Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. 1)
Securities Exchange Act of 1934 (Amendment No. 1)
Filed by the Registrant þ
Filed by a Party other than the Registrant o
Filed by a Party other than the Registrant o
Check the appropriate box:
o
Preliminary Proxy Statement
o Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material Pursuant to § 240.14a-12
PIXELWORKS, INC.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
þ
No fee required.
o Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
| 1) | Title of each class of securities to which transaction applies: | ||
| 2) | Aggregate number of securities to which transaction applies: | ||
| 3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): | ||
| 4) | Proposed maximum aggregate value of transaction: | ||
| 5) | Total fee paid: |
| o | Fee paid previously with preliminary materials. | |
| o | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. |
| 1) | Amount Previously Paid: | ||
| 2) | Form, Schedule or Registration Statement No.: | ||
| 3) | Filing Party: | ||
| 4) | Date Filed: |
Table of Contents
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS
TO BE HELD OCTOBER 26,
2006
A Special Meeting of Shareholders of Pixelworks, Inc. will be
held Thursday, October 26, 2006 at 2:00 p.m. Pacific
Daylight Time at our principal executive offices, 8100 SW Nyberg
Road, Tualatin, Oregon, in order to approve a proposed exchange
of eligible outstanding stock options for a lesser number of
stock options. No other business may properly be brought before
the meeting.
Shareholders who owned shares of our common stock at the close
of business on Friday, September 15, 2006 are entitled to
receive notice of, attend and vote at the meeting.
Your vote is important. Whether or not you plan to attend the
meeting, please vote as soon as possible. For specific voting
instructions, please refer to the information provided with your
proxy card and in this proxy statement. You may attend the
meeting in person even if you send in your proxy. Retention of
the proxy is not necessary for admission to or identification at
the meeting.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ Allen
H. Alley
Allen H. Alley
Chairman of the Board, President and
Chief Executive Officer
Chief Executive Officer
Tualatin, Oregon
October 5, 2006
TABLE OF CONTENTS
Table of Contents
PIXELWORKS,
INC.
8100 SW Nyberg Road
Tualatin, Oregon 97062
PROXY STATEMENT
2006 SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER 26, 2006
8100 SW Nyberg Road
Tualatin, Oregon 97062
PROXY STATEMENT
2006 SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER 26, 2006
QUESTIONS
AND ANSWERS ABOUT THESE PROXY MATERIALS AND VOTING
Why am I
receiving these materials?
We are mailing this proxy statement, with the accompanying proxy
card, to you on or about October 5, 2006 in connection with
the solicitation of proxies by the Board of Directors of
Pixelworks, Inc. (the “Company”) for a special meeting
of shareholders to be held on October 26, 2006, and any
adjournment or postponement of that meeting. The meeting will be
held 2:00 p.m. Pacific Daylight Time at our principal
executive offices, 8100 SW Nyberg Road, Tualatin, Oregon. You
are invited to attend the special meeting, and we request that
you vote on the proposal described in this proxy statement. You
do not need to attend the meeting in person to vote your shares.
You may simply complete, sign and return your proxy card in
order to have your shares voted at the meeting on your behalf.
You are being asked to approve an exchange of certain
outstanding stock options for a lesser number of stock options
in accordance with a
4-to-1
exchange ratio. Eligible options have exercise prices greater
than or equal to $4.75 per share and were granted under the
Pixelworks, Inc. 1997 Stock Incentive Plan, as amended (the
“1997 Plan”), and the Pixelworks, Inc. 2001
Nonqualified Stock Option Plan (the “2001 Plan”)
(taken together, the “Old Stock Option Plans”). All
employees are eligible to participate in the exchange program
except for the five most highly compensated executive officers.
Members of the Board of Directors are not eligible to
participate in the program.
Why are
we recommending that shareholders approve this
proposal?
The exchange is beneficial to shareholders as it reduces the
significant equity award “overhang” represented by
outstanding stock options and motivates employees to help return
the Company to profitability. Our stock price has experienced
volatility and a significant decline in value during the past
year. As a result, many of our employees hold options with
exercise prices significantly higher than the current market
price of our common stock. We believe these
“out-of-the-money”
options are no longer effective as performance and retention
incentives and they have created a significant equity award
overhang.
The exchange can reduce the equity award overhang for three
reasons. First, the options eligible for exchange were granted
out of the Old Stock Option Plans and these plans were replaced
by the Pixelworks, Inc. 2006 Stock Incentive Plan (the
“2006 Plan”) when approved by shareholders in May
2006. As a result, the shares associated with the surrendered
option will be retired since they are associated with an expired
Old Stock Option Plan. Second, the new grants would be exchanged
according to the
4-to-1
exchange ratio, and thus would include 75% fewer shares than
those associated with the surrendered grant. Third, the shares
associated with the smaller, new option grants would come out of
the pool associated with the 2006 Plan, thus reducing the
potential grants available from that pool in the future.
Why is
this proposal being submitted at a special meeting instead of an
annual meeting?
Our management and Board of Directors believe that the longer we
wait to implement the exchange program the more risk there will
be to our ability to retain employees that we believe are needed
to contribute to the future growth and success of our business.
Therefore, we do not believe it prudent to wait until our next
annual meeting in May 2007 to act on this proposal.
1
Table of Contents
Who can
attend and vote at this special meeting?
Shareholders of record, including shareholders of Exchangeable
Shares (described below), at the close of business on
September 15, 2006 are entitled to attend and vote at the
meeting. Each share of our common stock is entitled to one vote
on all matters to be voted on at the meeting, and can be voted
only if the record owner is present to vote or is represented by
proxy.
Exchangeable Shares are shares issued by our Canadian
subsidiary, Jaldi Semiconductor Corporation. These Exchangeable
Shares are the economic equivalent of Pixelworks’ common
shares, and may be exchanged at any time for Pixelworks common
stock on a
one-for-one
basis. We have one series of preferred stock designated as the
Special Voting Share Series, of which there is one voting share
issued and outstanding (Voting Share). The Voting Share entitles
the Exchangeable Shares to vote on any matters that come before
the Pixelworks common shareholders. The Voting Share is held in
trust for the benefit of the holders of the Exchangeable Shares
and provides the holders of the Exchangeable Shares with voting
rights, among other rights, equivalent to those of
Pixelworks’ common shareholders. The Voting Share entitles
the holder of record to a number of votes equal to the number of
Exchangeable Shares outstanding on the record date. As of
September 15, 2006, the record date, there are 548,879
Exchangeable Shares outstanding.
What
constitutes a quorum at the meeting?
The presence at the meeting, in person or represented by proxy,
of the holders of a majority of the common stock outstanding on
September 15, 2006, the record date, will constitute a
quorum for purposes of the meeting. On the record date,
48,530,035 shares of common stock were outstanding. For
purposes of determining whether a quorum exists, proxies
received but marked “abstain” and so-called
“broker non-votes” (described below) will be counted
as present. A separate quorum for the shareholders of the
Exchangeable Shares is not required, rather each Exchangeable
Share is treated as one share of our common stock for purposes
of determining whether a quorum exists.
How do I
vote by proxy?
If you properly fill in your proxy card and we receive it in
time to vote at the meeting, your “proxy” (one of the
individuals named on your proxy card) will vote your shares as
you have directed.
If you sign, date and return the proxy card but do not specify
how your shares are to be voted, then your proxy will vote your
shares FOR approval of the proposed option exchange
program described in this proxy statement.
Can I
change my vote after I return my proxy card?
Yes. You may change your vote at any time before your proxy is
exercised. To change your vote you must:
| • | Deliver to our corporate secretary a written notice revoking your earlier vote; or | |
| • | Deliver to our transfer agent a properly completed and signed proxy card with a later date; or | |
| • | Vote in person at the meeting. |
Your attendance at the meeting will not be deemed to revoke a
previously-delivered proxy unless you clearly indicate at the
meeting you intend to revoke your proxy and vote in person.
How do I
vote if my shares are held by my broker?
