<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
or
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission file number: 0-20784
TRIDENT MICROSYSTEMS, INC.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 77-0156584
- ------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer identification No.)
incorporation or organization)
189 North Bernardo Avenue, Mountain View, CA 94043-5203
---------------------------------------------------------
(Address of principal executive offices) (Zip code)
(650) 691-9211
------------------------------------------------------
(Registrant's telephone number, including area code)
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 [X] No [ ]
The number of shares of the registrant's $0.001 par value Common Stock
outstanding at September 30, 1998 was 12,914,119.
This document (including exhibits) contains 17 pages.
<PAGE> 2
TRIDENT MICROSYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1: Unaudited Financial Information
Condensed Consolidated Balance Sheet - September 30, 1998 (Unaudited) and
June 30, 1998 3
Condensed Consolidated Statement of Operations for the Three Months
Ended September 30, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Statement of Cash Flows for the Three Months
Ended September 30, 1998 and 1997 (Unaudited) 5
Notes to the Condensed Consolidated Financial Statements (Unaudited) 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3: Quantitative and Qualitative Disclosures About Market Risk Not Applicable
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 15
Item 2: Changes in Securities Not Applicable
Item 3: Defaults upon Senior Securities Not Applicable
Item 4: Submission of Matters to Vote by Security Holders Not Applicable
Item 5: Other Information Not Applicable
Item 6: Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
-2-
<PAGE> 3
TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
September 30, June 30,
1998 1998
------------- ---------
(unaudited)
<S> <C> <C>
Current assets:
Cash, cash equivalents $ 19,996 $ 22,916
Short-term investments 20,656 13,970
Accounts receivable, net 11,638 8,183
Inventories 4,049 10,146
Deferred income taxes 2,266 2,266
Prepaid expenses and other assets 1,739 1,236
--------- ---------
Total current assets 60,344 58,717
Property and equipment, net 7,502 7,766
Investment in joint venture 49,289 49,289
Other assets 2,645 2,655
--------- ---------
Total assets $ 119,780 $ 118,427
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,436 $ 3,359
Accrued expenses and other liabilities 6,896 5,805
Current portion of obligation under capital lease 382 380
Income taxes payable 1,276 1,292
--------- ---------
Total current liabilities 14,990 10,836
Deferred income taxes 2,350 2,350
Obligations under capital lease 258 350
--------- ---------
Total liabilities 17,598 13,536
--------- ---------
Stockholders' equity:
Common stock and additional paid-in capital 45,352 45,352
Retained earnings 60,015 62,724
Treasury stock, at cost, 374 shares (3,185) (3,185)
--------- ---------
Total stockholders' equity 102,182 104,891
--------- ---------
Total liabilities and stockholders equity $ 119,780 $ 118,427
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-3-
<PAGE> 4
TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Net sales $ 23,876 $ 38,539
Cost of sales 16,918 22,993
-------- --------
Gross margin 6,958 15,546
Research and development expenses 6,226 6,591
Sales, general and administrative expenses 3,927 5,512
-------- --------
Income (loss) from operations (3,195) 3,443
Interest income, net 515 825
-------- --------
Income (loss) before income taxes (2,680) 4,268
Provision for income taxes 29 1,195
-------- --------
Net income (loss) $ (2,709) $ 3,073
======== ========
Basic earnings (loss) per share $ (0.21) $ 0.24
======== ========
Shares used in computing per share amounts 12,914 12,935
======== ========
Diluted earnings (loss) per share $ (0.21) $ 0.21
======== ========
Shares used in computing diluted per share amounts 12,914 14,602
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-4-
<PAGE> 5
TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,709) $ 3,073
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 961 853
Provision for doubtful accounts and sales returns 188 --
Changes in assets & liabilities:
Accounts receivable (3,643) (4,099)
Inventories 6,097 (2,802)
Prepaid expenses and other current assets (503) (231)
Other assets 10 (93)
Accounts payable 3,077 5,124
Accrued expenses and other liabilities 1,091 (1,190)
Income tax payable (16) 2,619
-------- --------
Net cash provided by operating activities 4,553 3,254
-------- --------
Cash flows from investing activities:
Sale (purchase) of short-term investments, net (6,686) (414)
Purchase of property and equipment (697) (1,556)
-------- --------
Net cash used in investing activities (7,383) (1,970)
-------- --------
Cash flows from financing activities:
Issuance of common stock -- 998
Repayment of capital leases (90) (76)
-------- --------
Net cash provided by (used in) financing activities (90) 922
-------- --------
Net increase (decrease) in cash and cash equivalents (2,920) 2,206
Cash and cash equivalents at beginning of period 22,916 29,745
-------- --------
Cash and cash equivalents at end of period $ 19,996 $ 31,951
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-5-
<PAGE> 6
TRIDENT MICROSYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
In the opinion of Trident Microsystems, Inc. (the "Company"), the
condensed consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
financial position, operating results and cash flows for those periods
presented. The condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
and are not audited. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the year ended June 30, 1998 included in the Company's annual report on Form
10-K filed with the Securities and Exchange Commission.
