UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2003 |
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TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission File Number: 000-30269
PIXELWORKS, INC.
(Exact name of registrant as specified in its charter)
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Oregon |
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91-1761992 |
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(State or other jurisdiction of |
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(I.R.S. Employer Identification Number) |
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8100 SW Nyberg Road, Tualatin, OR |
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97062 |
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(503) 454-1750 |
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(Address of principal executive offices) |
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(Registrant’s zip code) |
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(Registrant’s telephone number, |
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
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Aggregate market value of voting Common Stock held by non-affiliates of the Registrant at June 30, 2003: $209,200,869. For purposes of this calculation, officers and directors are considered affiliates.
Number of shares of Common Stock outstanding at February 29, 2004: 45,847,387.
Portions of the Registrant’s proxy statement relating to its 2004 Annual Shareholder’s Meeting, to be filed subsequently – Part III.
PIXELWORKS, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
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We are a leading designer, developer and marketer of semiconductors and software for the advanced display industry, including advanced televisions, multimedia projectors and flat panel monitors. Our system-on-chip semiconductors provide the ‘intelligence’ for these new types of displays by processing and optimizing video and computer graphic signals to produce high-quality images. Many of the world’s leading manufacturers of consumer electronics and computer display products utilize our technology to enhance image quality and ease of use of their products. Our goal is to provide all of the electronics necessary to process the signal along its entire path through the system in order to provide a turnkey solution for our customers.
The display industry is undergoing a transformation from displays using cathode ray tubes, or CRTs, which have been the predominant display technology for more than 60 years and operate using analog, or waveform, signals. A new generation of technologies are now available that utilize display screens comprised of a grid of thousands of tiny picture elements, or pixels, and operate digitally. Examples of these new types of displays include liquid crystal displays, plasma displays, micro-mirror devices and other advanced display technologies.
During the transition to digital display technology, the way signal processing integrated circuits, or ICs, are developed is shifting away from development by vertically integrated manufacturers toward development by third-party companies like Pixelworks. We provide our customers, including manufacturers, original equipment manufacturers, or OEMs, and systems integrators, with video and graphics processing solutions that enable them to deliver an advanced display system with industry-leading performance and features to market rapidly. By choosing this product development strategy, our customers reduce their research and development costs, thereby reducing the cost of the overall system. In addition, our customers can utilize a consistent design environment across multiple product lines.
We have a broad product line that uses proprietary technologies and advanced designs to address the requirements of the industry we serve. Our products range from single-purpose discrete ICs to system-on-chip ICs integrating a microprocessor, memory and image processing circuits that function as a computer on a single chip. Pixelworks has expanded its technology portfolio through internal developments, acquisitions and co-developments with business partners. In the future, we plan to introduce products that continue to integrate additional functionality and utilize more advanced processes in order to improve performance and lower product costs.
Pixelworks serves three fast-growing markets that are reshaping how business users and consumers interact with information and entertainment, including advanced televisions, multimedia projectors and flat panel monitors. The display industry’s shift toward digital, fixed pixel display technologies is creating a need for video signal processing electronics that achieve the necessary performance, in terms of image quality, ease of use and cost, to spur the transition to mainstream market adoption. These three markets are in different stages of maturity and they each have unique requirements and dynamics.
Advanced Television Market
While the television is a widely accepted technology worldwide, the transition to digital-based television is just beginning. According to iSuppli/Stanford Resources, in 2003 non-CRT televisions using digital display technologies, referred to as advanced televisions, are closing in on the important inflection point of five percent penetration of the total television units out of the worldwide market of 160 million units.
Looking ahead, the shift to televisions using digital display technology that would require digital video signal processing ICs is set to accelerate in the market. The display technologies include liquid crystal displays, or LCDs, plasma display panels, or PDPs, and rear-projection televisions using LCDs, digital micro-mirror devices, or DMDs, and newer technology such as liquid crystal on silicon, or LCoS. In 2007, advanced televisions are
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projected to comprise nearly one out of every five television units sold worldwide. While the entire television market is forecast to grow from 161 million units to almost 200 million units, a compound annual growth rate of 5.1 percent, the advanced television market totaled 4.9 million units in 2003 and is forecast to grow to 41.0 million units in 2007 for a compound annual growth rate of 70 percent.
