/or approval of matters by vote or
written consent), or made senior to any of those of any present or future
class of series of Preferred or Common Stock. Subject to compliance with
applicable Protective Provisions, the Board of Directors is also authorized
to increase or decrease the number of shares of any series, prior or
subsequent to the issue of that series, but not below the number of shares of
such series then outstanding. In case the number of shares of any series
shall be so decreased, the shares constituting such decrease shall resume the
status which they had prior to the adoption of the resolution originally
fixing the number of shares of such series.
- ------------------------------------------------------------------------------
1 - FIFTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
ARTICLE 3.
DESIGNATION OF SERIES OF PREFERRED STOCK.
3.1 DEFINITIONS AND DESIGNATION.
3.1.1 PREFERRED STOCK. For purposes of this Article 3, the term
"Preferred Stock" refers to shares of Preferred Stock of any
designated series, but not shares that have not yet been designated to
a series. Where rights, privileges, preferences or restrictions are
specific to a particular series, that series is identified by name,
e.g., "Series A Preferred Stock."
3.1.2 COMMON STOCK. As used in this Article 3, the term "Common
Stock" shall mean and include the Corporation's authorized Common
Stock, par value $.001 per share, as constituted on the date of filing
of these Fifth Amended and Restated Articles of Incorporation, and
shall also include any capital stock of any class of the Corporation
thereafter authorized which shall neither be limited to a fixed sum or
percentage of par value in respect of the rights of the holders
thereof to participate in dividends nor entitled to a preference in
the distribution of assets upon the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation; provided
that the shares of Common Stock receivable upon conversion of shares
of Preferred Stock shall include only shares designated as Common
Stock of the Corporation on the date of filing of these Fifth Amended
and Restated Articles of Incorporation, or in case of any
reorganization or reclassification of the outstanding shares thereof,
the stock, securities or assets provided for in Section 3.9.4 and
Section 3.9.5. The Common Stock, voting as a separate class, shall have
the right to elect one Director.
3.1.3 SERIES A PREFERRED STOCK: NUMBER, ISSUE PRICE, DIRECTOR
RIGHTS. There is hereby designated, out of the 50,000,000 authorized
shares of Preferred Stock, 2,906,976 shares as Series A Preferred
Stock, with rights, privileges, preferences and restrictions as
described in this Article 3. Series A Preferred Stock shall have an
Issue Price of $0.43 per share. The Series A Preferred Stock, voting
as a separate series, shall have the right to elect one Director.
3.1.4 SERIES B PREFERRED STOCK: NUMBER, ISSUE PRICE, DIRECTOR
RIGHTS. There is hereby designated, out of the 50,000,000 authorized
shares of Preferred Stock, 5,500,005 shares as Series B Preferred
Stock, with rights, privileges, preferences and restrictions as
described in this Article 3. Series B Preferred Stock shall have an
Issue Price of $1.20 per share. The Series B Preferred Stock, voting
as a separate series, shall have the right to elect one Director.
3.1.5 SERIES C PREFERRED STOCK: NUMBER AND ISSUE PRICE. There
is hereby designated, out of the 50,000,000 authorized shares of
Preferred Stock, 2,493,026 shares as Series C Preferred Stock, with
rights, privileges, preferences and restrictions as described in this
Article 3. Series C Preferred Stock shall have an Issue Price of $4.68
per share.
3.1.6 SERIES D PREFERRED STOCK: NUMBER AND ISSUE PRICE. There
is hereby designated, out of the 50,000,000 authorized shares of
Preferred Stock, 2,250,000 shares as Series D Preferred Stock, with
rights, privileges, preferences and restrictions as described in this
Article 3. Series D Preferred Stock shall have an Issue Price of $12.75
per share.
- ------------------------------------------------------------------------------
2 - FIFTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
3.2 VOTING. Except as may be otherwise provided in this Article 3 or
by law, issued Preferred Stock shall vote together with all other classes and
series of stock of the Corporation as a single class on all actions to be
taken by the stockholders of the Corporation. Each share of Preferred Stock
shall entitle the holder thereof to such number of votes per share on each
such action as shall equal the number of shares of Common Stock (including
fractions of a share) into which each share of Preferred Stock is then
convertible.
3.3 BOARD OF DIRECTORS.
3.3.1 SIZE. The Corporation shall not, without the affirmative
vote or written consent of a majority of all directors elected by
holders of Preferred Stock consenting or voting (as the case may be)
separately as holders of such Preferred Stock, increase the maximum
number of directors constituting the Board of Directors to a number in
excess of five (5).
3.3.2 RIGHTS TO ELECT. The holders of Preferred Stock shall be
entitled to elect that number of directors of the Corporation (voting
by series, or collectively among one or more series, as may be
specified) as is specified in Section 3.1. At any meeting (or in a
written consent in lieu thereof) held for the purpose of electing
directors, the presence in person or by proxy of the holders of at
least a majority in interest of the then outstanding shares of
Preferred Stock of any given series shall constitute a quorum of the
Preferred Stock of that series for the election of directors to be
elected solely by the holders of that series. The presence in person
or by proxy of the holders of at least a majority in interest of the
then outstanding shares of Preferred Stock of any given combination of
series shall constitute a quorum of the Preferred Stock of that
combination, for the election of directors to be elected solely by
that particular combination of series. A vacancy in any directorship
elected by the holders of any particular series or combination of
series of Preferred Stock shall be filled only by vote or written
consent of the holders of that series or combination of series of
Preferred Stock. The directors shall serve for terms extending from
the date of their election and qualification until the time of the
next succeeding annual meeting of shareholders and until their
successors have been elected and qualified. All remaining directors
not elected pursuant to Section 3.1 above shall be elected only upon
election by each of the holders of the Common Stock, voting as a
separate class, the holders of the Series A Preferred Stock, voting as
a separate class, the holders of the Series B Preferred Stock, voting
as a separate class, and the holders of the Series C Preferred Stock
and Series D Preferred Stock, voting together as a separate class.
3.4 DIVIDENDS. Preferred Stock shall be entitled to receive
dividends, when and if declared by the Board of Directors, in amounts per
share (determined on an as-converted-to-common-stock basis) not less than
those paid on Common Stock per share, and in preference to and before any
dividends are paid on Common Stock. All dividends declared upon the Preferred
Stock shall be declared pro rata per share.
3.5 LIQUIDATION, DISSOLUTION AND WINDING-UP.
3.5.1 LIQUIDATION PREFERENCE PAYMENT. Upon any liquidation,
dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of shares of Series C Preferred Stock and
Series D Preferred Stock shall be entitled to receive in preference to
the holders of the shares of Series A and Series B Preferred Stock and
Common Stock an amount per share equal to the Issue Price for each such
series, plus, an amount per share equal to any
- ------------------------------------------------------------------------------
3 - FIFTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
dividends declared but unpaid thereon, computed to the date payment
thereof is made (the "Senior Liquidation Preference Payment"). After
payment of the Senior Liquidation Preference payment, the holders of
shares of Series B Preferred Stock shall be entitled to receive in
preference to the holders of the shares of Series A Preferred Stock
and Common Stock an amount per share equal to the Issue Price for that
series, plus, an amount per share equal to any dividends declared but
unpaid thereon, computed to the date payment thereof is made (the
"Series B Liquidation Preference Payment"). After payment of the
Senior Liquidation Preference Payment and the Series B Liquidation
Preference Payment, the holders of shares of Series A Preferred Stock
shall be entitled to receive in preference to the holders of shares of
Common Stock an amount per share equal to the Issue Price for that
series, plus, an amount per share equal to any dividends declared but
unpaid thereon, computed to the date payment thereof is made (the
"Series A Liquidation Preference Payment"). The Senior Liquidation
Preference Payment, the Series B Liquidation Preference Payment and
the Series A Liquidation Preference Payment, collectively are the
"Liquidation Preference Payments." If upon any liquidation,
dissolution, or winding up of the Corporation, the assets to be
distributed to the holders of the Preferred Stock shall be
insufficient to permit payment to such shareholders of the full
preferential amounts aforesaid, then all of the assets of the
Corporation available for distribution to holders of the Preferred
Stock shall be distributed (i) first to holders of shares of Series D
Preferred Stock and Series C Preferred Stock in proportion to their
respective preferences that would have been payable in respect of the
shares held by them upon such distribution if all preferences on or
with respect to such shares were paid in full, (ii) then to holders of
shares of Series B Preferred Stock pro rata, so that each such holder
receives that proportion of the assets available for distribution as
the number of shares of Series B Preferred Stock held by such holder
of Series B Preferred Stock, times the Series B Liquidation Preference
Payment appropriate to each share, bears to the total Series B
Liquidation Preference Payments, and (iii) then to holders of shares
of Series A Preferred Stock pro rata, so that each such holder
receives that proportion of the assets then available for distribution
to holders of Series A Preferred Stock as the number of shares of
Series A Preferred Stock held by such holder of Series A Preferred
Stock, times the Series A Liquidation Preference Payment appropriate
to each share, bears to the total Series A Liquidation Preference
Payments.
3.5.2 DISTRIBUTION OF BALANCE. Upon any liquidation,
dissolution or winding up of the Corporation, immediately after the
holders of Preferred Stock shall have been paid in full the
Liquidation Preference Payments, the remaining net assets of the
Corporation available for distribution shall be distributed ratably
among the holders of the shares of Series A Preferred Stock and Common
Stock in an amount per share as would have been payable had each share
of Series A Preferred Stock been converted to Common Stock immediately
prior to such liquidation, dissolution or winding up.
3.5.3 EQUIVALENCE OF CERTAIN MERGERS AND SALES. The (x)
consolidation or merger of the Corporation into or with any other
entity or entities which results in the exchange of outstanding shares
of the Corporation for securities or other consideration issued or
paid or caused to be issued or paid by any such entity or affiliate
thereof (except a consolidation or merger into a subsidiary or merger
in which the Corporation is the surviving Corporation and the holders
of the Corporation's voting stock outstanding immediately prior to the
transaction constitute a majority of the holders of voting stock
outstanding immediately following the transaction), or (y) the sale or
transfer by the Corporation of all or substantially all its assets, or
(z) the sale or transfer by the Corporation's shareholders of more
than 80% in voting power of the Corporation's capital stock shall be
deemed to be a liquidation, dissolution or winding up of the
Corporation
- ------------------------------------------------------------------------------
4 - FIFTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
within the meaning of the provisions of this Section, provided as a
result of any such transaction or as an integral part of it, the
Preferred Stock with respect to which payment or exchange is given or
received is converted to Common Stock or otherwise retired following
the payments required pursuant to this Section 3.5.
3.5.4 VALUE OF NON-CASH DISTRIBUTIONS. Whenever the
distribution provided for in this Section 3.5 shall be payable in
property other than cash, the value of such distribution shall be the
fair market value of such property as determined in good faith by the
Board of Directors of the Corporation.