If your shares are held by your broker in “street
name”, you will need to instruct your broker concerning how
to vote your shares in the manner provided by your broker. If
your shares are held in “street name” and you wish to
vote them in person at the meeting, you must obtain from your
broker a properly executed legal proxy, identifying you as a
shareholder of the Company, authorizing you to act on behalf of
the broker at the meeting.
2
Table of Contents
What
discretion does my broker have to vote my shares held in
“street name”?
A broker holding your shares in “street name” must
vote those shares according to any specific instructions it
receives from you. In the absence of such instructions, your
broker does not have discretion to vote your shares on the
proposed option exchange program. Therefore, without receiving
specific instructions from you, your broker will not vote your
shares at the meeting, giving rise to what is called a
“broker non-vote”. Shares represented by broker
non-votes will be counted for purposes of determining whether a
quorum is met for the transaction of business, but for purposes
of determining the number of shares voting at the meeting,
broker non-votes will not be counted as votes cast or shares
voting.
How are
votes counted?
The approval of the proposed option exchange program requires
that the votes cast by the shares entitled to vote favoring
approval exceed the votes cast opposing approval. Abstentions
and broker non-votes, which are described above, will have no
effect on the outcome of voting on this matter.
How is
the Company soliciting proxies?
We bear the cost of preparing, assembling and mailing the proxy
material relating to the solicitation of proxies by the Board of
Directors for the meeting. In addition to the use of the mails,
certain of our officers and regular employees may, without
additional compensation, solicit proxies in person, by telephone
or through other means of communication. We will also request
brokerage houses, custodians, nominees and fiduciaries to
forward copies of the proxy material to those persons for whom
they hold shares, and will reimburse those record holders for
their reasonable expenses in transmitting this material.
PROPOSAL TO
APPROVE AN OPTION EXCHANGE PROGRAM
Overview
On August 1, 2006, our Board of Directors authorized,
subject to shareholder approval, a program (the “exchange
program”) that will permit our eligible employees to
exchange certain options outstanding under the Old Stock Option
Plans (“eligible options”) for a lesser number of
stock options. The exchange program will be open to eligible
employees of the Company and any of our subsidiaries designated
for participation by the Compensation Committee of our Board of
Directors. However, members of our Board of Directors and our
current five most highly compensated executive officers (Allen
Alley, Hans Olsen, Michael Yonker, John Lau and Richard Tobias)
will not be eligible to participate.
The 2006 Plan contains a provision whereby the plan
administrator may not reduce the exercise price of any
outstanding option without shareholder approval. Additionally, a
majority of the Old Stock Option Plans contain similar
provisions. Although the new stock options will be issued under
our 2006 Plan and the eligible options to be surrendered have
been issued under one of the Old Stock Option Plans, we believe
the nature of the proposed option exchange program is analogous
to a reduction in the exercise price of outstanding options and
have accordingly brought this matter to shareholder vote.
The ratio of shares subject to eligible options to new stock
options will be
4-to-1. This
exchange ratio is intended to result in the issuance of new
stock options having an aggregate value no greater than the
aggregate value of the stock options surrendered, determined
using the Black-Scholes option valuation model described
elsewhere herein. Each new stock option granted in the exchange
program will have an exercise price equal to the fair market
value of our common stock on the date of exchange and will vest
33% six-months from the last day of the month of the date of
grant and ratably thereafter on a monthly basis over
12 months, provided that the grantee remains an employee of
the Company as of each such date. The new stock options will
have a term of seven years.
Options to purchase approximately 4,344,339 shares of our
common stock will be eligible for exchange, and approximately
1,086,085 new stock options will be issued if all eligible
options are surrendered in the exchange program. The exercise
prices of the eligible options range from $4.75 to
$39.00 per share, and these
3
Table of Contents
options are held by 373 employees. All eligible options were
granted under our Old Stock Option Plans and the new stock
options granted in connection with the exchange program will be
granted under our 2006 Plan.
The exchange program will not take place unless it is approved
by shareholders. If shareholder approval of the exchange program
is not obtained, currently outstanding stock options will remain
outstanding and in effect in accordance with their existing
terms.
We believe the exchange program, if approved by the
shareholders, will permit us:
| • | To restore incentives for employees to remain with the Company and help motivate them to return the Company to profitability by issuing them new stock options at the market price of our common stock on the date of exchange that vest over 18 months; and | |
| • | To reduce the equity award “overhang” represented by outstanding options that have high exercise prices and are no longer effective as performance and retention incentives. |
Therefore the Board believes the proposed exchange program is
favorable to the interests of our shareholders and unanimously
recommends a vote “FOR” approval of the exchange
program.
Reasons
for the Exchange Program
Under the Old Stock Option Plans, we granted stock options
annually to a substantial portion of our employees. When the
Compensation Committee approves the grant of a stock option, it
establishes the exercise price that the employee must pay to
purchase shares of common stock when the option is exercised.
The per share exercise price is set at the market price of a
share of our common stock on the date the option is granted.
Thus, an employee receives value only if he or she exercises an
option and sells the purchased shares at a price that exceeds
the option’s exercise price. The granting of stock options
is intended to align the interests of our employees with those
of our shareholders in terms of increasing the value of our
common stock.
Our stock price has experienced a significant decline and
volatility during the past year as a result of a number of
factors affecting our business, including most recently, delays
associated with new product introductions, relative weakness in
the semiconductor industry and slower than expected transition
of customers from older generation products to newer generation
products. As a result, many of our employees hold options with
exercise prices significantly higher than the current market
price of our common stock. As of August 25, 2006, eligible
employees held options for 4,344,339 shares with exercise
prices ranging from $4.75 to $39.00, while the closing price of
our common stock on the NASDAQ Global Market on that date was
$2.47.
We believe these
out-of-the-money
options are no longer effective as performance and retention
incentives. We believe that to enhance long-term shareholder
value we need to maintain competitive employee compensation,
incentive and retention programs. An equity stake in the success
of the Company is a critical component of these programs. We
believe the exchange program will provide us with an opportunity
to restore for eligible employees an incentive to remain with us
and contribute to the future growth and success of our business.
Moreover, many of the eligible options have been
out-of-the-money
for an extended period of time and, therefore, have not been
exercised by our employees. Coupled with periodic grants of
options to new and continuing employees, the number of shares
subject to outstanding stock options has steadily increased as a
percentage of our total shares of common stock outstanding,
creating a significant equity award overhang. Under the proposed
exchange program, participating employees will receive
significantly fewer shares subject to new options granted than
the number of shares subject to options surrendered. Because
participating employees will exchange a greater number of
options for a lesser number of options, the number of shares of
stock subject to all outstanding stock options will be reduced,
thereby reducing the equity award “overhang”. If all
eligible options are exchanged in accordance with the
4-to-1
exchange ratio, eligible options for approximately
4,344,339 shares will be surrendered and cancelled, while
approximately 1,086,085 new options will be issued, resulting in
a net reduction in the equity award overhang by approximately
3,258,254 shares or
4
Table of Contents
approximately 7% of the number of shares of our common stock
outstanding as of August 25, 2006. All eligible options
that are not exchanged will remain outstanding and in effect in
accordance with their existing terms.
Although we believe overall this option exchange program will be
favorable for both the Company and our shareholders, there are
potentially some negative effects. Additional stock-based
compensation expense will likely be recognized in the
Company’s consolidated statement of operations related to
options exchanged pursuant to this option exchange program.
Additionally, the likelihood that the new options will be
exercised will increase because the new options will be issued
at a current market price, causing an increase in the likelihood
of potential dilution albeit on fewer shares.
Finally, we believe this option exchange program is favorable to
employees as those employees who elect to participate will
receive a new option grant at the then current market price of
our common stock. On the other hand, such options will be
exercisable for a fewer number of shares and will have a new vesting
schedule. By participating in the exchange program, the employee
will give up shares and receive a new vesting schedule. If the
employee’s relationship with the Company terminates prior
to the employee becoming vested in the new option grant, the
employee may forfeit a greater number of shares than would have
under their original option award.