Looking more closely at the growth forecasted by iSuppli/Stanford Resources, two sub-categories will drive the adoption of advanced televisions as consumers choose thin-screen televisions for their homes. LCD televisions are expected to lead the transition among advanced televisions rising from 3.6 million units in 2003 to 28.3 million units in 2007, a compound annual growth rate of 68 percent. Plasma display televisions are expected to grow at a similar rate to LCD televisions, although at approximately one quarter of the overall units due to their higher average selling price based on their larger form factor. Plasma display televisions are estimated to grow from 885,000 units in 2003 to 8.0 million units in 2007, a compound annual growth rate of 74 percent.
Rear-projection television, or RPTV, growth is projected to be modest between 2003 and 2007, growing from 5.0 million units to 6.1 million units for a compound annual growth rate of 5.0 percent. However, the underlying architecture of RPTV is shifting from older projection TVs using analog CRT technology to newer digital technologies. In 2003, approximately 8 percent of RPTVs are based on digital display technologies. That is expected to exceed 70 percent in 2007 with 4.3 million units, comprised of DMD, LCD and LCoS, for a combined compound annual growth rate of 80 percent.
Another market that has emerged for Pixelworks is CRT televisions that utilize our discrete semiconductors for advanced video signal processing to enhance the picture quality, most frequently to de-interlace incoming television signals for CRTs that display using progressive scanning. These types of televisions are referred to as advanced CRT televisions.
Market forecasts indicate that the advanced television market is poised for robust growth over the next several years. In addition to the introduction of new display technologies into the consumer electronics marketplace, two major trends are driving the growth of advanced televisions worldwide: the introduction of digital television standards and new entrants in television manufacturers.
The introduction of a new broadcast standard requiring the use of digital transmission rather than analog methods is an important transition in the industry. Digital television offers a clearer image than analog and enables the transmission of high-definition standards, a wide-screen format, less interference and new types of applications such as interactivity and data transmission. In the United States, the digital television standard is referred to as the ATSC format with similar broadcast standards being developed in Europe and in Japan called DVB and ARIB, respectively. The ATSC format, which is being mandated by the Federal Communications Commission to be complete in 2007, is considered to be the most significant technology shift since the introduction of commercial television. According to the Yankee Group, approximately two million homes currently have HDTV and the installed base is projected to grow to 40 million homes in 2007. Commensurate with this technology transition, consumers are expected to upgrade to new televisions, which is underpinning the strong growth forecast by market research firms.
The second trend driving the growth of new entrants into the television market illustrates the shift in the supply chain from electronics developed by vertically integrated manufacturers toward those provided by third-party companies such as Pixelworks. With strong growth expected in advanced televisions, consumer electronics and PC manufacturers are converging on the television as the information and entertainment gateway. In addition, regional manufacturers in Asia are also attempting to gain a position in the market that further increases the competitive landscape.
Multimedia Projector Market
The multimedia projector market is continuing to mature with steady growth as prices continue to decline steadily and models are becoming more targeted, including an emerging segment for consumers. In 2003, 2.5 million units were sold worldwide. Pacific Media Associates is forecasting that in 2007 the multimedia projector market will expand to 8.2 million units, for a compound annual growth rate of 35 percent.
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Two digital display technologies are currently used in multimedia projectors. Approximately 70 percent of the market is currently using liquid crystal displays while the remainder is utilizing digital micro-mirror devices, according to Pacific Media Associates. Models range from larger units designed for installation, to ultra-portable devices weighing less than two and a half pounds for maximum portability.
The largest segment of the market serves professional users who use multimedia projectors to display presentation materials from PCs and for showing video presentations. Requirements for the professional market include portability, compatibility with multiple sources and features that ensure simple operation. While businesses will continue to purchase projectors, we expect the growth in the professional segment to come from the education and government sectors.
One of the drivers for growth in the multimedia projector market is the emerging market for consumer projectors for home entertainment. Consumers are discovering that they can have a satisfying home cinema experience by investing in a sub-$1,000 multimedia projector. In order to achieve attractive price targets, manufacturers are developing models using lower resolution displays, often with 800-by-600 pixel resolution, also known as SVGA which is an acronym for Super Video Graphics Array, and using lower cost liquid crystal displays. According to Pacific Media Associates, the consumer market for multimedia projectors was 313,000 units in 2003 with the segment growing to 1.6 million units in 2007 for a compound annual growth rate of 50 percent.