3.6 REDEMPTION. The shares of Preferred Stock shall be redeemed as
follows:
3.6.1 OPTIONAL REDEMPTION BY HOLDERS OF SERIES A PREFERRED
STOCK. With the approval of the holders of a majority of the then
outstanding shares of Series A Preferred Stock, one or more holders of
shares of Series A Preferred Stock may, by giving notice (the "Series
A Notice") to the Corporation at any time after March 1, 2002, require
the Corporation to redeem all of the outstanding shares of Series A
Preferred Stock in two installments, with up to one-half of the shares
redeemed on the First Series A Redemption Date (as defined below), and
the remainder redeemed on the first anniversary of the First Series A
Redemption Date (the "Second Series A Redemption Date"). The Series A
Notice shall state the number of shares of Series A Preferred Stock
which the Corporation shall be required to redeem in accordance with
the limitations set forth in the preceding sentence. Upon receipt of
the Series A Notice, the Corporation will so notify all other persons
holding Series A Preferred Stock. After receipt of the Series A
Notice, the Corporation shall fix the first date for redemption (the
"First Series A Redemption Date"), provided that such First Series A
Redemption Date shall occur within sixty (60) days after receipt of
the Series A Notice. All holders of shares of Series A Preferred Stock
shall deliver to the Corporation during regular business hours, at the
office of any transfer agent of the Corporation for the Series A
Preferred Stock, or at the principal office of the Corporation or at
such other place as may be designated by the Corporation, the
certificate or certificates for the Series A Preferred Stock, duly
endorsed for transfer to the Corporation (if required by it) on or
before the First Series A Redemption Date. Notwithstanding the
foregoing, upon the receipt of the Series A Notice requiring
establishment of the First Series A Redemption Date, the Corporation
may, if the Board of Directors deems it to be in the best interest of
the Corporation, postpone the First Series A Redemption Date to a date
that is not later than one (1) year and sixty (60) days from the date
of the Series A Notice.
3.6.2 OPTIONAL REDEMPTION BY HOLDERS OF SERIES B PREFERRED
STOCK. With the approval of the holders of a majority of the then
outstanding shares of Series B Preferred Stock, one or more holders of
shares of Series B Preferred Stock may, by giving notice (the "Series
B Notice") to the Corporation at any time after March 1, 2003, require
the Corporation to redeem all of the outstanding shares of Series B
Preferred Stock in two installments, with up to one-half of the shares
redeemed on the First Series B Redemption Date (as defined below), and
the remainder redeemed on the first anniversary of the First Series B
Redemption Date (the "Second Series B Redemption Date"). The Series B
Notice shall state the number of shares of Series B Preferred Stock
which the Corporation shall be required to redeem in accordance with
the limitations set forth in the preceding sentence. Upon receipt of
the Series B Notice, the Corporation will so notify all other persons
holding Series B Preferred Stock. After receipt of the Series B
Notice, the Corporation shall fix the first date for redemption (the
"First Series B
- ------------------------------------------------------------------------------
5 - FIFTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
Redemption Date"), provided that such First Series B Redemption Date
shall occur within sixty (60) days after receipt of the Series B
Notice. All holders of shares of Series B Preferred Stock shall
deliver to the Corporation during regular business hours, at the
office of any transfer agent of the Corporation for the Series B
Preferred Stock, or at the principal office of the Corporation or at
such other place as may be designated by the Corporation, the
certificate or certificates for the Series B Preferred Stock, duly
endorsed for transfer to the Corporation (if required by it) on or
before the First Series B Redemption Date. Notwithstanding the
foregoing, upon the receipt of the Series B Notice requiring
establishment of the First Series B Redemption Date, the Corporation
may, if the Board of Directors deems it to be in the best interest of
the Corporation, postpone the First Series B Redemption Date to a date
that is not later than one (1) year and sixty (60) days from the date
of the Series B Notice.
3.6.3 OPTIONAL REDEMPTION BY HOLDERS OF SERIES C PREFERRED
STOCK. With the approval of the holders of a majority of the then
outstanding shares of Series C Preferred Stock, one or more holders of
shares of Series C Preferred Stock may, by giving notice (the "Series
C Notice") to the Corporation at any time after March 1, 2004, require
the Corporation to redeem all of the outstanding shares of Series C
Preferred Stock in two installments, with up to one-half of the shares
redeemed on the First Series C Redemption Date (as defined below), and
the remainder redeemed on the first anniversary of the First Series C
Redemption Date (the "Second Series C Redemption Date"). The Series C
Notice shall state the number of shares of Series C Preferred Stock
which the Corporation shall be required to redeem in accordance with
the limitations set forth in the preceding sentence. Upon receipt of
the Series C Notice, the Corporation will so notify all other persons
holding Series C Preferred Stock. After receipt of the Series C
Notice, the Corporation shall fix the first date for redemption (the
"First Series C Redemption Date"), provided that such First Series C
Redemption Date shall occur within sixty (60) days after receipt of
the Series C Notice. All holders of shares of Series C Preferred Stock
shall deliver to the Corporation during regular business hours, at the
office of any transfer agent of the Corporation for the Series C
Preferred Stock, or at the principal office of the Corporation or at
such other place as may be designated by the Corporation, the
certificate or certificates for the Series C Preferred Stock, duly
endorsed for transfer to the Corporation (if required by it) on or
before the First Series C Redemption Date. Notwithstanding the
foregoing, upon the receipt of the Series C Notice requiring
establishment of the First Series C Redemption Date, the Corporation
may, if the Board of Directors deems it to be in the best interest of
the Corporation, postpone the First Series C Redemption Date to a date
that is not later than one (1) year and sixty (60) days from the date
of the Series C Notice.
3.6.4 OPTIONAL REDEMPTION BY CORPORATION OF SERIES A PREFERRED
STOCK. On or after March 1, 2005, the Corporation may at its option
establish a redemptiondate (the "Series A Call Redemption Date") as of
which the Corporation shall redeem all, but not less than all, of the
then outstanding Series A Preferred Stock. The Corporation shall give
notice of the Series A Call Redemption Date to all holders of Series A
Preferred Stock as provided for the First Series A Redemption Date in
Section 3.6.1.
3.6.5 OPTIONAL REDEMPTION BY CORPORATION OF SERIES B PREFERRED
STOCK. On or after March 1, 2006, the Corporation may at its option
establish a redemption date (the "Series B Call Redemption Date") as
of which the Corporation shall redeem all, but not less than all, of
the then outstanding Series B Preferred Stock. The Corporation shall
give notice of the Series B Call
- ------------------------------------------------------------------------------
6 - FIFTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
Redemption Date to all holders of Series B Preferred Stock as provided
for the First Series B Redemption Date in Section 3.6.2.
3.6.6 OPTIONAL REDEMPTION BY CORPORATION OF SERIES C PREFERRED
STOCK. On or after March 1, 2007, the Corporation may at its option
establish a redemption date (the "Series C Call Redemption Date") as
of which the Corporation shall redeem all, but not less than all, of
the then outstanding Series C Preferred Stock. The Corporation shall
give notice of the Series C Call Redemption Date to all holders of
Series C Preferred Stock as provided for the First Series C Redemption
Date in Section 3.6.3.
3.6.7 REDEMPTION PRICE AND PAYMENT. The First Series A
Redemption Date, the Second Series A Redemption Date, the First Series
B Redemption Date, the Second Series B Redemption Date, the First
Series C Redemption Date, the Second Series C Redemption Date, the
Series A Call Redemption Date, the Series B Call Redemption Date and
the Series C Call Redemption Date are collectively referred to in this
Section 3.6.7 and in Section 3.6.8 below as the Redemption Dates, and
individually each is a Redemption Date. The Series A Preferred Stock
to be redeemed on the Redemption Dates shall be redeemed by paying for
each share in cash an amount equal to the greater of (i) the then Fair
Market Value per share or (ii) $0.43 per share, plus, in the case of
each share, an amount equal to all dividends declared and unpaid
thereon, such amount being referred to as the "Series A Redemption
Price." The Series B Preferred Stock to be redeemed on the Redemption
Dates shall be redeemed by paying for each share in cash an amount
equal to the greater of (i) the then Fair Market Value per share or
(ii) $1.20 per share, plus, in the case of each share, an amount equal
to all dividends declared and unpaid thereon, such amount being
referred to as the "Series B Redemption Price." The Series C Preferred
Stock to be redeemed on the Redemption Dates shall be redeemed by
paying for each share in cash an amount equal to the greater of (i)
the then Fair Market Value per share or (ii) $4.68 per share, plus, in
the case of each share, an amount equal to all dividends declared and
unpaid thereon, such amount being referred to as the "Series C
Redemption Price." Such payment of the Series A Redemption Price,
Series B Redemption Price or the Series C Redemption Price shall be
made in full on each of the Redemption Dates to the holders entitled
thereto. The term "Fair Market Value" shall mean an amount equal to
the fair market value of a share of Preferred Stock of the series
being redeemed (giving effect to the value of the rights and
preferences of such shares as herein provided) determined as follows:
the Board of Directors of the Corporation shall endeavor in good faith
to agree unanimously to the fair market value of a share of Preferred
Stock of the series being redeemed. If they are unable to do so within
sixty (60) days after the occurrence of an event giving rise to a need
to determine that fair market value, an investment banking firm chosen
by a majority of the holders of those series of Preferred Stock being
redeemed and an investment banking firm chosen by the Corporation
shall each calculate such value (determined after giving effect to the
fees of such investment bankers). In the event the difference between
such valuations is less than twenty percent (20%) of the higher
valuation, then the Fair Market Value shall be deemed to be the
average of such two valuations. In the event that the difference
between such valuations is greater than twenty percent (20%) of the
higher valuation, the two investment banking firms shall designate a
third investment banking firm which shall select from the two
valuations the valuation that such third firm determines to be closer
to its own valuation (reduced if appropriate by the additional fees of
the proceedings), and the valuation so selected shall be considered
the Fair Market Value. In all events, the fees and expenses of any
such investment banking firms shall be paid by the Corporation.