Implementing
the Exchange Program
We have not commenced the exchange program and will not do so
unless our shareholders approve this proposal. Provided such
approval is received, the exchange program will commence at a
time determined by the Compensation Committee. It is currently
anticipated that the exchange program will commence as promptly
as practicable following approval of this proposal by our
shareholders. However, even if the exchange program is approved
by our shareholders, the Compensation Committee will retain the
authority, in its discretion, to terminate or postpone the
exchange program at any time prior to expiration of the election
period under the exchange program.
Upon the commencement of the exchange program, eligible
employees holding eligible options will receive written
materials explaining the precise terms and timing of the
exchange program (an “offer to exchange”). Employees
will be given at least 20 business days to elect to exchange
some or all of their eligible options for a new option award on
a
grant-by-grant
basis. They will make this election by filling out an election
form which will be distributed to them as part of the offer to
exchange and submitting the form to our stock plan administrator
within the 20 business day period (or such longer period as we
choose to keep the offer to exchange open). After the offer to
exchange is closed, eligible options that were surrendered for
exchange will be cancelled, and the Compensation Committee will
approve grants of new stock option awards to participating
employees in accordance with the
4-to-1
exchange ratio. All such option awards will be granted under the
2006 Plan and will be subject to the terms of such plan.
At or before commencement of the exchange program, we will file
the offer to exchange with the Securities and Exchange
Commission (the “SEC”) as part of the tender offer
statement on Schedule TO. Eligible employees, as well as
shareholders and members of the public, will be able to obtain
the offer to exchange and other documents we file with the SEC
free of charge from the SEC’s website at www.sec.gov.
If you are both a shareholder and an eligible employee
holding eligible options, please note that voting to approve the
exchange program does not constitute an election to participate
in the exchange program.
Description
of the Exchange Program
Eligible Options. As of August 25, 2006,
options to purchase approximately 8,379,515 shares of our
common stock were outstanding under all of our equity
compensation plans. Of these, options to purchase
4,344,339 shares of common stock, having exercise prices
ranging from $4.75 to $39.00, are held by eligible employees and
would be eligible for exchange under the exchange program. The
Compensation Committee will retain the discretion to adjust the
minimum threshold exercise price of options eligible to
participate in the exchange program if there is a significant
change in the market price of our common stock preceding the
5
Table of Contents
commencement of the exchange program in comparison to the
average market price used in determining the exchange ratio
described under “Exchange Ratio” below. However, any
options that have exercise prices less than the higher of
(a) the minimum threshold price or (b) closing price
of our common stock as reported on the NASDAQ Global Market on
the last day of the election period under the exchange program
will not be eligible options.
The 8,379,515 options that were outstanding as of
August 25, 2006 have a weighted average exercise price of
$9.03 per share and a weighted average remaining term of
7.5 years. Of these, the 4,344,339 eligible options have a
weighted average exercise price of $9.95 per share and a
weighted average remaining term of 7.6 years. The 4,035,176
options that were outstanding as of August 25, 2006 and are
not eligible for the exchange program have a weighted average
exercise price of $8.02 per share and a weighted average
remaining term of 7.5 years.
Exchange Ratio. Our objective in establishing
a 4-to-1
exchange ratio is to provide that the new stock option awards
granted in connection with the exchange program will have an
aggregate value no greater than the aggregate value of the stock
options surrendered. We calculated the aggregate fair value of
the eligible options using the Black-Scholes option valuation
model. The Black-Scholes model is a common method used for
estimating the fair value of a stock option, and we use this
model for determining stock-based compensation in our
consolidated financial statements. For purposes of determining
the aggregate fair value of eligible options in connection with
the exchange program, the Black-Scholes option valuation model
was used with the following factors: (a) the eligible
options’ weighted average exercise price; (b) an
assumed value of $2.76 per share of our common stock, which
was the average closing price per share on the NASDAQ Global
Market over the period from May 1, 2006 to August 25,
2006; (c) an expected volatility of our common stock price
of 95%; (d) the remaining weighted average contractual life
of eligible options; (e) a risk-free interest rate of
4.77%; and (f) no expected dividends. For purposes of
determining the aggregate fair value of options to be issued in
the exchange program, the Black-Scholes option valuation model
was used with the following factors: (a) an assumed
exercise price of $2.76, which was the average closing price per
share on the NASDAQ Global Market over the period from
May 1, 2006 to August 25, 2006; (b) an assumed
value of $2.76 per share of our common stock, which was the
average closing price per share on the NASDAQ Global Market over
the period from May 1, 2006 to August 25, 2006;
(c) an expected volatility of our common stock price of
95%; (d) the remaining contractual life of the stock
option; (e) a risk-free interest rate of 4.77%; and
(f) no expected dividends. According to these calculations,
if all of the eligible options are exchanged for new options in
accordance with the
4-to-1
exchange ratio, options to purchase approximately
4,344,339 shares, having an aggregate fair value of
approximately $8,479,189, will be surrendered in exchange for
options to purchase approximately 1,086,085 shares having
an assumed fair value of approximately $2,470,596.
The total number of stock options a participating employee will
receive with respect to a surrendered eligible option grant will
be determined by dividing the number of shares subject to the
surrendered option grant by four and rounding to the nearest
whole share.
The valuation of the eligible options and the new options that
may be issued in the exchange program was made and the exchange
ratio was selected on the basis of our average stock price over
the period from May 1, 2006 to August 25, 2006. While
it is our objective that the new stock option awards granted in
connection with the exchange program have an aggregate value no
greater than the aggregate value of the stock options
surrendered, use of a fixed exchange ratio will result in
certain specific option grants having a lesser fair value (based
on the Black-Scholes option valuation model using the
assumptions described above) than the value of the new stock
option granted in exchange (based on the Black-Scholes option
valuation model using the assumptions described above). The
Compensation Committee will retain the discretion to adjust the
threshold exercise price of options eligible to participate in
the exchange program and the exchange ratio if there is a
significant change in the market price of our common stock
preceding the commencement of the exchange program in comparison
to the average market price used in selecting the
4-to-1
exchange ratio. However, in no event will we grant new stock
option awards in connection with the exchange program having an
aggregate value (based on the Black-Scholes option valuation
model using the assumptions described above) greater than the
aggregate fair value of the stock options surrendered (based on
the Black-Scholes option valuation model using the assumptions
described above).
6
Table of Contents
Election to Participate. Participation in the
exchange program will be voluntary. Eligible employees will have
an election period of at least 20 business days from the
commencement of the offer to exchange in which to determine
whether they wish to participate.
Vesting of New Stock Options. Of the 4,344,339
eligible options, 2,062,777 are vested as of August 25,
2006. The unvested eligible options of 2,281,562 vest over a
weighted average remaining vesting period of 17 months from
the estimated date of exchange. Approximately 91% of the
eligible options will be past their first year anniversary at
the estimated date of exchange. The new stock option awards
granted in the exchange program will be completely unvested at
the time they are granted. They will vest 33% six-months from
the last day of the month of the date of grant and ratably
thereafter on a monthly basis over 12 months, provided the
grantee remains employed by us as of each such date. A
participant in the exchange program will forfeit any portion of
the options surrendered that remains unvested at the time his or
her employment with us terminates for any reason. The new stock
option awards would have a term of seven years.
Effect on the 2006 Plan. As of August 25,
2006, 3,408,020 shares of common stock were available for
future grant under the 2006 Plan. The eligible options subject
to the exchange program were all granted under the Old Stock
Option Plans, so any shares subject to outstanding awards
granted under the Old Stock Option Plans that are cancelled
pursuant to the exchange program will not be added to the number
of shares available for issuance under the 2006 Plan. Upon
adoption of the 2006 Plan by our shareholders on May 23,
2006, the 2006 Plan replaced our Old Stock Option Plans and the
Board’s authority to make further grants under the Old
Stock Option Plans terminated, although previously granted
awards under the Old Stock Option Plans remain outstanding
according to their terms. Assuming all of the eligible options
are surrendered and cancelled pursuant to the exchange program
and new stock option awards are granted in accordance with the
4-to-1 exchange ratio, the number of shares available for
issuance under the 2006 Plan would be reduced by approximately
1,086,085, leaving approximately 2,321,935 shares available
for issuance under the 2006 Plan.