LCD Monitor Market
The desktop computer market has led the transition to digital display technologies with liquid crystal display monitors becoming available in 1997. Since that time, sales for LCD monitors have surged into the mainstream and the technology is expected to overtake CRT-based monitors in terms of units in 2004. In 2003, DisplaySearch reported that 49.1 million LCD monitors were shipped worldwide, which comprised 42 percent of the desktop monitor market. Looking ahead, DisplaySearch shows that the growth will continue in coming years with 2007 shipments forecast to be 112.4 million units, a compound annual growth rate of 23 percent. According to DisplaySearch forecasts, LCD monitors are expected to comprise nearly 80 percent of the market at that time.
LCD monitors are segmented primarily by size and resolution, which is directly proportionate to average selling price. According to DisplaySearch, the greatest number of LCD monitor units sold consist of a 17-inch monitor at SXGA resolution, an acronym for Super Extended Graphics Array, which denotes that the screen consists of a matrix of 1,280-by-1,024 pixels. Larger monitor sizes with higher resolutions up to 1,600-by-1,200, referred to as Ultra Extended Graphics Array, or UXGA, are used in applications such as at engineering workstations and by graphics designers where users are working on very high-resolution images. UXGA resolution monitors currently comprise less than two percent of the LCD monitor units.
Our Products and Technologies
We design, develop and market ICs and software that optimize video and computer graphic signals for a wide variety of displays used in business and consumer markets, including advanced televisions, multimedia projectors and flat panel monitors. We have a broad product line that uses proprietary and licensed technologies and advanced designs to address the requirements of the industry we serve. Our products range from single-purpose discrete ICs to system-on-chip ICs integrating a microprocessor, memory and image processing circuits that function as a computer on a single IC.
As the advanced display industry has grown rapidly, we have expanded and adapted our products to meet the needs of manufacturers in terms of performance, cost and functionality. Our product development strategy is to take a systems-level approach, which means we design products from the manufacturers’ viewpoint in terms of analyzing how we can integrate maximum functionality at a reasonable cost. We believe that by innovatively developing parts that anticipate the requirements of our target markets we will help accelerate the adoption of advanced display technologies.
Products
We currently have three major product categories in our portfolio as follows:
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ImageProcessor ICs. System-on-chip ICs include embedded microprocessors and digital signal processing circuitry that control the operations and signal processing within the advanced display system. ImageProcessor ICs are used in advanced televisions, multimedia projectors and LCD monitors. Semiconductors in this category include circuitry for advanced image scaling, aspect ratio conversion, color compensation, customizable on-screen display, automatic image optimization and control of the system operating system. ImageProcessor ICs can also include the following additional functions: advanced de-interlacing circuitry; digital keystone correction; an analog-to-digital controller, or ADC; a Digital Visual Interface, or DVI; and an LCD panel timing controller circuit, or TCON.
ImageProcessor ICs were our first product offerings and continue to form the core of our business in each of our markets. We have continued to design the architecture for optimal performance and manufactured the ICs on processes that align with our customers’ requirements. Additionally, since our ImageProcessor ICs include the microprocessor for the entire system, we provide a complete software development environment and operating system that enables our customers to rapidly develop their products, customize the “look and feel” of their products, and provide a consistent software architecture across product lines and product categories.
Our most recent generation of ImageProcessor ICs code-named Photopia, targets the advanced television and digital projector markets. Photopia integrates our most advanced de-interlacing and color processing technology for a highly integrated solution.
Video SignalProcessor ICs. Integrated circuits in this category are discrete semiconductors that are companion chips for our ImageProcessor ICs that offer manufacturers more flexibility in their multimedia projection and advanced television system architectures. Video SignalProcessor ICs are most frequently used to pre-process video signals prior to sending them to an ImageProcessor IC. By offering these ICs, we can target specific needs in our markets and can perfect our technology developments prior to integrating the technology into our ImageProcessor ICs.