The results of operations for the interim periods presented are not
necessarily indicative of the results that may be expected for any other period
or for the entire fiscal year which ends June 30, 1999.
NOTE 2 REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment. Provision is
made for expected sales returns and allowances when revenue is recognized. The
Company has limited control over the extent to which products sold to
distributors are sold through to end users. Accordingly, a portion of the
Company's sales may from time to time result in increased inventory at its
distributors. The Company provides reserves for returns and allowances for
distributor inventories. These reserves are based on the Company's estimates of
inventory held by its distributors and the expected sell through of its products
by its distributors. Actual results could differ from these estimates.
NOTE 3 INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Work in process $ 2 $ 4,784
Finished goods 4,047 5,314
------- -------
$ 4,049 $10,098
======= =======
</TABLE>
NOTE 4 EARNINGS PER SHARE
Basic Earnings Per Share (EPS) is computed by dividing net income
available to common stockholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period and excludes the
dilutive effect of stock options. Diluted Earnings Per Share (EPS) gives effect
to all dilutive potential common shares outstanding during a period. In
computing Diluted
-6-
<PAGE> 7
EPS, the average stock price for the period is used in determining the number of
shares assumed to be purchased from exercise of stock options.
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted EPS computations for the periods presented below.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------
(in thousands, except per share data) 1998 1997
-------- --------
<S> <C> <C>
Basic Net Income (Loss) per Share
Net income (loss) available to Common
Shareholders $ (2,709) $ 3,073
======== ========
Weighted average commmon shares 12,914 12,935
======== ========
Basic net income (loss) per share $ (0.21) $ 0.24
======== ========
Diluted Net Income (Loss) per Share
Net income (loss) available to Common
Shareholders $ (2,709) $ 3,073
======== ========
Weighted average common shares 12,914 12,935
Dilutive common stock equivalents -- 1,667
-------- --------
Weighted average common shares
and equivalents 12,914 14,602
======== ========
Diluted net income (loss) per share $ (0 .21) $ 0.21
======== ========
</TABLE>
Options to purchase 4,211,741 shares of common stock were outstanding
during the three month period ended September 30, 1998 but were not included in
the computations of diluted EPS because the Company incurred a loss for the
three month period. Options to purchase 172,801 shares of common stock were
outstanding during the three months ended September 30, 1997 and were not
included in the computations of diluted EPS because the options' exercise price
was greater than the average market price of the common shares.
NOTE 5 PREFERRED RIGHTS AGREEMENT
On July 24, 1998, the Board of Directors ("Board") adopted a Preferred
Shares Rights Agreement ("Agreement") and pursuant to the Agreement authorized
and declared a dividend of one preferred share purchase right ("Right") for each
common share outstanding of the Company on August 14, 1998. The Rights are
designed to protect and maximize the value of the outstanding equity interests
in the Company in the event of an unsolicited attempt by an acquirer to take
over the Company, in a manner or terms not approved by the Board. Each Right
becomes exercisable to purchase one-hundredth of a share of Series A Preferred
Stock of the Company at an exercise price of $50.00 and expire on July 23, 2008.
The Company may redeem the Rights at a price of $0.001 per Right.