- ------------------------------------------------------------------------------
7 - FIFTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
3.6.8 REDEMPTION MECHANICS. At least twenty (20) but not more
than thirty (30) days prior to each Redemption Date, written notice
(the "Redemption Notice") shall be given by the Corporation by mail,
postage prepaid, or by facsimile transmission to non-U.S. residents,
to each holder of record (at the close of business on the business day
next preceding the day on which the Redemption Notice is given) of
shares of the affected series of Preferred Stock notifying such holder
of the redemption and specifying the Series A Redemption Price, Series
B Redemption Price or the Series C Redemption Price, as applicable,
the Redemption Date and the place where said redemption price shall be
payable. The Redemption Notice shall be addressed to each holder at
the holder's address as shown by the records of the Corporation. From
and after the close of business on the Redemption Date, unless there
shall have been a default in the payment of the applicable redemption
price, all rights of holders of shares of Preferred Stock of the
affected series (except the right to receive the applicable redemption
price) shall cease with respect to such shares, and such shares shall
not thereafter be transferred on the books of the Corporation or be
deemed to be outstanding for any purpose whatsoever. If the funds of
the Corporation legally available for redemption of shares of the
affected series of Preferred Stock on any Redemption Date are
insufficient to redeem the total number of outstanding shares of that
series of Preferred Stock to be redeemed on such redemption date, the
holders of shares of that series of Preferred Stock shall share
ratably in any funds legally available for redemption of such shares
according to the respective amounts which would be payable with
respect to the full number of shares owned by them if all such
outstanding shares were redeemed in full, and the ratable portion of
such shares whose Fair Market Value has thus been paid shall be deemed
to have been redeemed. The shares of Preferred Stock of the affected
series not redeemed shall remain outstanding and entitled to all
rights and preferences provided herein. At any time thereafter when
additional funds of the Corporation are legally available for the
redemption of such shares of Preferred Stock of the affected series,
such funds will be used, at the end of the next succeeding fiscal
quarter, to redeem the balance of such shares, or such portion thereof
for which funds are then legally available, on the basis set forth
above.
3.6.9 REDEEMED OR OTHERWISE ACQUIRED SHARES TO BE RETIRED. Any
shares of Preferred Stock redeemed pursuant to this Section 3.6 or
otherwise acquired by the Corporation in any manner whatsoever shall
be cancelled and shall not under any circumstances be reissued; and
the Corporation may from time to time take such appropriate corporate
action as may be necessary to reduce accordingly the number of
authorized shares of Preferred Stock.
3.7 PROTECTIVE PROVISIONS. At any time when shares of Preferred
Stock are outstanding, except where the vote or written consent of the
holders of a greater number of shares of the Corporation is required herein
or by law, and in addition to any other vote required herein or by law,
without the written consent of the holders of at least two-thirds (2/3) in
interest of the then outstanding shares of Preferred Stock given in writing
or by vote at a meeting and acting together as a single class (or, if the
action affects one class differently than another, voting as separate
classes), the Corporation will not:
3.7.1 MERGE OR CONSOLIDATE. Merge or consolidate with or into,
or permit any subsidiary to merge or consolidate with or into, any
other corporation, corporations, entity or entities (except a
consolidation or merger into a Subsidiary or merger in which the
Corporation is the surviving Corporation and the holders of the
Corporation's voting stock outstanding immediately prior to the
transaction constitute a majority of the holders of voting stock
outstanding immediately following the transaction).
- ------------------------------------------------------------------------------
8 - FIFTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
3.7.2 TRANSFER SUBSTANTIALLY ALL ASSETS. Sell, abandon,
transfer, lease or otherwise dispose of all or substantially all of
its properties or assets.
3.7.3 AMEND ARTICLES OR BYLAWS ADVERSELY. Amend, alter or
repeal any provision of its Articles of Incorporation or Bylaws in a
manner adverse to any series of Preferred Stock;
3.7.4 CREATE, RECLASSIFY, OR AUTHORIZE ADDITIONAL PREFERRED.
Create or authorize the creation of any additional class or series of
shares of stock, or reclassify any existing class of series of stock,
unless the same ranks junior to the then-existing Preferred Stock as
to voting, dividends and the distribution of assets on the
liquidation, dissolution or winding up of the Corporation, or increase
the authorized amount of Preferred Stock of any series or increase the
authorized amount of any additional class or series of shares of stock
unless the same ranks junior to the then-existing Preferred Stock as
to dividends and the distribution of assets on the liquidation,
dissolution or winding up of the Corporation, or create or authorize
any obligation or security convertible into shares of Preferred Stock
or into shares of any other class or series of stock unless the same
ranks junior to the then-existing Preferred Stock as to dividends and
the distribution of assets on the liquidation, dissolution or winding
up of the Corporation, whether any such creation, authorization or
increase shall be by means of amendment to the Articles of
Incorporation or by merger, consolidation or otherwise.
3.7.5 CHANGE ARTICLES. In any manner amend, alter or change
the designations or the powers, preferences or rights, privileges or
the restrictions of any series of Preferred Stock adversely.
3.7.6 DISSOLVE CORPORATION. Dissolve, liquidate, or wind up
the Corporation.
3.7.7 REDEEM STOCK. Repurchase, redeemn, or retire any shares
of capital stock of the Corporation other than pursuant to contractual
rights to repurchase shares of Common Stock held by employees,
directors or consultants of the Corporation or its subsidiaries upon
termination of their employment or services or pursuant to the
exercise of a contractual right of first refusal held by the
Corporation.
3.8 CONVERSION. The holders of shares of Preferred Stock shall have
the following conversion rights.
3.8.1 DEFINITIONS. The "Conversion Price" as used in this
Section 3.8 and in Section 3.9 and as applicable to any given series of
Preferred Stock means, as of the date of these Articles, the Issue
Price for that series. The Conversion Price will be adjusted from time
to time as this Section 3.8 and Section 3.9 require, and such adjusted
Conversion Price shall be deemed to be the Conversion Price in effect
at the date any shares of Preferred Stock are converted. The "Original
Issue Date" with respect to any given series of Preferred Stock is the
date on which shares of that series were first issued to anyone.
3.8.2 RIGHT TO CONVERT. Subject to the terms and conditions of
this Section , the holder of any share or shares of Preferred Stock
shall have the right, at its option at any time, to convert any such
shares of Preferred Stock (except that upon any liquidation of the
Corporation or any transaction contemplated in Section 3.5.3 the right
of conversion shall terminate at the close
- ------------------------------------------------------------------------------
9 - FIFTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
of business on the business day fixed for payment of the amounts
distributable on the Preferred Stock) into such number of fully paid
and nonassessable shares of Common Stock as is obtained by (i)
multiplying the number of shares of Preferred Stock of each series so
to be converted by the Issue Price applicable to that series and (ii)
dividing the result by the Conversion Price then applicable to that
series. Such rights of conversion shall be exercised by the holder
thereof by giving written notice that the holder elects to convert a
stated number of shares of Preferred Stock into Common Stock and by
surrender of a certificate or certificates for the shares so to be
converted to the Corporation at its principal office (or such other
office or agency of the Corporation as the Corporation may designate
by notice in writing to the holders of the Preferred Stock) at any
time during its usual business hours on the date set forth in such
notice, together with a statement of the name or names (with address)
in which the certificate or certificates for shares of Common Stock
shall be issued.
3.8.3 ISSUANCE OF CERTIFICATES; TIME CONVERSION EFFECTED.
Promptly after the receipt of the written notice referred to in
Section 3.8.2 and surrender of the certificate or certificates for the
share or shares of Preferred Stock to be converted, the Corporation
shall issue and deliver, or cause to be issued and delivered, to the
holder, registered in such name or names as such holder may direct, a
certificate or certificates for the number of whole shares of Common
Stock issuable upon the conversion of such share or shares of
Preferred Stock. To the extent permitted by law, such conversion shall
be deemed to have been effected and the Conversion Price applicable to
the relevant series shall be determined as of the close of business on
the date on which such written notice shall have been received by the
Corporation and the certificate or certificates for such share or
shares shall have been surrendered as aforesaid, and at such time the
rights of the holder of such share or shares of Preferred Stock shall
cease, and the person or persons in whose name or names any
certificate or certificates for shares of Common Stock shall be
issuable upon such conversion shall be deemed to have become the
holder or holders of record of the shares represented thereby.
3.8.4 MANDATORY CONVERSION. All outstanding shares of
Preferred Stock shall automatically convert to shares of Common Stock
if at any time the Corporation shall effect a firm commitment
underwritten public offering of shares of Common Stock in which (i)
the aggregate net proceeds (prior to deduction of underwriters'
discounts, commissions and expenses) from such offering to the
Corporation shall be at least $10,000,000 and (ii) the price paid by
the public for such shares shall be at least $7.00 per share (except
that for Series D Preferred Stock, conversion shall not be automatic
unless the price paid by the public for such shares shall be at least
$12.75 per share) (share prices herein identified to be appropriately
adjusted to reflect the occurrence of any event described in Section
3.9.1 and Section 3.9.2), then effective upon the closing of the sale
of such shares by the Corporation pursuant to such public offering,
all outstanding shares of Preferred Stock shall automatically convert
to shares of Common Stock. All outstanding shares of Preferred Stock
of a given series shall likewise automatically convert to shares of
Common Stock if at any time a majority of the total number of shares
of that series of Preferred Stock originally issued by the Corporation
have been converted into Common Stock through the mechanism described
in Section 3.8.2.
3.8.5 FRACTIONAL SHARES; DIVIDENDS; PARTIAL CONVERSION. No
fractional shares shall be issued upon conversion of Preferred Stock
into Common Stock and no payment or adjustment shall be made upon any
conversion on account of any cash dividends on the Common Stock issued
upon such conversion. Subject to the provisions of Section 3.5, at the
time of each conversion, the Corporation shall: (i) if cash is legally
available, pay in cash an amount equal to all dividends
- ------------------------------------------------------------------------------
10 - FIFTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
accrued and unpaid on the shares of Preferred Stock surrendered for
conversion to the date upon which such conversion is deemed to take
place as provided in Section 3.8.3 or Section 3.8.4, or (ii) if cash
is not then legally available, pay such dividends if and when such
cash does become legally available. In case the number of shares of
Preferred Stock represented by the certificate or certificates
surrendered pursuant to Section 3.8.2 exceeds the number of shares
converted, the Corporation shall, upon such conversion, execute and
deliver to the holder, at the expense of the Corporation, a new
certificate or certificates for the number of shares of Preferred
Stock represented by the certificate or certificates surrendered which
are not to be converted. If any fractional share of Common Stock
would, except for the provisions of the first sentence of this Section
3.8.5, be delivered upon such conversion, the Corporation, in lieu of
delivering such fractional share, shall pay to the holder surrendering
the Preferred Stock for conversion an amount in cash equal to the
current market price of such fractional share as determined in good
faith by the Board of Directors of the Corporation, and based upon the
aggregate number of Shares of Preferred Stock surrendered by any one
holder.
3.9 CONVERSION PRICE ADJUSTMENTS.
3.9.1 ADJUSTMENTS FOR STOCK SPLITS AND COMBINATIONS. If the
Corporation shall at any time or from time to time after Original
Issue Date effect a subdivision of the outstanding Common Stock
without a corresponding subdivision of that series of Preferred Stock,
the Conversion Price for that series in effect immediately before that
subdivision shall be proportionately decreased. Conversely, if the
Corporation shall at any time or from time to time after the Original
Issue Date combine the outstanding shares of Common Stock in to a
smaller number of shares without a corresponding combination of a
given series of Preferred Stock, the Conversion Price for that series
in effect immediately before the combination shall be proportionately
increased. Any adjustment under this section 3.9.1 shall become
effective at the close of business on the date the subdivision or
combination becomes effective.