We currently produce two classes of Video SignalProcessor ICs. The first category is the family that performs de-interlacing. Currently, many video signals are delivered in an interlaced format which means that each frame of video is sent in two sequential fields comprised of first the odd-numbered rows and then the even-numbered. However, most advanced display technologies show fields in a single frame so the two separate fields must be reconstituted into a single frame of video information. This process presents many challenges and can introduce visual artifacts into the image, but our Video SignalProcessor ICs use patented de-interlacing technology to maximize video quality. We currently sell our Video SignalProcessor family that performs de-interlacing into the advanced television market, including the advanced CRT segment.
Our second class of Video SignalProcessor ICs are signal interface chips that combine a video decoder and analog-to-digital converter for processing current television formats and new digital television standards. Certain versions also include a DVI receiver. We currently offer our signal interfacing Video SignalProcessor family in the multimedia projector and advanced television markets.
Digital TV Production Reference Designs. In order to assist manufacturers in their development of advanced television designs, we pioneered the concept for our Digital TV Production Reference Designs. By rigorously studying market demands and evaluating systems for performance and cost, Pixelworks developed production-ready designs that an advanced television manufacturer can quickly implement based on our complete hardware and software solution.
As part of the Digital TV Production Reference Designs, we provide a complete circuit board using our ImageProcessor and Video SignalProcessor ICs as well as a system software architecture. Each system is able to be adapted to conform to standards in any geography that assists our customers in navigating the worldwide digital television standards, including features such as Closed Captioning, V-chip and Teletext.
Our Digital TV Production Reference Designs sell in low volumes, but help generate future business by serving as a catalyst for customer designs. We provide designs that contain varying levels of functionality in order to serve a range of digital TVs from the low-cost baseline models up to full-featured televisions.
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Technologies
In order to offer targeted products, our semiconductors are designed with a flexible chip architecture that allows us to combine functional blocks of digital and mixed signal circuitry. Accordingly, we develop technologies that can be implemented across multiple product lines. Following is a description of selected technologies by target market.
Core Technologies for Advanced Displays
• Advanced Image Scaling and Shaping. Since advanced displays are typically fixed-pixel, digital display technologies, a constant challenge is to reconfigure incoming content in video or PC formats that does not match the display resolution. Pixelworks has developed innovative, industry leading image scaling technologies that intelligently enlarge or compress images for display in different resolutions or aspect ratios, which is the ratio of width to height of display screens. This technology is essential for interfacing fixed resolution digital displays to the wide range of inputs that are present in today’s marketplace, including high-definition television, or HDTV. In addition, our image processing technology incorporates proprietary programmable image scaling capable of resizing images to fit a wide variety of 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 an incoming signal and configure the system to produce 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 approach, any color can be addressed independently and adjusted without impacting other colors.
• Fully Customizable On-Screen Display. Our technology couples an integrated on-screen display controller with our industry-first development application. These technologies allow customers who are designing ImageProcessor semiconductors into their display products to quickly develop and implement their own unique user interfaces with up to 256 colors that can incorporate graphics and colorful icons in start-up displays and menus.
Advanced Television Technologies
We have a suite of technologies that are designed to serve the advanced television market which we call DNX – Digital Natural ExpressionTM. Pixelworks’ DNX video processing technology dramatically improves the quality of video images by combining multiple enhancement techniques to deliver clear, natural-looking standard and high-definition video images. DNX technology utilizes sophisticated digital video processing to deliver a lifelike picture through a combination of techniques.
• DNX Motion-Adaptive De-Interlacing. We have developed a proprietary video processing technology to convert interlaced content into progressive content that virtually eliminates image artifacts such as stair-stepping, often referred to as ‘jaggies,’ that can occur with less sophisticated techniques. Our motion-adaptive de-interlacing is able to analyze the content and apply the most appropriate methods for both standard television formats and also high-definition television formats. In addition, DNX Motion-Adaptive De-Interlacing automatically recognizes when incoming signals were originally captured on film so that special methods are employed to display the content.
• DNX PixelBoost. A technology that improves pixel response to eliminate blurring in fast-motion video as seen on some LCD panels. Liquid crystal display pixels are not able to turn on and off as rapidly as pixels in CRTs, which results in blurry images when content contains quick movements. PixelBoost can
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compensate for this property of LCD panels by manipulating the content in a way that makes it display more crisply on the screen.
• DNX Rich Color Processing. A technology that renders more than one billion colors with 10-bit color processing and also optimizes content appearance for various display technologies. While several companies have developed and sold 10-bit processing using expensive proprietary solutions, we believe Pixelworks is the only supplier of a commercially available true 10-bit processing solution.