-7-
<PAGE> 8
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
RESULTS OF OPERATIONS
The following table sets forth the results of operations expressed as
percentages of net sales for the three months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------
1998 1997
---- ----
<S> <C> <C>
Net sales 100% 100%
Cost of sales 71 60
---- ----
Gross margin 29 40
Research and development 26 17
Selling, general and administrative 16 14
---- ----
Income (loss) from operations (13) 9
Interest income, net 2 2
---- ----
Income (loss) before income taxes (11) 11
Provision for income taxes -- 3
---- ----
Net income (loss) (11)% 8%
==== ====
</TABLE>
Net Sales
Net sales for the three months ended September 30, 1998 were $23.9
million or 38% less than the $38.5 million reported in the three months ended
September 30, 1997. Net sales for the three months ended September 30, 1998
increased $4.6 million, or 24%, from the $19.3 million reported in the three
months ended June 30, 1998. The sales decrease from the three months ended
September 30, 1997 was predominantly due to a decrease in unit shipments in both
desktop and notebook products. For the three months ended September 30, 1998,
sales have declined compared to the prior year as product revenue from the newly
introduced 3D products in both the desktop and notebook area were not enough to
offset declines in the older, less in demand 2D products. Desktop and portable
products accounted for 49% and 45%, respectively, of the Company's sales for the
three months ended September 30, 1998, and 52% and 45%, respectively, for the
three months ended September 30, 1997.
Sales to North American and European customers represented 15% of net
sales in the three months ended September 30, 1998, a decrease from
approximately 21% in the three months ended September 30, 1997. This decrease is
primarily due to a decrease in OEM sales in North America and Europe. The
Company expects Asian customers will continue to account for a significant
portion of the Company's sales. Sales to Asian customers, primarily in Hong
Kong, Taiwan, Korea and Japan, accounted for approximately 85% of net sales in
the three months ended September 30, 1998, up from approximately 79% in the
three months ended September 30, 1997. In the three months ended September 30,
1998, sales to three customers accounted for 16%, 15%, and 15% of net sales,
respectively. In the three months ended September 30, 1997, sales to three
customers, accounted for 16%, 13%, and 12% of net sales, respectively.
-8-
<PAGE> 9
The Company derives a portion of its revenues from sales to distributors. Sales
to distributors represented 14% and 20% of revenues during the three months
ended September 30, 1998 and 1997, respectively. During the first half of fiscal
year 1998 the Company experienced higher than usual returns resulting from
certain distributors adjusting their inventory mix and levels. Sales returns
from distributors have historically not been material. Substantially all of the
sales transactions were denominated in U.S. dollars during both periods.
The Company plans from time to time to introduce new and higher
performance desktop and portable graphics controller and multimedia products
which it will seek to sell to existing customers as well as new customers in
Asia, North America and Europe. The Company's future success depends upon the
regular and timely introduction of these and other new products and upon those
products meeting customer requirements. There can be no assurance that the
Company will be able to successfully complete the development of these products
or to commence shipments of these products in a timely manner, or that product
specifications will not be changed during the development period. In addition,
even if regularly and timely developed and shipped, there can be no assurance
that the products described above will be well accepted in the market place.
Gross Margin
Gross margin decreased to $7.0 million for the three months ended
September 30, 1998, down from $15.5 million in the three months ended September
30, 1997. The gross margin as a percent of sales for the three month period
ended September 30, 1998 decreased to 29% of net sales as compared to 40% for
the three months ended September 30, 1997. Gross margin for the three months
ended September 30, 1998 was adversely affected by lower sales of notebook
products which traditionally have been higher margin products, continued above
normal ASP declines across all product lines, and the positioning of our 3D
desktop products in the more price sensitive portion of the market.
The Company believes that prices of semiconductor products will decline
over time as availability and competition increase and advanced products are
introduced. The Company expects to see continued competitive pressure on gross
margins in the desktop and notebook business in the foreseeable future. The
Company continues to maintain a strategy based on maintaining gross margins
through the introduction of new products with higher margins, reducing
manufacturing costs accomplished through the Company's custom design methodology
and the migrating to the newest process technology. As a result, the Company
depends upon the success of new product development and the timely introduction
of new products, as well as upon the achievement of its manufacturing cost
reduction efforts. There can be no assurance that the Company can successfully
or timely develop and introduce new products, that such products will gain
market acceptance, or that it can continue to successfully reduce manufacturing
costs.