Potential Modification to Exchange Program to Comply with
Governmental Requirements. The terms of the
exchange program will be described in an offer to exchange that
will be filed with the SEC. Although we do not anticipate that
the SEC would require us to modify the terms materially, it is
possible that we will need to alter the terms of the exchange
program to comply with comments from the SEC. In addition, we
intend to make the exchange program available to our employees
who are located outside the United States, where permitted by
local law and where we determine it is feasible and practical to
do so. It is possible that we may need to make modifications to
the terms offered to employees in countries outside the
U.S. to comply with local requirements, or for tax or
accounting reasons.
New Plan
Benefits
Because the decision whether to participate in the exchange
program is completely voluntary, we are not able to predict who
or how many employees will elect to participate, how many
options will be surrendered for exchange or the number of new
stock options that may be issued. As noted above, members of our
Board of Directors and our five most highly compensated
executive officers (including our chief executive officer) are
not eligible to participate in the exchange program.
7
Table of Contents
The information in the following table assumes that all of the
eligible options are exchanged and new stock option awards are
granted in accordance with the
4-to-1
exchange ratio:
| Eligible Options | New Options | |||||||||||||||||||||||
|
Exercise |
Exercise |
|||||||||||||||||||||||
|
Name and Position
|
Value(1) | Number | Prices | Value(1) | Number | Prices | ||||||||||||||||||
|
Allen Alley,
|
— | — | — | — | — | — | ||||||||||||||||||
|
President and Chief Executive
|
||||||||||||||||||||||||
|
Officer(2)
|
||||||||||||||||||||||||
|
Hans Olsen,
|
— | — | — | — | — | — | ||||||||||||||||||
|
Executive Vice President and
|
||||||||||||||||||||||||
|
Chief Operating Officer(2)
|
||||||||||||||||||||||||
|
Michael Yonker,
|
— | — | — | — | — | — | ||||||||||||||||||
|
Vice President and
|
||||||||||||||||||||||||
|
Chief Financial Officer(2)
|
||||||||||||||||||||||||
|
John Lau,
|
— | — | — | — | — | — | ||||||||||||||||||
|
Vice President, Operations(2)
|
||||||||||||||||||||||||
|
Richard Tobias,
|
— | — | — | — | — | — | ||||||||||||||||||
|
Vice President and
|
||||||||||||||||||||||||
|
Chief Technology Officer(2)
|
||||||||||||||||||||||||
|
All executive officers as a
group(3)
|
$ | 2,559,819 | 1,286,792 | $ | 5.02 - $18.19 | $ | 731,790 | 321,698 | (5) | |||||||||||||||
|
All non-executive officer
directors(4)
|
— | — | — | — | — | — | ||||||||||||||||||
|
Employees as a group (excluding
executive officers)
|
5,919,370 | 3,057,547 | $ | 4.75 - $39.00 | 1,738,806 | 764,387 | (5) | |||||||||||||||||
| (1) | The estimated values of the eligible and new options were calculated using the Black-Scholes option valuation model, using the assumptions described under the heading “Description of the Exchange Program — Exchange Ratio”. | |
| (2) | None of our five most highly compensated executive officers are eligible to participate in the option exchange program. For purposes of determining which executives should be deemed the five most highly compensated executive officers, we considered the executives’ 2006 annual base salary, length of service expected for 2006 and bonuses paid to date relating to the 2006 fiscal year. Any bonus expected to be paid pursuant to our 2006 Management Bonus Plan was not considered in this determination. Accordingly, the Named Executive Officers in our 2007 proxy statement for the year ending December 31, 2006 may differ from those excluded from this option exchange program. | |
| (3) | Excludes our five most highly compensated executive officers (including our chief executive officer), who are not eligible to participate in the exchange program. See (2) above. | |
| (4) | Members of our Board of Directors will not be eligible to participate in the exchange program. | |
| (5) | The exercise price will be equal to the fair market value of our common stock on the date of exchange and, accordingly, cannot be determined at this time. |
Summary
of U.S. Federal Income Tax Consequences
The exchange of eligible options for new stock options pursuant
to the exchange program should be treated as a non-taxable
exchange and the Company, our shareholders and our employees
generally should recognize no income for U.S. federal tax
purposes upon the surrender of eligible options and the grant of
new stock options. The tax consequences for participating
non-U.S. employees
may differ from the U.S. federal income tax consequences.
8
Table of Contents
Accounting
Impact
On January 1, 2006, we adopted the provisions of Financial
Accounting Standards Board Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment
(“SFAS 123R”). Under SFAS 123R we expect
to recognize the incremental compensation cost of the new stock
option awards granted in the exchange program. The incremental
compensation cost will be measured as the excess, if any, of the
fair value of each new stock option award granted to employees
in exchange for surrendered stock options, measured as of the
date such awards are granted, over the fair value of the
original stock option grant surrendered in exchange for such
awards, measured immediately before the exchange. The
incremental and remaining compensation expense associated with
the exchange program will be recognized over the service period
of such awards. If any portion of the new stock option awards
granted is forfeited prior to the completion of the service
condition due to termination of employment, the compensation
cost for the forfeited portion of the new stock option award
will not be recognized.
Effect on
Shareholders
We are unable to predict the impact of the exchange program on
our shareholders because we are unable to predict how many or
which employees will exchange their eligible options. The
exchange program was designed to be no less than value neutral
to our shareholders and to reduce the dilution in ownership from
outstanding equity awards. If all of the eligible options are
exchanged pursuant to the exchange program in accordance with
the 4-to-1
exchange ratio, eligible options for approximately
4,344,339 shares will be surrendered and cancelled, while
new stock option awards of approximately 1,086,085 will be
issued, resulting in a net reduction in the equity award
overhang by approximately 3,258,254 shares, or
approximately 7%, of the number of shares of our common stock
outstanding as of August 25, 2006.