3.9.2 ADJUSTMENTS FOR COMMON STOCK DIVIDENDS AND
DISTRIBUTIONS. If the Corporation at any time or from time to time
after the Original Issue Date makes, or fixes a record date for the
determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in additional shares of Common
Stock, in each such event the Conversion Price that is then in effect
shall be decreased as of the time of such issuance or, in the event
such record date is fixed, as of the close of business on such record
date, by multiplying the Conversion Price then in effect by a fraction
(1) the numerator of which is the total number of shares of Common
Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date, and (2) the
denominator of which is the total number of shares of Common Stock
issued and outstanding immediately prior to the time of such issuance
or the close of business on such record date plus the number of shares
of Common Stock issuable in payment of such dividend or distribution;
provided, however, that if such record date is fixed and such dividend
is not fully paid or if such distribution is not fully made on the
date fixed therefor, the Conversion Price shall be recomputed
accordingly as of the close of business on such record date and
thereafter the Conversion Price shall be adjusted pursuant to this
Section 3.9.2 to reflect the actual payment of such dividend or
distribution.
3.9.3 ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. If
the Corporation at any time or from time to time after the Original
Issue Date makes, or fixes a record date for the determination of
holders of Common Stock entitled to receive, a dividend or other
distribution
- ------------------------------------------------------------------------------
11 - FIFTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
payable in securities of the Corporation other than shares of Common
Stock, in each such event provision shall be made so that the holders
of the Preferred Stock shall receive upon conversion thereof, in
addition to the number of shares of Common Stock receivable thereupon,
the amount of other securities of the Corporation which they would
have received had their Preferred Stock been converted into Common
Stock on the date of such event and had they thereafter, during the
period from the date of such event to and including the conversion
date, retained such securities receivable by them as aforesaid during
such period, subject to all other adjustments called for during such
period under this Section 3.9 with respect to the rights of the holders
of the Preferred Stock or with respect to such other securities by
their terms.
3.9.4 ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND
SUBSTITUTION. If at any time or from time to time after the Original
Issue Date, the Common Stock issuable upon the conversion of the
Preferred Stock is changed into the same or a different number of
shares of any class or classes of stock, whether by recapitalization,
reclassification or otherwise (other than through a consolidation or
merger qualifying for purposes of Section 3.5.3 or a subdivision or
combination of shares or stock dividend or a reorganization, merger,
consolidation or sale of assets provided for elsewhere in this Section
3.9), in any such event each holder of Preferred Stock shall have the
right thereafter to convert such stock into the kind and amount of
stock and other securities and property receivable upon such
recapitalization, reclassification or other change by holders of the
maximum number of shares of Common Stock into which such shares of
Preferred Stock could have been converted immediately prior to such
recapitalization, reclassification or change, all subject to further
adjustment as provided herein or with respect to such other securities
or property by the terms thereof.
3.9.5 REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF
ASSETS. If at any time or from time to time after the Original Issue
Date, there is a capital reorganization of the Common Stock (other
than a transaction qualifying for purposes of Section 3.5.3 or a
recapitalization, subdivision, combination, reclassification, exchange
or substitution of shares provided for elsewhere in this Section 3.9),
as a part of such capital reorganization, provision shall be made so
that the holders of the Preferred Stock shall thereafter be entitled to
receive upon conversion of the Preferred Stock the number of shares of
stock or other securities or property of the Corporation to which a
holder of the number of shares of Common Stock deliverable upon
conversion would have been entitled on such capital reorganization,
subject to adjustment in respect of such stock or securities by the
terms thereof. In any such case, appropriate adjustment shall be made
in the application of the provisions of this Section 3.9 with respect
to the rights of the holders of Preferred Stock after the capital
reorganization to the end that the provisions of this Section 3.9
(including adjustment of the Conversion Price then in effect and the
number of shares issuable upon conversion of the Preferred Stock)
shall be applicable after that event and be as nearly equivalent as
practicable.
3.9.6 WEIGHTED AVERAGE ANTIDILUTION ADJUSTMENT. If the
Corporation at any time after the effective date of these Fourth
Amended and Restated Articles of Incorporation shall issue any
Additional Stock (as defined below) without consideration or for a
consideration per share less than the Conversion Price for any given
series of Preferred Stock then in effect (the "Old Conversion Price",)
the Conversion Price applicable to each such series shall be adjusted
or readjusted, as follows.
- ------------------------------------------------------------------------------
12 - FIFTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
(a) CALCULATION. The Conversion Price for each series of
Preferred Stock affected shall be adjusted to be equal to (i) the
sum of: the "Old Stock" times the Old Conversion Price, and the
New Consideration; (i) divided by the sum of the "Old Stock" and
the "New Stock." "Old Stock" is the number of shares of Common
Stock outstanding immediately prior to such issue or sale
(including all Additional Stock previously deemed issued), plus
the total number of shares of Common Stock that would be issued
upon conversion of all outstanding Preferred Stock, before any
adjustment in Conversion Price associated with such issue or
sale, plus the total number of shares of stock issuable on the
exercise of any options then granted and outstanding. The "New
Stock" is the number of common equivalent shares actually issued
(or deemed issued) in the transaction giving rise to the
adjustment in the Conversion Price. The "New Consideration" is
the aggregate consideration received by the Corporation for the
New Stock.
(b) SIMPLIFYING DELAY. No adjustment of the Conversion
Price for Preferred Stock shall be made in an amount less than
one cent per share, provided that any adjustments which are not
required to be made by reason of this sentence shall be carried
forward and taken into account in any subsequent adjustment.
(c) DEFINING "ADDITIONAL STOCK." "Additional Stock" shall
mean any shares of Common Stock issued, or deemed issued under
the rules of this Section 3.9.6, by the Corporation after the
effective date of these Fifth Amended and Restated Articles of
Incorporation other than "Reserved Shares." "Reserved Shares" are
defined as follows:
(A) Common Stock issued pursuant to a transaction
described in Sections 3.9.1 through 3.9.5, upon conversion of
Preferred Stock, or upon exercise of any warrants to purchase
common stock outstanding prior to the date of these Fourth
Amended and Restated Articles of Incorporation;
(B) Up to 3,900,000 shares of Common Stock issued to
employees, consultants, directors or advisory board members of
the Corporation primarily for the purpose of soliciting or
retaining their employment directly or pursuant to a stock option
plan or restricted stock plan approved by the shareholders and
directors of the Corporation, or such higher number of shares as
may be approved from time to time by a majority of the Board of
Directors including the affirmative consent of a majority of all
directors entitled to be elected by the holders of one or more
series of Preferred Stock, with respect to such series, or shares
reissued after repurchase pursuant to any restricted stock
purchase agreement following a termination in status as an
employee, consultant, director, or advisory board member; and
(C) Common Stock issued in equipment lease financing or
otherwise issued or issuable in standard commercial line of
credit transactions approved by a majority of the Board of
Directors in good faith, which majority shall include the
affirmative consent of a majority of all directors entitled to be
elected by the holders of one or more series of Preferred Stock,
with respect to such series.
(d) ISSUANCE OF RIGHTS OR OPTIONS. In case at any time the
Corporation shall in any manner grant (whether directly or by
assumption in a merger or otherwise) any warrants or other rights
to subscribe for or to purchase, or any options for the purchase
- ------------------------------------------------------------------------------
13 - FIFTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
of, Common Stock or any stock or security convertible into or
exchangeable for Common Stock (such warrants, rights or options
being called "Options" and such convertible or exchangeable stock
or securities being called "Convertible Securities") whether or
not such Options or the right to convert or exchange any such
Convertible Securities are immediately exercisable, and the price
per share for which Common Stock is issuable upon the exercise of
such Options or upon the conversion or exchange of such
Convertible Securities (determined by dividing (i) the total
amount, if any, received or receivable by the Corporation as
consideration for the granting of such Options, plus the minimum
aggregate amount of additional consideration payable to the
Corporation upon the exercise of all such Options, plus, in the
case of such Options which relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any,
payable upon the issue or sale of such Convertible Securities and
upon the conversion or exchange thereof, by (ii) the total
maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon the conversion or exchange of
all such Convertible Securities issuable upon the exercise of
such Options) shall be less than the Conversion Price for any
given series of Preferred Stock in effect immediately prior to
the time of the granting of such Options, then the total maximum
number of shares of Common Stock issuable upon the exercise of
such Options or upon conversion or exchange of the total maximum
amount of such Convertible Securities issuable upon the exercise
of such Options shall be deemed to have been issued for such
price per share as of the date of granting of such Options or the
issuance of such Convertible Securities and thereafter shall be
deemed to be outstanding. Except as otherwise provided in Section
3.9.6(f), no adjustment of the Conversion Price shall be made upon
the actual issue of such Common Stock or of such Convertible
Securities upon exercise of such Options or upon the actual issue
of such Common Stock upon conversion or exchange of such
Convertible Securities.
(e) ISSUANCE OF CONVERTIBLE SECURITIES. In case the
Corporation shall in any manner issue (whether directly or by
assumption in a merger or otherwise) or sell any Convertible
Securities, whether or not the rights to exchange or convert any
such Convertible Securities are immediately exercisable, and the
price per share for which Common Stock is issuable upon such
conversion or exchange (determined by dividing (i) the total
amount received or receivable by the Corporation as consideration
for the issue or sale of such Convertible Securities, plus the
minimum aggregate amount of additional consideration, if any,
payable to the Corporation upon the conversion or exchange
thereof, by (ii) the total maximum number of shares of Common
Stock issuable upon the conversion or exchange of all such
Convertible Securities) shall be less than the Conversion Price
for any given series of Preferred Stock in effect immediately
prior to the time of such issue or sale, then the total maximum
number of shares of Common Stock issuable upon conversion or
exchange of all such Convertible Securities shall be deemed to
have been issued for such price per share as of the date of the
issue or sale of such Convertible Securities and thereafter shall
be deemed to be outstanding, provided that (a) except as
otherwise provided in Section 3.9.6(f), no adjustment of the
Conversion Price shall be made upon the actual issue of such
Common Stock upon conversion or exchange of such Convertible
Securities and (b) if any such issue or sale of such Convertible
Securities is made upon exercise of any Options to purchase any
such Convertible Securities for which adjustments of the Conversion
Price for any given series of Preferred Stock have been or are to
be made pursuant to other provisions of these Articles, no
- ------------------------------------------------------------------------------
14 - FIFTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
further adjustment of the Conversion Price for that series shall
be made by reason of such issue or sale.