Research and Development
Research and development expenses for the three months ended September
30, 1998 decreased to $6.2 million from $6.6 million for the September 30, 1997
three month period. As a percent of net sales, research and development expenses
increased to 26% for the three months ended September 30, 1998 from 17% of net
sales for the three months ended September 30, 1997. The decrease in research
and development expenses in actual dollars for the three months ended September
30, 1998 from September 30, 1997 can be attributed primarily to a reduction in
workforce, and a decrease in nonrecurring engineering charges resulting from the
Company's cost reduction programs.
-9-
<PAGE> 10
Selling, General and Administrative
Selling, general and administrative expenses decreased to $3.9 million
in the three months ended September 30, 1998 from $5.5 million in the three
months ended September 30, 1997. As a percent of net sales, selling, general and
administrative expenditures increased to 16% of net sales for the three months
ended September 30, 1998 from 14% of net sales in the three months ended
September 30, 1997. The decrease in selling, general and administrative
expenditures in actual dollars is attributed primarily to the Company's cost
reduction programs, and a decrease in representative commissions due to lower
sales for the three month period ending September 30, 1998. The Company will
continue to monitor and control its selling, general and administrative
expenses.
Interest Income, Net
The amount of interest income earned by the Company varies directly with
the amount of its cash, cash equivalents and short-term investments and the
prevailing interest rates. Interest income decreased to $515,000 in the three
months ended September 30, 1998 from $825,000 in the same prior year period. The
decrease from the three months ended September 30, 1997 is primarily the result
of lower average cash levels invested by the Company.
Provision for Income Taxes
Due to the current loss situation of the Company, no provision for U.S.
taxes was taken for the three months ending September 30, 1998.
Year 2000 Conversion Project
The Company has a Year 2000 project designed to identify and assess the
risks associated with its information systems, products, operations and
infrastructure, and suppliers that are not Year 2000 compliant and to develop,
implement, and test remediation and contingency plans to mitigate these risks.
The project is composed of four phases: (1) identification of risks, (2)
assessment of risks, (3) development of remediation and contingency plans, and
(4) implementation and testing.
Information systems. In 1997, the Company undertook a project to upgrade
all its information systems to Year 2000 compliance.
Products. The Company has assessed the capabilities of all of its
products sold to customers. Based on the assessments made to date, none of the
Company's products are affected by Year 2000 issues.
Operations and Infrastructure. Office equipment and other items used in
the operations and facilities of the Company are currently being assessed for
Year 2000 compliance to be completed during the second quarter of fiscal 1999.
Suppliers. The Company is also in the process of evaluating its supplier
base to determine whether Year 2000 issues affecting suppliers will adversely
impact the Company's operations. To mitigate this risk, the Company has
contacted all of its suppliers to assess their Year 2000 readiness and will
continue to monitor the progress of its key suppliers. The Company has a limited
number of key suppliers and expects to have the assessment of these key
suppliers completed during the next six months.
-10-
<PAGE> 11
General and Risk Factors. The Company's Year 2000 project is currently
in the assessment phase and, with respect to certain information systems and
products, in the remediation phase. The Company believes that its greatest
potential risks are associated with its information systems and systems embedded
in its operations and infrastructure. The Company is at the beginning stage of
assessments for its operations and infrastructure, and cannot predict whether
significant problems will be identified. The Company has not yet determined the
extent of contingency planning that may be required. Based on the status of the
assessment made and remediation plans developed to date, the Company is not in a
position to state the total cost of remediation of all Year 2000 issues. Costs
identified to date are expected to be not less than $100,000.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company's principal sources of liquidity
included cash and cash equivalents of $20.0 million and short-term investments
of $20.7 million. The increase in short-term investments from $14.0 million at
June 30, 1998 was due to transfers from cash and cash equivalents to short-term
investments during the quarter ended September 30, 1998.
In the three months ended September 30, 1998, $4.6 million of cash was
provided by operations, compared to the three months ended September 30, 1997 in
which $3.3 million of cash was provided by operations. The increase was mainly
the result of a decrease in inventories, and an increase in accounts payable,
and accrued expenses, offset in part by unprofitable operations and an increase
in accounts receivable for the three months ended September 30, 1998. The
decrease in inventories reflected the Company's effort to reduce inventory cost
according to adjusted sales expectations. Capital expenditures were $0.7 million
for the three months ended September 30, 1998 compared to $1.6 million for the
three months ended September 30, 1997.