• DNX Video Enhancement Processing. Most content has been encoded in order to enhance its appearance on CRT-based televisions which makes it appear unnatural when displayed on LCDs, DMDs or plasma displays. Our DNX Video Enhancement Processing enables manufacturers to apply filters that compensate for the signals in order to produce sharp, rich picture quality.
• DNX Noise Reduction. Digital displays often appear to create movement where none exists because pixels flicker in areas where there is no motion, creating a distracting shimmering effect. This is referred to as ‘noise.’ We have developed proprietary technology that minimizes noise for a stable, accurate video image.
Other key video technologies include:
• SteadySyncTM Weak Signal Compatibility. In many parts of the world, television viewers still receive their content via over-the-air broadcast. Our SteadySync technology is able to compensate for broadcast signals that are weak by being able to better lock onto a signal and display a picture. This technology helps users in under-served regions to better receive television broadcasts, which is attractive for manufacturers serving developing countries.
• Intelligent Windowing. Intelligent windowing offers consumers control over how they view multiple content simultaneously. Our ImageProcessor ICs for advanced televisions are capable of displaying video and computer content in various, user-controlled formats such as side-by-side, Picture-In-Picture, or PIP, and Picture-On-Picture, or POP, where as many as 12 images from various other sources or channels can be monitored while watching a primary viewing window. Our Intelligent Windowing delivers additional flexibility with adjustable transparency and user-controlled resizing of windows.
Multimedia Projector Technologies
• Digital Keystone Correction. We pioneered digital keystone correction technology and it is now established as a key feature on multimedia projectors. When projecting an image, if the digital projector is not perpendicular to the surface on which it is shining the image, the image will be distorted. Our digital keystone correction modifies the geometry of the image in our ImageProcessor IC so that it will appear that the image is ‘squared up,’ which allows a projector to be placed virtually anywhere in the room. Our ICs have the ability to adjust the image both vertically and horizontally. With our CornerKlickTM feature, a user can simply correct the image using our unique user interface.
• Smart Timing Controllers. We have focused our development efforts for the LCD monitor market on an emerging trend called ‘SmartPanels.’ SmartPanels integrate all of the electronics directly onto the LCD display module in order to streamline monitor product development by reducing the number of circuit boards used, lowering assembly costs and minimizing the manufacturing challenges caused by sourcing and integrating an array of individual components from different vendors. Typically, every LCD module requires a specific IC called a timing controller, or TCON, that is a purpose-built, discrete component with the function of signaling the LCD module when to turn on and off the pixels. Our Smart TCONs are programmable to work with most LCD modules so it serves as a more flexible component.
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Pixelworks has continued to expand its technology portfolio through internal developments, acquisitions, co-developments with business partners, licensing and through selling of joint reference designs. In the future, we plan to introduce products and technologies that will enable us to provide the electronics solution for our customers for the entire signal path of an advanced display. We will look to provide electronics for MPEG decoding, a form of data compression for television images, broadcast signal tuners and networking capabilities.
We have achieved design wins with global leaders in the business computing and consumer electronics markets. 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 and reducing their costs, which complements our customers’ 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 semiconductors.
Our global distribution channel is multi-tiered and involves:
• Distributors. Distributors are resellers in local markets who provide pre- and post-sales support and stock our semiconductors in direct relation to specific manufacturing customer orders. Sales to distributors accounted for 69%, 68% and 61% of total revenue for the years ended December 31, 2003, 2002 and 2001, respectively.
Our largest distributor, Tokyo Electron Device, or TED, located in Japan, represented 39%, 45% and 52% of our total revenue for the years ended December 31, 2003, 2002 and 2001, respectively. TED accounted for 20% and 48% of our total accounts receivable at December 31, 2003 and 2002, respectively.
Our second largest distributor, Neoview, located in Taiwan, represented 16%, 12% and 8% of total revenue for the years ended December 31, 2003, 2002 and 2001, respectively. Neoview accounted for 33% and 17% of our total accounts receivable at December 31, 2003 and 2002, respectively. We have additional distributor relationships in China and Europe.