Equity
Compensation Plans
The following table provides information as of December 31,
2005 with respect to the shares of the Company’s common
stock that may be issued under the Company’s existing
equity compensation plans:
|
Number of |
||||||||||||
|
Securities |
||||||||||||
|
Number of |
Remaining |
|||||||||||
|
Securities to be |
Weighted |
Available for |
||||||||||
|
Issued Upon |
Average |
Issuance Under |
||||||||||
|
Exercise of |
Exercise Price of |
Compensation Plans |
||||||||||
|
Outstanding |
Outstanding |
(Excluding Securities |
||||||||||
|
Plan Category
|
Options(2) | Options | in First Column)(3) | |||||||||
|
Equity Compensation Plans Approved
by Shareholders(1)
|
5,207,210 | $ | 10.83 | 4,818,641 | ||||||||
|
Equity Compensation Plans Not
Approved by Shareholders(4)
|
3,956,272 | $ | 9.12 | 358,501 | ||||||||
|
Total
|
9,163,482 | $ | 10.09 | 5,177,142 | ||||||||
| (1) | Consists of the Company’s 1997 Plan and 2000 Employee Stock Purchase Plan (the “ESPP”). | |
| (2) | Excludes purchase rights under the ESPP, which has a shareholder-approved reserve of 1,700,000 shares at December 31, 2005. Under the ESPP, each eligible employee may purchase shares of the Company’s common stock at semi-annual intervals at a purchase price per share equal to 85% of the lower of (i) the fair market value of the common stock on the offering date or (ii) the fair market value on the semi-annual purchase date. | |
| (3) | Includes shares available for future issuance under the ESPP. As of December 31, 2005, an aggregate of 851,923 shares of common stock were available for issuance under the ESPP. Upon adoption of the 2006 Plan, the number of securities remaining available for issuance under our 1997 Plan and 2001 Plan terminated. |
9
Table of Contents
| (4) | Consists of the Company’s 2001 Plan, which allowed for option grants to employees and consultants (not officers and directors) of the Company, the Equator Technologies, Inc. (“Equator”) 1996 Stock Option Plan and individual stock option plans assumed in connection with our acquisition of Equator. |
The following table provides information as of August 25,
2006 with respect to the shares of the Company’s common
stock that may be issued under the Company’s existing
equity compensation plans:
|
Number of |
||||||||||||
|
Securities |
||||||||||||
|
Number of |
Remaining |
|||||||||||
|
Securities to be |
Weighted |
Available for |
||||||||||
|
Issued Upon |
Average |
Issuance Under |
||||||||||
|
Exercise of |
Exercise Price of |
Compensation Plans |
||||||||||
|
Outstanding |
Outstanding |
(Excluding Securities |
||||||||||
|
Plan Category
|
Options(2) | Options | in First Column)(3) | |||||||||
|
Equity Compensation Plans Approved
by Shareholders(1)
|
5,795,653 | $ | 8.56 | 3,899,452 | ||||||||
|
Equity Compensation Plans Not
Approved by Shareholders(4)
|
2,583,862 | $ | 10.09 | — | ||||||||
|
Total
|
8,379,515 | $ | 9.03 | 3,899,452 | ||||||||
| (1) | Consists of the Company’s 2006 Plan, 1997 Plan, and the ESPP. Upon adoption of our 2006 Plan by our shareholders, which was effective May 23, 2006, we are no longer permitted to grant awards under our 1997 Plan. | |
| (2) | Excludes purchase rights under the ESPP, which has a shareholder-approved reserve of 1,700,000 shares at August 25, 2006. Under the ESPP, each eligible employee may purchase shares of the Company’s common stock at semi-annual intervals at a purchase price per share equal to 85% of the lower of (i) the fair market value of the common stock on the offering date or (ii) the fair market value on the semi-annual purchase date. | |
| (3) | Includes shares available for future issuance under the ESPP and the 2006 Plan. As of August 25, 2006, an aggregate of 491,432 shares of common stock were available for issuance under the ESPP. Upon approval of the adoption of our 2006 Plan, we are no longer permitted to grant awards under our 1997 Plan and 2001 Plan and the Equator 1996 Stock Option Plan and individual stock option plans assumed in connection with our acquisition of Equator. | |
| (4) | Consists of the Company’s 2001 Plan, which allows for option grants to employees and consultants (not officers and directors) of the Company, the Equator 1996 Stock Option Plan and individual stock option plans assumed in connection with our acquisition of Equator. Upon adoption of our 2006 Plan by our shareholders, which was effective May 23, 2006, we are no longer permitted to grant awards under these equity compensation plans. |
10
Table of Contents
VOTING
SECURITIES
Who owns
more than 5% of our outstanding common stock?
On August 31, 2006, there were 48,508,947 shares of
our common stock outstanding. The 48,508,947 shares of
common stock outstanding includes 548,879 Exchangeable
Shares. On that date, to our knowledge there were three
shareholders who beneficially owned more than 5% of our common
stock. The table below contains information, as of that date
(except as noted below), regarding the beneficial ownership of
these persons or entities. Unless otherwise indicated, we
believe that each of the persons or entities listed below has
sole voting and investment power with respect to all shares of
common stock indicated.
|
Number of |
||||||||
|
Shares |
||||||||
|
Beneficially |
Percentage of |
|||||||
|
Name and Address of Beneficial Owner
|
Owned | Shares | ||||||
|
Mazama Capital Management,
Inc.
|
11,639,655 | (1) | 24.0 | % | ||||
|
One Southwest Columbia Street,
Suite 1500
Portland, Oregon 97258 |
||||||||
|
Kennedy Capital Management,
Inc.
|
4,028,360 | (2) | 8.3 | % | ||||
|
10829 Olive Boulevard
St. Louis, Missouri 63141 |
||||||||
|
Mac-Per-Wolf
Company
|
2,651,446 | (3) | 5.5 | % | ||||
|
310 South Michigan Avenue,
Suite 2600
Chicago, Illinois 60604 |
||||||||
| (1) | This information as to beneficial ownership is based on a Schedule 13G/A filed by Mazama Capital Management, Inc. (“Mazama”) with the SEC on February 8, 2006. The Schedule 13G/A states that Mazama is the beneficial owner of 11,639,655 shares of Common Stock over which it has sole voting power over 6,611,350 shares and sole dispositive power over 11,639,655 shares. | |
| (2) | This information as to beneficial ownership is based on a Schedule 13G/A filed by Kennedy Capital Management, Inc. (“Kennedy Capital”) with the SEC on September 8, 2006. The Schedule 13G/A states that Kennedy Capital is the beneficial owner of 4,028,360 shares of Common Stock over which it has sole voting power over 3,724,220 shares and sole dispositive power over 4,028,360 shares. | |
| (3) | This information as to beneficial ownership is based on a Schedule 13G/A filed by Mac-Per-Wolf Company (“Mac-Per-Wolf”) on February 15, 2006 and Schedule 13G filed by Janus Capital Management LLC (“Janus”) on February 14, 2006 with the SEC. | |
| The Schedule 13G/A states that Mac-Per-Wolf is the beneficial owner of 2,651,446 shares of Common Stock over which it has sole voting power over 75,846 shares, shared voting power over 2,575,600 shares, sole dispositive power over 75,846 shares, and shared dispositive power over 2,575,600 shares. | ||
| The Schedule 13G states that Janus is the beneficial owner of 2,575,600 shares of Common Stock over which it has shared voting power over 2,575,600 shares and shared dispositive power over 2,575,600 shares. | ||
| The holdings of Janus have been aggregated with those reported by Mac-Per-Wolf as Janus has an indirect ownership interest in Perkins, Wolf, McDonnell and Company, LLC (“PWMC”), in which Mac-Per-Wolf holds a majority interest. PWMC and Janus are investment advisers that furnish investment advice to certain individual and institutional clients (collectively, the “Managed Portfolios”). As a result of its role as investment adviser or sub-adviser to the Managed Portfolios, PWMC may be deemed to be the beneficial owner of 2,575,600 shares or 5.5% of the shares outstanding of Pixelworks common stock held by such Managed Portfolios. |
11
Table of Contents
How much
stock do the Company’s directors and executive officers
own?
The following information is furnished as of August 31,
2006, with respect to common stock beneficially owned by:
(i) directors, including our chief executive officer;
(ii) our four most highly compensated executive officers
other than the chief executive officer; and (iii) all
directors and executive officers as a group. Unless otherwise
indicated, the individuals named below held sole voting and
investment power over the shares listed.
|
Number of |
||||||||
|
Shares |
||||||||
|
Beneficially |
Percentage of |
|||||||
|
Name and Address of Beneficial Owner(1)
|
Owned(2) | Shares | ||||||
|
Mark Christensen
|
29,167 | * | ||||||
|
James Fiebiger
|
10,000 | * | ||||||
|
C. Scott Gibson
|
92,740 | * | ||||||
|
Frank Gill
|
99,659 | * | ||||||
|
Daniel Heneghan
|
10,000 | * | ||||||
|
Bruce Walicek
|
24,167 | * | ||||||
|
Allen Alley
|
2,156,933 | 4.4 | % | |||||
|
Hans Olsen
|
536,250 | 1.1 | % | |||||
|
Michael Yonker
|
1,250 | * | ||||||
|
John Lau
|
224,129 | * | ||||||
|
Richard Tobias
|
71,779 | * | ||||||
|
Directors and Executive Officers
as a Group (16 persons)
|
3,935,708 | 7.8 | % | |||||
| * | Less than 1%. | |
| (1) | Unless otherwise indicated, the address is c/o Pixelworks, Inc., 8100 SW Nyberg Road, Tualatin, Oregon 97062. |
| (2) | Beneficial ownership is determined in accordance with the rules of the SEC and includes voting power and investment power with respect to shares. Shares that a person or group has the right to acquire within 60 days after August 31, 2006 are deemed to be outstanding in calculating the percentage ownership of the person or group but are not deemed to be outstanding as to any other person or group. The number of stock options that are exercisable within 60 days of August 31, 2006 are as follows: Mark Christensen, 14,167; James Fiebiger, 0; C. Scott Gibson, 64,740; Frank Gill, 84,376; Daniel Heneghan, 0; Bruce Walicek, 14,167; Allen Alley, 346,250; Hans Olsen, 436,250; Michael Yonker, 0; John Lau, 208,250; and, Richard Tobias, 71,779. |
12
Table of Contents
EXECUTIVE
COMPENSATION
How were
the executive officers compensated for fiscal year
2005?