(f) CHANGE IN OPTION PRICE OR CONVERSION RATE. Upon the
happening of any of the following events, namely, if the
purchase price provided for in any Option referred to in
Section 3.9.6(d), the additional consideration, if any,
payable upon the conversion or exchange of any Convertible
Securities referred to in Section 3.9.6(d) or 3.9.6(e), or
the rate at which Convertible Securities referred to in
Sections 3.9.6(d) or 3.9.6(e) are convertible into or
exchangeable for Common Stock shall change at any time
(including, but not limited to, changes under or by reason
of provisions designed to protect against dilution), the
Conversion Price for any series of Preferred Stock in effect
at the time of such event shall forthwith be readjusted to
the Conversion Price which would have been in effect for
that series at such time had such Options or Convertible
Securities still outstanding provided for such changed
purchase price, additional consideration or conversion rate,
as the case may be, at the time initially granted, issued or
sold; and on the expiration of any such Option or the
termination of any such right to convert or exchange such
Convertible Securities, the Conversion Price then in effect
hereunder for any series of Preferred Stock as to which the
instrument in question had previously caused an adjustment
shall forthwith be increased to the Conversion Price which
would have been in effect at the time of such expiration or
termination had such Option or Convertible Securities, to
the extent outstanding immediately prior to such expiration
or termination, never been issued.
(g) CONSIDERATION FOR STOCK. In case any shares of Common
Stock, Options or Convertible Securities shall be issued or sold
for cash, the consideration received therefor shall be deemed to
be the amount received by the Corporation therefor, without
deduction therefrom of any expenses incurred or any underwriting
commissions or concessions paid or allowed by the Corporation in
connection therewith. In case any shares of Common Stock, Options
or Convertible Securities shall be issued or sold for a
consideration other than cash, the amount of the consideration
other than cash received by the Corporation shall be deemed to be
the fair value of such consideration as determined in good faith
by the Board of Directors of the Corporation, without deduction
of any expenses incurred or any underwriting commissions or
concessions paid or allowed by the Corporation in connection
therewith. In case any Options shall be issued in connection with
the issue and sale of other securities of the Corporation,
together comprising one integral transaction in which no specific
consideration is allocated to such Options by the parties
thereto, such Options shall be deemed to have been issued for
such consideration as determined in good faith by the Board of
Directors of the Corporation.
(h) RECORD DATE. In case the Corporation shall take a
record of the holders of its Common Stock for the purpose of
entitling them to subscribe for or purchase Common Stock, Options
or Convertible Securities, then such record date shall be deemed
to be the date of the granting of such right of subscription or
purchase.
3.10 NOTICE OF ADJUSTMENT. Upon any adjustment of the Conversion
Price, then and in each such case the Corporation shall give written notice
thereof, by first class mail, postage prepaid, or by facsimile transmission
to non-U.S. residents, addressed to each holder of shares of Preferred Stock
affected by the adjustment at the address of such holder as shown on the
books of the Corporation, which notice
- ------------------------------------------------------------------------------
15 - FIFTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
shall state the Conversion Price resulting from such adjustment, setting
forth in reasonable detail the method upon which such calculation is based.
3.11 STOCK TO BE RESERVED. The Corporation will at all times reserve
and keep available out of its authorized Common Stock, solely for the purpose
of issuance upon the conversion of Preferred Stock as herein provided, such
number of shares of Common Stock as shall then be issuable upon the
conversion of all outstanding shares of Preferred Stock. The Corporation
covenants that all shares of Common Stock which shall be so issued shall be
duly and validly issued and fully paid and nonassessable and free from all
taxes, liens and charges with respect to the issue thereof, and, without
limiting the generality of the foregoing, the Corporation covenants that it
will from time to time take all such action as may be requisite to assure
that the par value per share of the Common Stock is at all times equal to or
less than the Conversion Price in effect at the time for any given series of
Preferred Stock. The Corporation will take all such action as may be
necessary to assure that all such shares of Common Stock may be so issued
without violation of any applicable law or regulation, or of any requirement
of any national securities exchange upon which the Common Stock may be listed.
3.12 NO REISSUANCE OF PREFERRED STOCK. Shares of a particular series
of Preferred Stock which are converted into shares of Common Stock as
provided herein shall not be reissued, unless redesignated through procedures
provided for in Section 2.3.
3.13 ISSUE TAX. The issuance of certificates for shares of Common
Stock upon conversion of Preferred Stock shall be made without charge to the
holders thereof for any issuance tax in respect thereof, provided that the
Corporation shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the Preferred Stock
which is being converted.
3.14 CLOSING OF BOOKS. The Corporation will at no time close its
transfer books against the transfer of any Preferred Stock or of any shares
of Common Stock issued or issuable upon the conversion of any shares of
Preferred Stock in any manner which interferes with the timely conversion of
such Preferred Stock, except as may otherwise be required to comply with
applicable securities laws.
ARTICLE 4.
DIRECTORS
4.1 NUMBER OF DIRECTORS. The number of directors of the Corporation
shall be not less than three nor more than twelve, and within such limits,
the exact number shall be fixed and increased or decreased from time to time
by resolution of the Board of Directors.
4.2 ELECTION OF DIRECTORS. If the number of directors is fixed by the
Board of Directors at six or more, the directors shall be divided into three
classes designated Class I, Class II and Class III, each class to be as
nearly equal in number as possible. At the next annual meeting of
shareholders following that designation ("First Meeting"), directors of all
three classes shall be elected. The term of office of Class I directors shall
expire at the first annual meeting of shareholders following their election.
The terms of Class II directors shall expire at the second annual meeting of
shareholders following their election. The terms of the Class III directors
shall expire at the third annual meeting of shareholders following their
election. At each annual meeting of shareholders after the First Meeting,
each class of directors elected to succeed those
- ------------------------------------------------------------------------------
16 - FIFTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
directors whose terms expire shall be elected to serve for three-year terms
and until their successors are elected and qualified, so that the term of one
class of directors will expire each year. When the number of directors is
changed within the limits provided herein, any newly created directorships,
or any decrease in directorships, shall be so apportioned among the classes
as to make all classes as nearly equal as possible, provided that no decrease
in the number of directors constituting the Board of Directors shall shorten
the term of any incumbent directors.
4.3 REMOVAL. All or any number of the directors of the Corporation may
be removed only for cause and at a meeting of shareholders called expressly
for that purpose, by the vote of 75 percent of the votes then entitled to be
cast for the election of directors. Cause for removal shall be deemed to
exist only if the director whose removal is proposed has engaged in criminal
conduct or has engaged in fraudulent or dishonest conduct or gross abuse of
authority or discretion with respect to the Corporation. At any meeting of
shareholders at which one or more directors are removed, a majority of votes
then entitled to be cast for the election of directors may fill any vacancy
created by such removal. If any vacancy created by removal of a director is
not filled by the shareholders at the meeting at which the removal is
effected, such vacancy may be filled by a majority vote of the remaining
directors.
4.4 AMENDMENT OF ARTICLE. The provisions of this Article 4 may not be
amended, altered, changed or repealed in any respect unless such action is
approved by the affirmative vote of not less than 75 percent of the votes
then entitled to be cast for election of directors.
ARTICLE 5.
EXCLUSION OF DIRECTOR LIABILITY.
No director of the Corporation shall be personally liable to the
Corporation or its shareholders for monetary damages for conduct as a
director; provided that this Article 5 shall not eliminate the liability of a
director for any act or omission for which such elimination of liability is
not permitted under the Oregon Business Corporation Act. No amendment to the
Oregon Business Corporation Act that further limits the acts or omissions for
which elimination of liability is permitted shall affect the liability of a
director for any act or omission that occurs prior to the effective date of
such amendment.
ARTICLE 6.
INDEMNIFICATION OF DIRECTORS, OFFICERS, & FIDUCIARIES.
6.1 INDEMNIFICATION. The Corporation shall indemnify to the fullest
extent not prohibited by law any person who was or is a party or is
threatened to be made a party to any Proceeding (as defined below) against
all expenses (including attorney fees), judgments, fines, and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such Proceeding.
6.2 ADVANCEMENT OF EXPENSES. Expenses incurred by a director or
officer of the Corporation in defending a Proceeding shall in all cases be
paid by the Corporation in advance of the final disposition of such
Proceeding at the written request of such person, if the person:
- ------------------------------------------------------------------------------
17 - FIFTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
6.2.1 furnishes the Corporation a written affirmation of the
person's good faith belief that such person has met the standard of conduct
described in the Oregon Business Corporation Act or is entitled to be
indemnified by the Corporation under any other indemnification rights granted
by the Corporation to such person; and
6.2.2 furnishes the Corporation a written undertaking to repay
such advance to the extent it is ultimately determined by a court that such
person is not entitled to be indemnified by the Corporation under this
Article 6 or under any other indemnification rights granted by the
Corporation to such person.
Such advances shall be made without regard to the person's ability
to repay such advances and without regard to the person's ultimate
entitlement to indemnification under this Article 6 or otherwise.
6.3 DEFINITION OF PROCEEDING. The term "Proceeding" shall include any
threatened, pending, or completed action, suit, or proceeding, whether
brought in the right of the corporation or otherwise and whether of a civil,
criminal, administrative, or investigative nature, in which a person may be
or may have been involved as a party or otherwise by reason of the fact that
the person is or was a director or officer of the corporation or a fiduciary
within the meaning of the Employee Retirement Income Security Act of 1974
with respect to any employee benefit plan of the corporation, or is or was
serving at the request of the corporation as a director, officer, or
fiduciary of an employee benefit plan of another corporation, partnership,
joint venture, trust, or other enterprise, whether or not serving in such
capacity at the time any liability or expense is incurred for which
indemnification or advancement of expenses can be provided under this Article
6.
6.4 NON-EXCLUSIVITY AND CONTINUITY OF RIGHTS. This Article 6: (i)
shall not be deemed exclusive of any other rights to which those indemnified
may be entitled under any statute, agreement, general or specific action of
the board of directors, vote of shareholders or otherwise, both as to action
in the official capacity of the person indemnified and as to action in
another capacity while holding office, (ii) shall continue as to a person who
has ceased to be a director or officer, (iii) shall inure to the benefit of
the heirs, executors, and administrators of such person, and (iv) shall
extend to all claims for indemnification or advancement of expenses made
after the adoption of this Article 6.
6.5 AMENDMENTS. Any repeal of this Article 6 shall only be prospective
and no repeal or modification hereof shall adversely affect the rights under
this Article 6 in effect at the time of the alleged occurrence of any action
or omission to act that is the cause of any Proceeding.
ARTICLE 7.
SHAREHOLDER APPROVAL OF CERTAIN CORPORATE ACTIONS.