• Direct Relationships. We have established direct relationships with companies that manufacture advanced display systems. Some of our direct relationships are supported by manufacturers representatives, which are independent sales agents who represent us in local markets and provide pre- and post-sales support and do not carry inventory. Revenue through direct relationships accounted for 31%, 32% and 39% of total revenue for the years ended December 31, 2003, 2002 and 2001, respectively. Revenue through TED to a single end customer, Seiko Epson Corporation, accounted for 7%, 10% and 12% of total revenue for the years ended December 31, 2003, 2002 and 2001, respectively. We have identified three classifications of direct relationships as follows:
• Integrators. Integrators are OEM customers who build display devices based on specifications provided by branded manufacturers.
• Branded Manufacturers. Branded manufacturers are globally recognized manufacturers who develop display device specifications, manufacture, market and distribute display devices either directly or through resellers to end-users.
• Branded Suppliers. Branded suppliers are globally recognized suppliers who develop display device specifications and then source them from integrators, typically in Asia, and distribute them either directly or through resellers to end-users.
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Looking ahead, we anticipate an increase in the percentage of revenue through direct relationships. We expect this change to strengthen our relationships with our direct customers and to be cost effective.
Our sales and marketing team included 90 employees as of December 31, 2003. The sales and marketing team includes the architecture support team of 64 field application engineers who provide technical expertise and assistance to manufacturing customers on final product development. We have sales, marketing and support offices in the U.S., China, Japan and Taiwan.
Our business generally has followed a seasonal trend; however, there can be no assurance that this trend will continue. Historically, our sales were higher in the second half of the year, primarily due to holiday demand for consumer electronics including advanced televisions and flat panel monitors. Additionally, the multimedia projector market is subject to seasonality with higher shipments typically occurring in the fourth quarter.
Geographic Concerns
Our global operations subject us to risks and difficulties associated with doing business outside the U.S. These risks include foreign currency exchange rate fluctuations, political and economic instability, reduced or limited protection of our intellectual property and increased transaction costs. Our global operations also increase the difficulty of managing our distributors and manufacturers due to varying time zones, languages and business customs.
Financial information regarding our domestic and foreign operations is presented in Note 8 of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
Our sales are made pursuant to customer purchase orders for delivery of standard products. The quantity of products actually purchased by our customers, as well as shipment schedules, are subject to frequent revisions that reflect changes in both the customers’ needs and in product availability. Our entire order backlog is cancelable, with a portion subject to restocking fees. In light of industry practice and our own experience, we do not believe that backlog as of any particular date is indicative of future results.
Our internal research and development efforts are focused on the development of our semiconductors for the advanced television, multimedia projector and LCD monitor markets. Our development efforts are focused on pursuing higher levels of integration and new features in order to extend our system-on-chip semiconductors and discrete ICs to provide our customers with electronics solutions, including software, service and support, that enable them to introduce market leading products. These higher levels of integration are designed to reduce components on circuit boards and help lower final systems costs for our customers.
In addition to our 64 applications engineers, on December 31, 2003, we had 104 engineers, technologists and scientists who are organized into the following functional groups: Integrated Circuit Design, Software Engineering, Video and Image Processing Engineering, Display Interface Engineering, Systems Engineering and Product and Test Engineering.
We have invested, and expect that we will continue to invest, significant resources in research and development activities. Our research and development expenses, inclusive of stock-based compensation, were $25.1 million, $25.7 million and $24.2 million in 2003, 2002, and 2001, respectively.
Our products require advanced semiconductor processing and packaging technologies. Within the semiconductor industry we are known as a “fabless” company, meaning that we do not fabricate the semiconductors that we
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design and develop, but instead rely on third parties to manufacture our products. We have IC foundry relationships with Infineon, Semiconductor Manufacturing International Corporation, or SMIC, Taiwan Semiconductor Manufacturing Corporation, or TSMC, and Toshiba. This approach allows us to concentrate our resources on product design and development where we believe we have greater competitive advantages; however, as the estimated time for us to adapt a product’s design to a particular contract manufacturer’s process is at least four months, there is no readily available alternate supply for any specific product.
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-chip technology. As of February 2004, we held 8 patents in the U.S. and have 40 patent applications pending with the U.S. Patent and Trademark Office, which relate generally to improvements in the visual display of digital image data including, but not limited to, improvements in image scaling, image correction, automatic image optimization and video signal processing for digital displays.