The following table sets forth all compensation paid to, earned
by or awarded by the Company, with respect to the last three
fiscal years to the Chief Executive Officer, four other most
highly compensated executive officers at December 31, 2005
whose annual compensation exceeded $100,000, and one additional
officer who would have qualified as one of the four most highly
compensated executive officers had he been employed as of
December 31, 2005 (collectively, the “Named Executive
Officers”).
| Long-Term Compensation | ||||||||||||||||||||
|
Stock |
All |
|||||||||||||||||||
| Annual Compensation |
Options |
Other |
||||||||||||||||||
|
Name and Position
|
Year | Salary | Bonus | Granted (#) | Compensation | |||||||||||||||
|
Allen H. Alley
|
2005 | $ | 306,346 | $ | 38,350 | 100,000 | $ | — | ||||||||||||
|
President and Chief Executive
Officer
|
2004 | 295,558 | 210,500 | 100,000 | — | |||||||||||||||
| 2003 | 279,015 | 172,000 | 100,000 | — | ||||||||||||||||
|
Hans H. Olsen
|
2005 | 259,615 | 32,500 | 85,000 | — | |||||||||||||||
|
Executive Vice President and
|
2004 | 259,652 | 176,250 | 100,000 | — | |||||||||||||||
|
Chief Operating Officer
|
2003 | 234,615 | 145,000 | 100,000 | — | |||||||||||||||
|
Jeffrey B. Bouchard(1)
|
2005 | 203,673 | 12,719 | 40,000 | — | |||||||||||||||
|
Vice President, Finance and
|
2004 | 188,615 | 72,250 | 40,000 | — | |||||||||||||||
|
Chief Financial Officer
|
2003 | 176,599 | 60,000 | 50,000 | — | |||||||||||||||
|
Marc W. Fleischmann(2)
|
2005 | 152,163 | — | 25,000 | 210,000 | |||||||||||||||
|
Senior Vice President, Engineering
|
2004 | 204,846 | 47,250 | 40,000 | — | |||||||||||||||
| 2003 | 197,801 | 38,500 | 25,000 | — | ||||||||||||||||
|
Richard Tobias(3)
|
2005 | 161,231 | 140,000 | 200,000 | — | |||||||||||||||
|
Vice President and
|
2004 | — | — | — | — | |||||||||||||||
|
Chief Technology Officer
|
2003 | — | — | — | — | |||||||||||||||
|
Hongmin (Bob) Zhang
|
2005 | 211,120 | 13,125 | 50,000 | — | |||||||||||||||
|
Vice President, Technology
|
2004 | 204,971 | 45,000 | — | — | |||||||||||||||
| 2003 | 185,348 | 59,195 | 150,000 | — | ||||||||||||||||
| (1) | Mr. Bouchard resigned from the Company effective February 10, 2006. | |
| (2) | Mr. Fleischmann served as the Company’s Senior Vice President, Engineering until August 2, 2005. He received a payment of $210,000 upon termination. | |
| (3) | Mr. Tobias joined the Company on May 18, 2005. |
Executive
Officer Stock Option Grants in Last Fiscal Year
The following table sets forth information concerning the award
of stock options to the Named Executive Officers during the year
ended December 31, 2005:
|
Number of |
Potential Realizable Value |
|||||||||||||||||||||||
|
Securities |
Percent of |
Exercise |
at Assumed Annual Rates |
|||||||||||||||||||||
|
Underlying |
Total Options |
Price |
of Stock Price Appreciation |
|||||||||||||||||||||
|
Options |
Granted in |
per |
Expiration |
for Option Term(3) | ||||||||||||||||||||
| Granted(1) | 2005(2) | Share | Date | 5% ($) | 10% ($) | |||||||||||||||||||
|
Allen H. Alley
|
100,000 | 3 | % | $ | 9.48 | 3/4/2015 | $ | 596,192 | $ | 1,510,868 | ||||||||||||||
|
Hans H. Olsen
|
85,000 | 2 | % | 9.48 | 3/4/2015 | 506,763 | 1,284,238 | |||||||||||||||||
|
Jeffrey B. Bouchard
|
40,000 | 1 | % | 9.48 | (4 | ) | 238,477 | 604,347 | ||||||||||||||||
|
Marc W. Fleischmann
|
25,000 | 1 | % | 9.48 | (5 | ) | — | — | ||||||||||||||||
|
Richard Tobias
|
200,000 | 5 | % | 8.07 | 5/18/2015 | 1,015,036 | 2,572,300 | |||||||||||||||||
|
Hongmin (Bob) Zhang
|
50,000 | 1 | % | 9.48 | 3/4/2015 | 298,096 | 755,434 | |||||||||||||||||
13
Table of Contents
| (1) | Options granted under the plans must generally be exercised while the individual is an employee, and within ten years from the date of grant. On the new hire vesting schedule, each option becomes exercisable at a rate of 25% on the first anniversary date of the grant and 2.083% per month thereafter for a total of thirty-six additional increments, unless otherwise specified at the time of grant. On the merit 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. | |
| (2) | Calculation of percent of total options granted in 2005 includes options exchanged in connection with the acquisition of Equator Technologies, Inc. of 1,263,417. | |
| (3) | The amounts shown are hypothetical gains based on the indicated assumed rates of appreciation of our common stock compounded annually for the ten-year period. Actual gains, if any, on stock option exercises are dependent on the future performance of our common stock and overall stock market conditions. There can be no assurance that our common stock will appreciate at any particular rate or at all in future years. | |
| (4) | Mr. Bouchard resigned effective February 10, 2006. As a result of his termination, the number of securities underlying options granted of 36,333 were canceled February 10, 2006. The number of securities underlying options granted of 3,667 expired May 10, 2006. | |
| (5) | As a result of Mr. Fleishmann’s termination, the number of securities underlying options granted of 24,167 and 833 were canceled August 2, 2005 and November 2, 2005, respectively. |
Executive
Officer Option Exercises and Year-End Option Values
The following table indicates for each of the Named Executive
Officers: (i) stock options exercised during the year ended
December 31, 2005, including the value realized on the date
of exercise; (ii) the number of securities underlying
vested (exercisable) stock options and the number of shares
underlying unvested (unexercisable) stock options as of
December 31, 2005; and (iii) the value of vested and
unvested
“in-the-money”
options as of December 31, 2005.
|
Number of |
||||||||||||||||||||||||
|
Securities Underlying |
Value of Unexercised |
|||||||||||||||||||||||
|
Shares |
Unexercised Options at |
In-the-Money
Options at |
||||||||||||||||||||||
|
Acquired on |
Value |
December 31, 2005 | December 31, 2005(1) | |||||||||||||||||||||
| Exercise | Realized | Exercisable | Unexercisable | Exercisable | Unexercisable | |||||||||||||||||||
|
Allen H. Alley
|
— | $ | — | 274,584 | 209,166 | $ | 162,675 | $ | — | |||||||||||||||
|
Hans H. Olsen
|
— | — | 337,209 | 235,291 | — | — | ||||||||||||||||||
|
Jeffrey B. Bouchard
|
— | — | 164,730 | 87,999 | 109,919 | — | ||||||||||||||||||
|
Marc W. Fleischmann
|
— | — | — | — | — | — | ||||||||||||||||||
|
Richard Tobias
|
— | — | — | 200,000 | — | — | ||||||||||||||||||
|
Hongmin Zhang
|
— | — | 333,758 | 147,242 | — | — | ||||||||||||||||||
| (1) | Based on the closing market value of our common stock of $5.08 on December 30, 2005. |
Pixelworks
Change of Control Resolutions
The Board of Directors adopted resolutions on March 22,
2002, approving a change of control and severance program for
executive officers and directors. Under the terms of the
resolutions, upon a change of control, we will accelerate the
vesting schedule of the options held by the executive officer or
director that would have vested during the next 12 months
according to the vesting schedule associated with such options.