No agreement of merger or consolidation of this corporation which
requires shareholder approval under the Oregon Business Corporation Act shall
be approved or become effective unless the holders of not less than
sixty-seven percent (67%) of the outstanding shares of the corporation
entitled to vote thereon shall vote for the adoption of the agreement. This
corporation shall not sell, lease or exchange all or substantially all of its
property and assets unless the holders of not less than sixty-seven percent
(67%) of the outstanding shares of the corporation entitled to vote thereon
shall vote for such sale, lease or exchange.
- ------------------------------------------------------------------------------
18 - FIFTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
Dissolution or liquidation of the corporation shall require the prior
approval of holders of not less than sixty-seven percent (67%) of the
outstanding shares of the corporation entitled to vote thereon.
- ------------------------------------------------------------------------------
19 - FIFTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
EXHIBIT 3.2
SIXTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
PIXELWORKS, INC.
Pursuant to the Oregon Business Corporation Act (ORS Chapter 60),
PixelWorks, Inc. hereby adopts the following Sixth Amended and Restated Articles
of Incorporation, which shall supersede the heretofore existing Fifth Restated
Articles of Incorporation and all previous amendment and restatements thereof.
ARTICLE 1.
NAME.
The name of the Corporation is Pixelworks, Inc.
ARTICLE 2.
SHARES AND RIGHTS THEREOF GENERALLY.
2.1 AUTHORIZED STOCK. The aggregate number of shares which the
corporation shall have authority to issue is 250,000,000 shares of common stock
with a par value of $0.001 per share ("Common Stock") , and 50,000,000 shares of
preferred stock with a par value of $0.001 per share (Preferred Stock").
2.2 RIGHTS OF COMMON STOCK. The shares of common stock have unlimited
voting rights and are entitled to receive the net assets of the Corporation on
dissolution, subject to rights of the Preferred Stock.
2.3 AUTHORITY TO DESIGNATE SERIES PREFERRED. The Board of Directors is
hereby authorized to fix or alter the rights, preferences, privileges and
restrictions granted to or imposed upon additional series of Preferred Stock,
and the number of shares constituting any such series and the designation
thereof, or of any of them. Subject to compliance with applicable protective
voting rights or consent rights which have been or may be granted to the
Preferred Stock or any series thereof herein, by law, or in Articles of
Amendment adopted by the Board of Directors ("Protective Provisions"), but
notwithstanding any other rights of the Preferred Stock or any series thereof,
the rights, privileges, preferences and restrictions of any such additional
series may be subordinated to, made PARI PASSU with (including, without
limitation, inclusion in provisions with respect to liquidation and acquisition
preferences, redemption and/or approval of matters by vote or written consent),
or made senior to any of those of any present or future class of series of
Preferred or Common Stock. Subject to compliance with applicable Protective
Provisions, the Board of Directors is also authorized to increase or decrease
the number of shares of any series, prior or subsequent to the issue of that
series, but not below the number of shares of such series then outstanding. In
case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the
1 - SIXTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
status which they had prior to the adoption of the resolution originally
fixing the number of shares of such series.
ARTICLE 3.
DIRECTORS.
3.1 NUMBER OF DIRECTORS. The number of directors of the Corporation
shall be not less than three nor more than twelve, and within such limits, the
exact number shall be fixed and increased or decreased from time to time by
resolution of the Board of Directors.
3.2 ELECTION OF DIRECTORS. If the number of directors is fixed by the
Board of Directors at six or more, the directors shall be divided into three
classes designated Class I, Class II and Class III, each class to be as nearly
equal in number as possible. At the next annual meeting of shareholders
following that designation ("First Meeting"), directors of all three classes
shall be elected. The term of office of Class I directors shall expire at the
first annual meeting of shareholders following their election. The terms of
Class II directors shall expire at the second annual meeting of shareholders
following their election. The terms of the Class III directors shall expire at
the third annual meeting of shareholders following their election. At each
annual meeting of shareholders after the First Meeting, each class of directors
elected to succeed those directors whose terms expire shall be elected to serve
for three-year terms and until their successors are elected and qualified, so
that the term of one class of directors will expire each year. When the number
of directors is changed within the limits provided herein, any newly created
directorships, or any decrease in directorships, shall be so apportioned among
the classes as to make all classes as nearly equal as possible, provided that no
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent directors.
3.3 REMOVAL. All or any number of the directors of the Corporation may
be removed only for cause and at a meeting of shareholders called expressly for
that purpose, by the vote of 75 percent of the votes then entitled to be cast
for the election of directors. Cause for removal shall be deemed to exist only
if the director whose removal is proposed has engaged in criminal conduct or has
engaged in fraudulent or dishonest conduct or gross abuse of authority or
discretion with respect to the Corporation. At any meeting of shareholders at
which one or more directors are removed, a majority of votes then entitled to be
cast for the election of directors may fill any vacancy created by such removal.
If any vacancy created by removal of a director is not filled by the
shareholders at the meeting at which the removal is effected, such vacancy may
be filled by a majority vote of the remaining directors.
3.4 AMENDMENT OF ARTICLE. The provisions of this Article 3 may not be
amended, altered, changed or repealed in any respect unless such action is
approved by the affirmative vote of not less than 75 percent of the votes then
entitled to be cast for election of directors.
2 - SIXTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
ARTICLE 4.
EXCLUSION OF DIRECTOR LIABILITY.
No director of the Corporation shall be personally liable to the
Corporation or its shareholders for monetary damages for conduct as a director;
provided that this Article 4 shall not eliminate the liability of a director for
any act or omission for which such elimination of liability is not permitted
under the Oregon Business Corporation Act. No amendment to the Oregon Business
Corporation Act that further limits the acts or omissions for which elimination
of liability is permitted shall affect the liability of a director for any act
or omission that occurs prior to the effective date of such amendment.
ARTICLE 5.
INDEMNIFICATION OF DIRECTORS, OFFICERS, & FIDUCIARIES.
5.1 INDEMNIFICATION. The Corporation shall indemnify to the fullest
extent not prohibited by law any person who was or is a party or is threatened
to be made a party to any Proceeding (as defined below) against all expenses
(including attorney fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred by the person in connection with such
Proceeding.
5.2 ADVANCEMENT OF EXPENSES. Expenses incurred by a director or
officer of the Corporation in defending a Proceeding shall in all cases be paid
by the Corporation in advance of the final disposition of such Proceeding at the
written request of such person, if the person:
5.2.1 furnishes the Corporation a written affirmation of the
person's good faith belief that such person has met the
standard of conduct described in the Oregon Business
Corporation Act or is entitled to be indemnified by the
Corporation under any other indemnification rights granted
by the Corporation to such person; and
5.2.2 furnishes the Corporation a written undertaking to repay
such advance to the extent it is ultimately determined by
a court that such person is not entitled to be indemnified
by the Corporation under this Article 5 or under any other
indemnification rights granted by the Corporation to such
person.
Such advances shall be made without regard to the person's ability
to repay such advances and without regard to the person's ultimate entitlement
to indemnification under this Article 5 or otherwise.
5.3 DEFINITION OF PROCEEDING. The term "Proceeding" shall
include any threatened, pending, or completed action, suit, or proceeding,
whether brought in the right of the corporation or otherwise and whether of a
civil, criminal, administrative, or investigative nature, in which a person may
be or may have been involved as a party or otherwise by reason of the fact that
the person is or was a director or officer of the corporation or a fiduciary
within the meaning of the Employee Retirement Income Security Act of 1974 with
respect to any employee benefit plan of the corporation, or is or was serving at
the request of the corporation as a director, officer, or fiduciary of an
employee benefit plan of another corporation, partnership, joint venture, trust,
or other enterprise, whether or not serving in such capacity at the time any
3 - SIXTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
liability or expense is incurred for which indemnification or advancement of
expenses can be provided under this Article 5.
5.4 NON-EXCLUSIVITY AND CONTINUITY OF RIGHTS. This Article 5:
(i) shall not be deemed exclusive of any other rights to which those indemnified
may be entitled under any statute, agreement, general or specific action of the
board of directors, vote of shareholders or otherwise, both as to action in the
official capacity of the person indemnified and as to action in another capacity
while holding office, (ii) shall continue as to a person who has ceased to be a
director or officer, (iii) shall inure to the benefit of the heirs, executors,
and administrators of such person, and (iv) shall extend to all claims for
indemnification or advancement of expenses made after the adoption of this
Article 5.
5.5 AMENDMENTS. Any repeal of this Article 5 shall only be
prospective and no repeal or modification hereof shall adversely affect the
rights under this Article 5 in effect at the time of the alleged occurrence of
any action or omission to act that is the cause of any Proceeding.
ARTICLE 6.
SHAREHOLDER APPROVAL OF CERTAIN CORPORATE ACTIONS.
No agreement of merger or consolidation of this corporation which
requires shareholder approval under the Oregon Business Corporation Act shall be
approved or become effective unless the holders of not less than sixty-seven
percent (67%) of the outstanding shares of the corporation entitled to vote
thereon shall vote for the adoption of the agreement. This corporation shall not
sell, lease or exchange all or substantially all of its property and assets
unless the holders of not less than sixty-seven percent (67%) of the outstanding
shares of the corporation entitled to vote thereon shall vote for such sale,
lease or exchange. Dissolution or liquidation of the corporation shall require
the prior approval of holders of not less than sixty-seven percent (67%) of the
outstanding shares of the corporation entitled to vote thereon.
4 - SIXTH AMENDED AND RESTATED ARTICLES OF INCORPORATION
<PAGE>
EXHIBIT 5.1
Ater Wynne LLP
222 SW Columbia, Suite 1800
Portland, Oregon 97201
503-226-1191 (Phone)
503-226-0079 (fax)
April 5, 2000
Board of Directors
Pixelworks, Inc.
7700 SW Mohawk Street
Tualatin, OR 97062
Re: Pixelworks, Inc.
Gentlemen:
In connection with the public offering of up to 6,612,500 shares of
common stock, par value $0.001 per share of Pixelworks, Inc., an Oregon
corporation (the "Company"), under the Registration Statement on Form S-1, SEC
File No. 333-31134 (the "Registration Statement"), and the proposed sale of the
common stock pursuant to the terms of an underwriting agreement to be entered
into by and among the Company and Salomon Smith Barney, Deutsche Banc Alex
Brown, SG Cowen and E*Offering, as representatives of the several underwriters,
we have examined such corporate records, certificates of public officials and
officers of the Company and other documents as we have considered necessary or
proper for the purpose of this opinion.
Based on the foregoing and having regard to legal issues which we deem
relevant, it is our opinion that the shares of common stock being registered
under the Registration Statement to be issued and sold pursuant to the
underwriting agreement, when such shares have been delivered against payment
therefor as contemplated by the underwriting agreement, will be validly issued,
fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
above-mentioned Registration Statement and to the reference to this firm under
the caption "Legal Matters" in the prospectus constituting a part of the
Registration Statement. In giving such consent, we do not hereby admit that we
are in the category of persons whose consent is required to be filed pursuant to
Section 7 of the Securities Act of 1933, as amended, or the rules thereunder.