In addition to filing patents in the United States, we have applied for and have been granted 7 patents in Canada. We intend to seek patent protection for other significant technologies that we have already developed and expect to seek patent protection for future products as necessary. Any future patents may not be granted and if granted may be invalidated, circumvented, challenged or licensed to others.
To supplement the technologies that we develop internally, we have licensed rights to use intellectual properties held by third parties, and we may license additional technology rights in the future. If any of these agreements terminate, we would be required to exclude the licensed technology from our existing and future product lines.
In particular, we licensed two U.S. patents (5,767,916 and 5,805,233) in February 2000 from InFocus Corporation. These patents are related to the method and apparatus for automatic pixel clock phase and frequency correction in analog-to-digital video signal conversion. These patents expire in the year 2018.
The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. We have indemnification obligations with respect to the infringement of third party intellectual property rights. There is no intellectual property litigation currently pending against us. However, we may, from time to time, receive notifications of claims that we may be infringing patents or other intellectual property rights owned by third parties. If it is necessary or desirable, we may seek licenses under those patents or intellectual property rights. However, we cannot be sure that licenses will be offered or that the terms of any offered licenses would be acceptable to us.
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 scaling components. Some of these include Genesis Microchip, I-Chips, ITE, Macronix, Mediatek, Media Reality Technologies, Micronas, MStar Semiconductor, Inc., Oplus, Realtek, Silicon Image, Silicon Optix, STMicroelectronics, Techwell, Topro, Trident, Trumpion, Weltrend, Zoran and other companies. Potential competitors may include diversified semiconductor manufacturers and the semiconductor divisions or affiliates of some of our customers, including ATI, Intel, Koninlijke Philips Electronics, LG Electronics, Matsushita Electric Industrial, Mitsubishi, National Semiconductor, NEC, nVidia, Samsung Electronics, Sanyo Electric Company,
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Sharp Corporation, Sony Corporation, Texas Instruments and Toshiba Corporation. In addition, start-up companies may seek to compete in our markets.
Employees
As of December 31, 2003, we had a total of 241 employees – 104 in engineering, 90 in sales and marketing, of which 64 are application engineers and 26 sales and marketing staff, 15 in operations, and 32 in finance and administration. Of these employees, 146 are in the United States. None of our employees are represented by a collective bargaining agreement, nor have we experienced any work stoppage. We consider our relationship with our employees to be good. The Company’s future success will depend in large part upon its ability to continue to attract, retain, and motivate highly skilled and qualified personnel.
We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 as amended (Exchange Act). You can inspect and copy our reports, proxy statements and other information filed with the SEC at the offices of the SEC’s Public Reference Rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Rooms. The SEC maintains an Internet Web site at http://www.sec.gov/ where you can obtain most of our SEC filings. In addition, you can inspect our reports, proxy materials and other information at the offices of the Nasdaq Stock Market at 1735 K Street NW, Washington D.C. 20006. We also make available free of charge on our website at www.pixelworks.com our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are filed electronically with the SEC.
We lease approximately 55,000 square feet in two buildings located in Tualatin, Oregon, which house our corporate headquarters, and include engineering, operations, sales and marketing and administrative facilities. We have leased these spaces through various dates ranging from May 2004 through December 2008.
In connection with our acquisitions of nDSP Corp. in January 2002 and Jaldi Semiconductor in September 2002, we added approximately 13,000 square feet in Campbell, California, and 12,000 square feet in Ontario, Canada. These leased facilities house research and development activities. We have subsequently subleased approximately 4,000 square feet in Campbell due to excess capacity. The Canadian lease expires in August 2005 and the Campbell lease and sublease expire in May 2006.
We rent space in three cities in China for purposes of sales and customer support, and we anticipate commencing research and development operations in these offices. We also rent additional space in Japan and Taiwan for the purpose of sales and customer support.
We are involved in litigation from time to time that is routine in nature and incidental to our business. We believe that the outcome of any such litigation would not have a material adverse effect on our financial condition, results of operations or cash flows.
No matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year ended December 31, 2003.
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Our Common Stock is listed for trading on the Nasdaq National Market under the symbol “PXLW.” The stock began trading on May 19, 2000. The following table sets forth, for the periods indicated, the highest and lowest sales prices for the Common Stock.
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