In addition, upon a change of control, and the termination of an
executive officer, or a substantial change in the executive
officer’s responsibilities within three months prior
to or 12 months following the change of control, the terminated
officer will be entitled to severance payments equal to
six months of his base salary as in effect on the date of
such termination and continuation of medical insurance benefits
for a period of six months from the date of termination.
14
Table of Contents
Bouchard
Employment Agreement
In December 1999 we entered into an employment agreement with
Jeffrey B. Bouchard, our former 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 the Company’s standard employee benefits. In addition,
we granted Mr. Bouchard options for 225,000 shares of
common stock pursuant to the Company’s 1997 Plan. The
agreement provided that if we terminated
Mr. Bouchard’s employment 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 would
be entitled to severance pay of three months salary. The
agreement also provided that if we sold all of our assets or
were merged into another company which was not under the control
of our shareholders, then pursuant to Mr. Bouchard’s
stock options, he would be entitled to his options which had
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 agreement pursuant to which he may not divulge any
of our proprietary information other than as permitted as part
of his employment with us.
Effective February 10, 2006, Mr. Bouchard resigned, at
which time his employment agreement was terminated.
DIRECTORS’
COMPENSATION
How are
directors compensated?
Newly-elected, non-employee members of our Board receive an
option grant to purchase 40,000 shares of our common stock
upon election. Incumbent directors receive an option grant to
purchase 10,000 shares of our common stock upon re-election
to the Board. Options are granted with exercise prices equal to
the fair market value of our common stock on the date of grant.
Each non-employee director receives cash compensation as follows:
| • | $6,250 per quarter for service on the Board; | |
| • | $2,500 per quarter for service by the Lead Director or Non-Management Chairperson; | |
| • | $1,000 per quarter for service on the Audit Committee, with the exception of the Chairperson, who receives $3,500 per quarter; | |
| • | $500 per quarter for service on the Compensation Committee, with the exception of the Chairperson, who receives $1,000 per quarter; and | |
| • | $500 per quarter for service on the Corporate Governance and Nominating Committee, with the exception of the Chairperson, who receives $1,000 per quarter. |
Directors who are also employees of the Company receive no
additional compensation for serving on the Board of Directors.
Other
Arrangements
During 2005, the Company was provided consulting services by
Bruce Walicek, who is a director, prior to his election to the
Board of Directors in May 2005. Fees for Mr. Walicek’s
consulting services totaled $37,500 in 2005.
15
Table of Contents
DATE FOR
SUBMISSION OF SHAREHOLDER PROPOSALS
Pursuant to
Rule 14a-8
under the Securities Exchange Act of 1934, some shareholder
proposals may be eligible for inclusion in the Company’s
2007 Proxy Statement. Any such proposal must be received by the
Company not later than December 11, 2006. Shareholders
interested in submitting such a proposal are advised to contact
knowledgeable counsel with regard to the detailed requirements
of the applicable securities law. The submission of a
shareholder proposal does not guarantee that it will be included
in the Company’s Proxy Statement.
Alternatively, under the Company’s bylaws, a proposal or
nomination that a shareholder does not seek to include in the
Company’s Proxy Statement pursuant to
Rule 14a-8
may be delivered to the Secretary of the Company not less than
60 days or more than 90 days prior to the date of an
Annual Meeting. In the event we provide notice or public
disclosure of the date of the Annual Meeting less than
60 days prior to the date of the Annual Meeting,
shareholders may submit a proposal or nomination not later than
the 10th day following the day on which we gave notice of
the Annual Meeting date.
A shareholders’ submission must include certain specific
information concerning the proposal or nominee, as the case may
be, and information as to the shareholder’s ownership of
common stock of the Company. Proposals or nominations not
meeting these requirements will not be entertained at the Annual
Meeting. If the shareholder does not also comply with the
requirements of
Rule 14a-4(c)(2)
under the Securities Exchange Act of 1934, the Company may
exercise discretionary voting authority under proxies it
solicits to vote in accordance with its best judgment on any
such proposal or nomination submitted by a shareholder.
OTHER
MATTERS
No other business may be presented at this special meeting of
shareholders.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ Allen
H. Alley
Allen H. Alley
Chairman of the Board, President and
Chief Executive Officer
Chief Executive Officer
Tualatin, Oregon
October 5, 2006
16
Table of Contents
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT PIXELWORKS SHAREHOLDERS VOTE FOR THE PROPOSAL BELOW.
| Please Mark Here | ||||||||||
| for Address | ||||||||||
| Change or | ||||||||||
| Comments | ||||||||||
| SEE REVERSE SIDE | ||||||||||
| FOR | AGAINST | ABSTAIN | ||||||||
Proposal:
|
Approve the proposed stock option exchange program described in proxy statement |
o | o | o |
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE
UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED “FOR” THE PROPOSAL.
Please sign and date as name is imprinted hereon, including designation as executor, trustee, etc.,
if applicable. Joint owners should each sign. The
undersigned acknowledges receipt from Pixelworks, prior to the execution of this proxy, of the
Notice of Special Meeting of Shareholders and the Proxy Statement with respect thereto and hereby revokes any proxy or proxies previously given.
Signature
|
Signature | Date | ||||||||
FOLD AND DETACH HERE
Vote by Internet or Telephone or Mail
24 Hours a Day, 7 Days a Week
24 Hours a Day, 7 Days a Week
Internet and telephone voting is available through 11:59 PM Eastern Time
the day prior to special meeting day.
the day prior to special meeting day.
Your Internet or telephone vote authorizes the named proxies to vote your shares in the same manner
as if you marked, signed and returned your proxy card.
Internet http://www.proxyvoting.com/ pxlw Use the internet to vote your proxy. Have your proxy card in hand when you access the web site. |
OR | Telephone
1-866-540- 5760 Use any touch-tone telephone to vote your proxy. Have your proxy card in hand when you call. |
OR | Mail Mark, sign and date your proxy card and return it in the enclosed postage-paid envelope. |
If you vote your proxy by Internet or by telephone,
you do NOT need to mail back your proxy card.
you do NOT need to mail back your proxy card.
Table of Contents
PIXELWORKS, INC.
PROXY
FOR SPECIAL MEETING OF SHAREHOLDERS OCTOBER 26, 2006
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Allen H. Alley and Michael D. Yonker, proxy with power of
substitution to vote on behalf of the undersigned all shares that the undersigned may be entitled
to vote at the Special Meeting of Shareholders of Pixelworks, Inc. to
be held on October 26, 2006
and any adjournments thereof, with all powers that the undersigned would possess if personally
present.
Whether
or not you expect to attend the special meeting, please vote your shares. THIS PROXY,
WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER.
IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED “FOR” THE PROPOSAL.
Address
Change/Comments (Mark the corresponding
box on the reverse side)
FOLD AND DETACH HERE
You can now access your Pixelworks, Inc. account online.
Access your Pixelworks, Inc. shareholder account online via Investor ServiceDirect®
(ISD).
Mellon Investor Services LLC, Transfer Agent for Pixelworks, Inc., now makes it easy and convenient
to get current information on your shareholder account.