Very truly yours,
/s/ Ater Wynne LLP
ATER WYNNE LLP
<PAGE>
EXHIBIT 10.6
PIXELWORKS, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 2000 Employee Stock Purchase Plan
of Pixelworks, Inc.
1. PURPOSE. The purpose of the Plan is to provide employees of the Company
and its Designated Subsidiaries with an opportunity to purchase Common Stock of
the Company through accumulated payroll deductions. It is the intention of the
Company to have the Plan qualify as an "Employee Stock Purchase Plan" under
Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of
the Plan, accordingly, shall be construed so as to extend and limit
participation in a manner consistent with the requirements of that section of
the Code.
2. DEFINITIONS.
(a) "BOARD" shall mean the Board of Directors of the Company.
(b) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(c) "COMMON STOCK" shall mean the common stock of the Company.
(d) "COMPANY" shall mean Pixelworks, Inc., an Oregon corporation, and
any Designated Subsidiary of the Company.
(e) "COMPENSATION" shall mean all base straight time gross earnings
and commissions, but exclusive of payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "DESIGNATED SUBSIDIARY" shall mean any Subsidiary which has been
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "EMPLOYEE" shall mean any individual who is an Employee of the
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to re-employment is not guaranteed either by statute or
by contract, the employment relationship shall be deemed to have terminated on
the 91st day of such leave.
(h) "ENROLLMENT DATE" shall mean the first Trading Day of each
Offering Period.
-1-
<PAGE>
(i) "EXERCISE DATE" shall mean the last Trading Day of each Purchase
Period.
(j) "FAIR MARKET VALUE" shall mean, as of any date, the value of
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock exchange or
a national market system, including without limitation the Nasdaq National
Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market
Value shall be the closing sales price for such stock (or the closing bid, if no
sales were reported) as quoted on such exchange or system for the last market
trading day on or before the date of such determination, as reported in The Wall
Street Journal or such other source as the Board deems reliable;
(2) If the Common Stock is regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean of the closing bid and asked prices for the Common Stock for the last
quotation day on or before the date of such determination, as reported in The
Wall Street Journal or such other source as the Board deems reliable;
(3) In the absence of an established market for the Common Stock, the
Fair Market Value thereof shall be determined in good faith by the Board; or
(4) For purposes of the Enrollment Date of the first Offering Period
under the Plan, the Fair Market Value shall be the initial price to the public
as set forth in the final prospectus included within the registration statement
in Form S-1 filed with the Securities and Exchange Commission for the initial
public offering of the Company's Common Stock (the "Registration Statement").
(k) "OFFERING PERIODS" shall mean the periods of approximately
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after February 1 and
August 1 of each year and terminating on the last Trading Day in the periods
ending twenty-four months later, PROVIDED, HOWEVER, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
January 31, 2002. The duration and timing of Offering Periods may be changed
pursuant to Section 4 of this Plan.
(l) "PLAN" shall mean this 2000 Employee Stock Purchase Plan.
(m) "PURCHASE PERIOD" shall mean the approximately six month period
commencing after one Exercise Date and ending with the next Exercise Date,
except that the first Purchase Period of any Offering Period shall commence on
the Enrollment Date and end with the next Exercise Date.
(n) "PURCHASE PRICE" shall mean 85% of the Fair Market Value of a share
of Common Stock on the Enrollment Date or on the Exercise Date, whichever is
lower; PROVIDED HOWEVER, that the Purchase Price may be adjusted by the Board
pursuant to Section 20.
-2-
<PAGE>
(o) "RESERVES" shall mean the number of shares of Common Stock covered
by each option under the Plan which have not yet been exercised and the number
of shares of Common Stock which have been authorized for issuance under the Plan
but not yet placed under option.
(p) "SUBSIDIARY" shall mean a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "TRADING DAY" shall mean a day on which national stock exchanges
and the Nasdaq System are open for trading.
3. ELIGIBILITY
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. OFFERING PERIODS. The Plan shall be implemented by consecutive,
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after February 1 and August 1 each year, or on such other date
as the Board shall determine, and continuing thereafter until terminated in
accordance with Section 20 hereof, PROVIDED, HOWEVER, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
January 31, 2002. The Board shall have the power to change the duration of
Offering Periods (including the commencement dates thereof) with respect to
future offerings without shareholder approval if such change is announced at
least five (5) days prior to the scheduled beginning of the first Offering
Period to be affected thereafter.
-3-
<PAGE>
5. PARTICIPATION.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll. deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. PAYROLL DEDUCTIONS.
(a) At the time a participant files his or her subscription agreement,
he or she shall elect to have payroll deductions made on each pay day during the
Offering Period in one percent (1%) increments of not less than two percent (2%)
or greater than ten percent (10%) of the Compensation which he or she receives
on each pay day during the Offering Period.
(b) All payroll deductions made for a participant shall be credited to
his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the Plan
as provided in Section 10 hereof, or may increase or decrease the rate of his or
her payroll deductions during the Offering Period by completing or filing with
the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during a
Purchase Period. Payroll deductions shall recommence at the rate provided in
such participant's subscription agreement at the beginning of the first Purchase
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at the
time some or all of the Company's Common Stock issued under the Plan is disposed
of, the participant must make adequate provision for the Company's federal,
state, or other tax withholding obligations, if any, which arise upon the
exercise of the option or the disposition of the Common Stock. At any time, the
Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any
-4-
<PAGE>
withholding required to make available to the Company any tax deductions or
benefits attributable to sale or early disposition of Common Stock by the
Employee.
7. GRANT OF OPTION. On the Enrollment Date of each Offering Period,
each eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employees payroll deductions accumulated prior
to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than two
thousand five hundred (2,500) shares of the Company's Common Stock (subject to
any adjustment pursuant to Section 19), and provided further that such purchase
shall be subject to the limitations set forth in Sections 3(b), 8(b) and 12
hereof. The Board may, for future Offering Periods, increase or decrease, in its
absolute discretion, the maximum number of shares of the Company's Common Stock
an Employee may purchase during each Purchase Period of such Offering Period.
Exercise of the option shall occur as provided in Section 8 hereof, unless the
participant has withdrawn pursuant to Section 10 hereof. The option shall expire
on the last day of the Offering Period.
8. EXERCISE OF OPTION.
(a) Unless a participant withdraws from the Plan as provided in Section
10 hereof, his or her option for the purchase of shares shall be exercised
automatically on the Exercise Date, and the maximum number of full shares
subject to option shall be purchased for such participant at the applicable
Purchase Price with the accumulated payroll deductions in his or her account;
provided that in no event shall an Employee be permitted to purchase during each
Purchase Period more than two hundred percent (200%) of the number of shares
that the Employee could purchase if the Purchase Price was limited to eight-five
percent (85%) of the Fair Market Value of a share of Common Stock on the
Enrollment Date. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section l0 hereof. Any other monies leftover in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.
(b) If the Board determines that, on a given Exercise Date, the number
of shares with respect to which options are to be exercised may exceed (i) the
number of shares of Common Stock that were available for sale under the Plan on
the Enrollment Date of the applicable Offering Period, or (ii) the number of
shares available for sale under the Plan on such Exercise Date, the Board may in
its sole discretion (x) provide that the Company shall make a pro rata
allocation of the shares of Common Stock available for purchase on such
Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall
be practicable and as it shall determine in its sole discretion to be equitable
among all participants exercising options to purchase Common Stock on such
Exercise Date, and continue all Offering Periods then in effect, or (y) provide
that the Company shall make a pro rata allocation of the shares available for
purchase on such Enrollment Date or Exercise Date,
-5-
<PAGE>
as applicable, in as uniform a manner as shall be practicable and as it shall
determine in its sole discretion to be equitable among all participants
exercising options to purchase Common Stock on such Exercise Date, and
terminate any or all Offering Periods then in effect pursuant to Section 20
hereof. The Company may make pro rata allocation of the shares available on
the Enrollment Date of any applicable Offering Period pursuant to the
preceding sentence, notwithstanding any authorization of additional shares
for issuance under the Plan by the Company's shareholders subsequent to such
Enrollment Date.
9. DELIVERY. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. WITHDRAWAL.
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participants payroll deductions
credited to his or her account shall be paid to such participant promptly after
receipt of notice of withdrawal and such participants option for the Offering
Period shall be automatically terminated, and no further payroll deductions for
the purchase of shares shall be made for such Offering Period. If a participant
withdraws from an Offering Period, payroll deductions shall not resume at the
beginning of the succeeding Offering Period unless the participant delivers to
the Company a new subscription agreement.
(b) A participants withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. TERMINATION OF EMPLOYMENT.
Upon a participant's ceasing to be an Employee, for any reason, he or
she shall be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option shall be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 15 hereof, and such participant's option shall be automatically
terminated. The preceding sentence notwithstanding, a participant who receives
payment in lieu of notice of termination of employment shall be treated as
continuing to be an Employee for the participant's customary number of hours per
week of employment during the period in which the participant is subject to such
payment in lieu of notice.
12. INTEREST. No interest shall accrue on the payroll deductions of a
participant in the Plan.
13. STOCK.
-6-
<PAGE>
(a) Subject to adjustment upon changes in capitalization of the Company
as provided in Section 19 hereof, the maximum number of shares of the Company's
Common Stock which shall be made available for sale under the Plan shall be one
million (1,000,000) shares, plus an annual increase to be added on the first day
of the Company's fiscal year beginning in 2005 equal to the lesser of (i) the
number of shares of Common Stock issued pursuant to the Plan during the
immediately preceding fiscal year of the Company, (ii) two percent (2%) of the
outstanding shares of Common Stock on the first day of the Company's fiscal year
for which the increase is being made or (iii) a lesser amount determined by the
Board.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. ADMINISTRATION. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claim filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall to the full extent
permitted by law, be final and binding upon all parties.
15. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant' s account under
the Plan in the event of such participant's death subsequent to an Exercise Date
on which the option is exercised but prior to delivery to such participant of
such shares and cash. In addition, a participant may file a written designation
of a beneficiary who is to receive any cash from the participant's account under
the Plan in the event of such participant's death prior to exercise of the
option. If a participant is married and the designated beneficiary is not the
spouse, spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant or if no spouse, dependent or relative is known to the Company, then
to such other person as the Company may designate.