•
|
View account status | • | View payment history for dividends | |||
•
|
View certificate history | • | Make address changes | |||
•
|
View book-entry information | • | Obtain a duplicate 1099 tax form | |||
| • | Establish/change your PIN |
Visit
us on the web at http://www.melloninvestor.com
Call 1-877-978-7778 between 9am-7pm
Monday-Friday Eastern Time
Call 1-877-978-7778 between 9am-7pm
Monday-Friday Eastern Time
Table of Contents
NOTICE TO EXCHANGEABLE
SHAREHOLDERS
Our records show that you own exchangeable shares
(“Exchangeable Shares”) in the capital of Jaldi
Semiconductor Corporation (“Jaldi”), a Canadian
company. The Exchangeable Shares provide you with economic and
voting rights which are, as nearly as practicable, equivalent to
those of holders of shares of common stock of Pixelworks, Inc.
(“Pixelworks” or “the Company”), the
U.S. parent of Jaldi. These rights include the right to
attend and vote at meetings of the common shareholders of
Pixelworks. The Company will be holding a special meeting (the
“Special Meeting”) of its common shareholders on
October 26, 2006 to approve the Stock Option Exchange
Program.
At such Special Meeting you will have voting rights, as
described below, equal to the number of Exchangeable Shares you
hold. You are permitted to instruct CIBC Mellon Trust Company,
the Trustee under the Voting and Exchange Trust Agreement,
as to how the Trustee is to vote your Exchangeable Shares at the
Special Meeting of Pixelworks. If you do not give voting
instructions, the Trustee will not be entitled to exercise the
voting rights attached to your Exchangeable Shares.
Alternatively, you may instruct the Trustee to give you, or a
person designated by you, a proxy to exercise personally the
voting rights attached to your Exchangeable Shares. To instruct
the Trustee as to how you wish to exercise your voting rights,
you must complete, sign, date and return the enclosed voting
instruction card to the Trustee by 2:00 p.m., Eastern
Daylight Time on October 24, 2006. Whether or not you plan
to attend, please sign, date and return the voting instruction
card in the envelope provided in order to ensure that your
Exchangeable Shares are represented at the Special Meeting.
You have the right to revoke any instructions to the Trustee by
giving written notice of revocation to the Trustee or by
executing and delivering to the Trustee a later-dated voting
instruction card. No notice of revocation or later-dated voting
instruction card however, will be effective unless received by
the Trustee prior to 2:00 p.m., Eastern Daylight Time on
October 24, 2006.
Information
Relating to Pixelworks
Exchangeable Shares are exchangeable on a
one-for-one
basis for shares of common stock of Pixelworks and you, as a
holder of Exchangeable Shares, are entitled to receive dividends
from Pixelworks payable at the same time as, and equivalent to
on a per-share basis, any dividends paid by Pixelworks to
holders of its common stock. As a result of the economic and
voting equivalency between the Exchangeable Shares and shares of
common stock of Pixelworks, you, as a holder of Exchangeable
Shares, will have a participating interest determined by
reference to Pixelworks not Jaldi. Accordingly, it is
information relating to Pixelworks that is relevant to you.
Enclosed in this package is Pixelworks’ Proxy Statement,
which we urge you to read carefully.
Tualatin, Oregon
October 5, 2006
Pixelworks,
Inc. > 8100 SW Nyberg
Road > Tualatin, OR 97062
USA > Tel:503.454.1750 > Fax:503.612.0848 > www.pixelworks.com
Table of Contents
VOTING
INSTRUCTION CARD
DIRECTION GIVEN BY REGISTERED HOLDERS OF EXCHANGEABLE SHARES OF
JALDI SEMICONDUCTOR CORPORATION FOR THE OCTOBER 26, 2006 SPECIAL
MEETING OF SHAREHOLDERS OF PIXELWORKS, INC.
DIRECTION GIVEN BY REGISTERED HOLDERS OF EXCHANGEABLE SHARES OF
JALDI SEMICONDUCTOR CORPORATION FOR THE OCTOBER 26, 2006 SPECIAL
MEETING OF SHAREHOLDERS OF PIXELWORKS, INC.
The undersigned, having read the Notice of Special Meeting of
Shareholders regarding the special meeting (the “Special
Meeting”) of common shareholders of Pixelworks, Inc.
(“Company”) to be held at the Company’s principal
executive offices located at 8100 SW Nyberg Road, Tualatin,
Oregon on October 26, 2006 at 2:00 p.m., Pacific
Daylight Time, the Proxy Statement dated October 5, 2006,
and the accompanying Notice to Exchangeable Shareholders,
receipt of each of which is hereby acknowledged, does hereby
instruct and direct CIBC Mellon Trust Company (the
“Trustee”), pursuant to the provisions of the Voting
and Exchange Trust Agreement (the “Agreement”)
dated as of September 6, 2002, among Jaldi Semiconductor
Corporation of Canada (“Jaldi”), the Company,
Pixelworks Nova Scotia Company and the Trustee, as follows:
PLEASE
NOTE: IF NO DIRECTION IS MADE AND YOU SIGN BELOW, THE TRUSTEE IS
HEREBY AUTHORIZED AND DIRECTED TO VOTE FOR THE
PROPOSAL BELOW.
PLEASE
SELECT ONE OF A, B OR C:
| o A. | Exercise or cause to be exercised, whether by proxy given by the Trustee to a representative of the Company or otherwise, the undersigned’s voting rights at the Special Meeting, or any postponement or adjournment thereof, as follows: |
Proposal — Approval of Stock Option Exchange
Program:
o FOR o AGAINST o ABSTAIN
IF YOU HAVE SELECTED ALTERNATIVE A, PLEASE GO DIRECTLY TO
THE
SIGNATURE LINE ON THIS VOTING INSTRUCTION CARD.
| o B. | Deliver a proxy card to the undersigned at the Special Meeting with respect to all Exchangeable Shares of Jaldi held by the undersigned on the record date for the Special Meeting so that the undersigned may exercise personally the undersigned’s voting rights at the Special Meeting or any postponement or adjournment thereof. |
IF YOU HAVE SELECTED ALTERNATIVE B, PLEASE GO DIRECTLY TO THE
SIGNATURE LINE ON THIS VOTING INSTRUCTION CARD.
| o C. | Deliver a proxy card to to attend and act for and on behalf of the undersigned at the Special Meeting with respect to all the Exchangeable Shares of Jaldi held by the undersigned on the record date for the Special Meeting with all the powers that the undersigned would possess if personally present and acting thereat, including the power to exercise the undersigned’s voting rights at the Special Meeting or any postponement or adjournment thereof. |
IF YOU HAVE SELECTED ALTERNATIVE C, PLEASE GO DIRECTLY TO
THE
SIGNATURE LINE ON THIS VOTING INSTRUCTION CARD.
SIGNATURE
Executed on
the
day of , 2006
Signature:
_
_
Print Name:
_
_
Table of Contents
NOTES:
| (1) | A shareholder has the right to appoint a person to represent him/her at the Special Meeting by inserting in the space provided in Alternative C the name of the person the shareholder wishes to appoint. Such person need not be a shareholder. |
| (2) | To be valid, this Voting Instruction Card must be signed and deposited with CIBC Mellon Trust Company, P.O. Box 721, Agincourt, Ontario, M1S 0A1 in the enclosed return envelope or, if delivered by person, presented to their offices at 320 Bay Street, Banking Hall, Toronto, Ontario, M5H 4A6, or by fax to (416) 368-2502 prior to 2:00 p.m., Eastern Daylight Time, on October 24, 2006 or, if the Special Meeting is adjourned, 48 hours (excluding Sundays and holidays) before any adjourned Special Meeting. |
| (3) | If the shareholder is an individual, please sign exactly as your Exchangeable Shares are registered. | |
| If Exchangeable Shares are registered in the name of an executor, administrator or trustee, please sign exactly as the Exchangeable Shares are registered. If the Exchangeable Shares are registered in the name of the deceased or other shareholder, the shareholder’s name must be printed in the space provided. This voting instruction card must be signed by the legal representative with his/her name printed below his/her signature and evidence of authority to sign on behalf of the shareholder must be attached to this voting instruction card. | ||
| (4) | If a share is held by two or more persons, each should sign this Voting Instruction Card. | |
| (5) | If this Voting Instruction Card is not dated in the space provided, it is deemed to bear the date on which it is mailed to the shareholder. |