16. TRANSFERABILITY. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
-7-
<PAGE>
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. USE OF FUNDS. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
18. REPORTS. Individual accounts shall be maintained for each
participant in the Plan. Statements of account shall be given to participating
Employees at least annually, which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
19. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION,
LIQUIDATION, MERGER OF ASSET SALE
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
shareholders of the Company, the Reserves, the maximum number of shares each
participant may purchase each Purchase Period (pursuant to Section 7), as well
as the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company, provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
-8-
<PAGE>
(c) MERGER OR ASSET SALE. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, any Purchase Periods
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date") and any Offering Periods then in progress shall end on the New
Exercise Date. The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each participant in writing, at
least ten (10) business days prior to the New Exercise Date, that the Exercise
Date for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised automatically on the New
Exercise Date, unless prior to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.
20. AMENDMENT OR TERMINATION.
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Offering Period or the Plan
is in the best interests of the Company and its shareholders. Except as provided
in Section 19 and this Section 20 hereof, no amendment may make any change in
any option theretofore granted which adversely affects the rights of any
participant. To the extent necessary to comply with Section 423 of the Code (or
any successor rule or provision or any other applicable law, regulation or stock
exchange rule), the Company shall obtain shareholder approval in such a manner
and to such a degree as required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
(c) In the event the Board determines that the ongoing operation of the
Plan may result in unfavorable financial accounting consequences, the Board may,
in its discretion and, to the extent necessary or desirable, modify or amend the
Plan to reduce or eliminate such accounting consequence including, but not
limited to:
(1) altering the Purchase Price for any Offering Period
including an Offering Period underway at the time of the change in
Purchase Price;
-9-
<PAGE>
(2) shortening any Offering Period so that Offering Period
ends on a new Exercise Date, including an Offering Period underway at
the time of the Board action; and
(3) allocating shares.
Such modifications or amendments shall not require stockholder
approval or the consent of any Plan participants.
21. NOTICES. All notices or other communications by a participant to
the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the
location, or by the person, designated by the Company for the receipt thereof.
22. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof
24. AUTOMATIC TRANSFER TO LOW PRICE OFFERING PERIOD. To the extent
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common Stock on the Enrollment Date
of such Offering Period, then all participants in such Offering Period shall be
automatically withdrawn from such Offering Period immediately after the exercise
of their option on such Exercise Date and automatically re-enrolled in the
immediately following Offering Period as of the first day thereof.
-10-
<PAGE>
EXHIBIT A
PIXELWORKS, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
__________Original Application Enrollment Date:______________
__________Change in Payroll Deduction Rate
__________Change of Beneficiary(ies)
1. __________________hereby elects to participate in the Pixelworks, Inc.
2000 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan")
and subscribes to purchase shares of the Company's Common Stock in
accordance with this Subscription Agreement and the Employee Stock
Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount
of ______% of my Compensation on each payday (from 2% to 10%) during
the Offering Period in accordance with the Employee Stock Purchase
Plan. (Please note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise
my option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is
in all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is
subject to shareholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should
be issued in the name(s) of (Employee or Employee and Spouse only):
____________________________________________________________________.
6. I understand that if I dispose of any shares received by me pursuant to
the Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after
the Exercise Date, I will be treated for federal income tax purposes as
having received ordinary income at the time of such disposition in an
amount equal to the excess of the fair market value of the shares at
the time such shares were purchased by me over the price which I paid
for the shares. I AGREE TO NOTIFY THE COMPANY IN WRITING WITHIN 30 DAYS
AFTER THE DATE OF ANY DISPOSITION OF MY SHARES AND I WILL MAKE ADEQUATE
PROVISION FOR FEDERAL, STATE OR OTHER TAX WITHHOLDING OBLIGATIONS, IF
ANY, WHICH ARISE UPON THE DISPOSITION OF THE COMMON STOCK. The Company
may, but will not be obligated to, withhold from my compensation the
amount necessary to meet any applicable
EXHIBIT A-1
<PAGE>
withholding obligation including any withholding necessary to make
available to the Company any tax deductions or benefits attributable
to sale or early disposition of Common Stock by me. If I dispose of
such shares at any time after the expiration of the 2-year and
1-year holding periods, I understand that I will be treated for
federal income tax purposes as having received income only at the
time of such disposition, and that such income will be taxed as
ordinary income only to the extent of an amount equal to the lesser
of (1) the excess of the fair market value of the shares at the time
of such disposition over the purchase price which I paid for the
shares, or (2) 15% of the fair market value of the shares on the
first day of the Offering Period. The remainder of the gain, if any,
recognized on such disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent
upon my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print) _________________________________________________________
(First) (Middle) (Last)
______________________ ______________________________________________________
Relationship
_____________________________________________________
(Address)
Employee's Social Security Number:____________________________________________
Employee's Address:___________________________________________________________
___________________________________________________________
___________________________________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:___________ _____________________________________________________
Signature of Employee
______________________________________________________
Spouse's Signature (If beneficiary other than spouse)
EXHIBIT A-2
<PAGE>
EXHIBIT B
PIXELWORKS, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Pixelworks,
Inc. 2000 Employee Stock Purchase Plan which began on ________________ _____,
20___ (the "Enrollment Date") hereby notifies the Company that he or she hereby
withdraws from the Offering Period. He or she hereby directs the Company to pay
to the undersigned as promptly as practicable all the payroll deductions
credited to his or her account with respect to such Offering Period. The
undersigned understands and agrees that his or her option for such Offering
Period will be automatically terminated. The undersigned understands further
that no further payroll deductions will be made for the purchase of shares in
the current Offering Period and the undersigned shall be eligible to participate
in succeeding Offering Periods only by delivering to the Company a new
Subscription Agreement.
Name and Address of Participant:
________________________________
________________________________
________________________________
Signature:
________________________________
Date: __________________________
<PAGE>
EXHIBIT 10.11
Dear Jeff:
I'm delighted to present to you here the documentation to support our
offer to you to become CFO of Pixelworks, Inc. (the Company.) The documentation
consists of 1) This letter; 2) Our company-standard proprietary information
agreement, and 3) the stock option grant form, on the terms we discussed. We
will look forward to receiving your signatures on these documents on your first
day at work.
This letter confirms that we will employ you, effective December 28,
1999. Your salary will initially be $140,000 per year, and will be reviewed from
time to time by the compensation committee of the Board of Directors, as with
other executive officers of the Company.
You are hired at will, but we do make these commitments concerning your
termination.
Pixelworks may terminate your employment with or without cause. A
termination is effective as of the date specified in the Notice of termination.
But the consequences to you are different.
1) "Cause" will exist if you are convicted of a crime involving the
company's business; or have misappropriated Company monies or assets; or have
committed fraud; or have been grossly negligent in or willfully fail to
accomplish the performance of your duties.
2) If you resign voluntarily or are terminated for cause, pay and
benefits will cease as of the effective date of the resignation or termination.
You will use good faith efforts to provide the Company as much notice as
possible of any resignation.
3) If you are terminated without cause, however, we will give you
severance benefits as follows.
. The Company will pay Executive's Base Salary, and any bonuses, all as
earned through the termination date, in accord with Company policy as
then in effect.
. The Company will in addition pay your Base Salary and benefits for a
three month Severance Period, beginning on the date of termination.
Payment of the Base Salary will be made on Company's standard payroll
schedules from the date of termination, as if you had not been
terminated.
If this all makes sense, we'll expect you on December 28, 1999 (the
Start Date), and look forward to completing the paperwork and signatures then!
Very truly yours,
/s/ Allen Alley
Allen Alley, President
Accepted, as of the start date:
/s/ Jeff Bouchard
Jeffrey Bouchard
<PAGE>
PIXELWORKS, INC.
STOCK OPTION GRANT AGREEMENT # I-92 AND N-2
============
<TABLE>
<CAPTION>
<S><C>
Given to: JEFFREY BOUCHARD ("Optionee" or "You") Date given: DECEMBER 8, 1999 ("Date of Grant")
Total Shares: 150,000 ("Shares") Price Per Share: $3.64 ("Price per Share")
Exercise Rights Start: UPON HIRE Options Expire: DECEMBER 7, 2009 ("Expiration Date")
Pixelworks, Inc. ("Company") grants you a option (the "Option") to
purchase the Shares at the Exercise Price. The Option is exercisable under the
Terms and Conditions of Option Grant attached as Exhibit A. The Option is
subject to the terms of the Company's 1997 Stock Incentive Plan (the "Plan"),
attached as Exhibit B. Of such options, those that first become exercisable for
10,302 shares in each year are INCENTIVE (qualified) stock options. The balance
are NONQUALIFIED stock options.
Your option becomes exercisable on the following schedule:
<CAPTION>
<S><C>
Date Option Becomes Exercisable Number of Shares
December 31, 1999, PROVIDED that if you leave the Company voluntarily before 37,500
December 31, 2000, then 1) if you have not yet exercised these options, your
right to do so lapses on the date of your departure, and 2) if you have
exercised these options, the Company shall have the right to repurchase them
from you at the exercise price, as if Unvested Shares under
Section 4.1 of the attached Shareholder Agreement.
On the last day of every month thereafter, beginning January 31, 2001, for a 3,125
total of 36 additional increments
If substantially all of the assets of the Company are sold, or the Company is The first (37,500) share increment
merged with another company under circumstances in which effective control of above listed, without conditions,
plus the surviving company rests in different hands than prior to the merger, so many of the following 36 monthly
then measured from the effective date (the "Close") of that transaction: increments as would otherwise become
exercisable in the twelve months
following the Close.
TOTAL SHARES: 150,000
</TABLE>
You acknowledge reviewing this document and its exhibits before
signing. You accept the grant, under the Terms and Conditions of Option Grant
(Exhibit A); the terms of the Plan (Exhibit B), and the Shareholder Agreement
(Exhibit C), each of which is attached. You also agree to accept as binding and
final all decisions or interpretations of the Board of Directors of the Company
upon any questions arising under the Plan or this Grant.
PIXELWORKS, INC. JEFFREY BOUCHARD
By: /s/ Allen H. Alley Sign: /s/ Jeff Bouchard
Print: Allen H. Alley Home address: 15555 SW 76th Avenue
Title: President and CEO Tigard, OR 97224
Date: December 28, 1999 Date: December 28, 1999
EXHIBITS:
A: Terms and Conditions of Option Grant
B: Pixelworks, Inc. 1997 Stock Incentive Plan
C: Shareholder Agreement
D: Stock Option Exercise Form
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Pixelworks, Inc.:
We consent to the use of our Independent Auditors' Report dated January 26, 2000
relating to the balance sheets of Pixelworks, Inc. as of December 31, 1998 and
1999, and the related statements of operations, redeemable convertible preferred
stock and shareholders' equity (deficit) and cash flows for the period from
January 16, 1997 (date of inception) through December 31, 1997 and for each of
the years in the two-year period ended December 31, 1999 which report is
included in the Registration Statement and Prospectus, dated April 11, 2000, of
Pixelworks, Inc., and to the reference to our firm under the heading "Experts"
in the Prospectus.
/s/ KPMG LLP
Portland, Oregon
April 11, 2000