In August 1995, the Company entered into a joint venture agreement with
United Microelectronics Corporation ("UMC") and other venture partners to
establish a foundry, United Integrated Circuits ("UICC"). Under the agreement,
the Company invested $49.3 million in the joint venture and the foundry
guarantees to Trident 12.5% of the foundry's total wafer supply. On October 3,
1997, a fire at UICC's fabrication plant in Hsinchu, Taiwan, completely
destroyed its fabrication equipment. The fabrication plant, and the destroyed
equipment, was insured. Trident was not utilizing the UICC fabrication plant,
and there are no existing Trident products on UICC's production lines. The UICC
foundry is being rebuilt and is expected to be in production in 1999. At
September 30, 1998, the Company held a 9.3% equity ownership in UICC.
The joint venture investment with UMC is intended to secure capacity so
that the Company can meet increased demand, should it occur. There are certain
risks associated with such an investment including the ability of UMC together
with its partners, to successfully rebuild the foundry and of the Company to
utilize the additional capacity. These agreements and the risks associated with
these and other foundry relationships are described under the caption
"Manufacturing" of the Form 10-K for the fiscal year ended June 30, 1998.
The agreement with UMC has utilized a significant amount of Trident's
available funds; however the Company believes its current resources are
sufficient to meet its needs for at least the next twelve months. The Company
regularly considers transactions to finance its activities, including debt and
equity offerings and new credit facilities or other financing transactions.
The Company believes its current reserves are adequate.
-11-
<PAGE> 12
In April, 1998, the Company's Board of Directors approved a $20 million
stock repurchase program over the next twelve months. During fiscal year 1998,
274,500 shares of common stock were repurchased for $2.1 million under this
Plan. During fiscal year 1997, the Company repurchased 100,000 shares of common
stock for $1.1 million. The Company's cash reserves may decline as a result of
its future use, if any, of the repurchase program.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements herein are forward looking statements, including
those regarding the Company's intention to continue to introduce new products,
expected sales to Asian customers, the Company's expectations regarding pricing
pressures and gross margin from new products and the Company's plan to invest in
research and development and to control selling, general, and administrative
functions. The actual results could vary from the Company's expectations, and
are subject to a number of risks and dependent on a variety of factors,
including those set forth below.
The Company's business is influenced by a variety of factors which
include the overall market for desktop and notebook PC computers, the general
economic climate, the success of the Company's customers and their resultant net
orders, seasonal customer demand, timing of new product introductions,
marketplace acceptance of new product offerings, overall product mix, sales
returns from distributors, competitors' activities and the availability of
foundry and assembly capacities. The Company's future operating results are also
influenced by its dynamic product area and by the amount and timing of planned
expenditures to future operating results as well as by a variety of global,
political, regulatory and foreign exchange factors. These factors will all
affect the Company's results and there can be no assurance of the Company's
future operating results.
The Company supplies components to a variety of OEM customers that in
turn sell their products into the overall PC marketplace. Their success
influences the overall net orders that the Company may receive and attempt to
fill. Should there be a downturn in the overall PC business or should the
existing customers not be in a position to place orders or to accept order
fulfillment, the Company's performance would be adversely impacted and there can
be no assurance that the Company would be successful in achieving offsetting
orders. The success of the Company's marketing and sales efforts can also be
affected by changes in the global graphics marketplace. Because the Company's
customers distribute their products worldwide, such factors as shifts in market
share from Asian clone makers to other manufacturers have in the past affected
the Company's operating results. It is likely that future shifts would continue
to influence the Company's business. Since a substantial portion of the
Company's revenues has been and is expected to continue to be generated from
customers in Asia, it is likely that the Company's operating results will
fluctuate with changes in the Asian economies, particularly those of Taiwan and
Hong Kong. During the six months ended December 31, 1997, the Company
experienced higher than usual returns resulting from certain distributors
adjusting their inventory mix and levels. These product exchanges are the result
of the industry transition from 2D to 3D, and the Company cannot predict that
these exchanges will not re-occur in the future. However, in the three months
ended September 30, 1998 exchanges were not significant. Past performance has
indicated that seasonal performance variations should be expected with the
historic slowest PC sales occurring during the summer. These factors influence
when the Company's customers place their orders and when delivery is required.
Because the Company currently operates in the increasingly competitive
graphics controller product area, timely introductions of new products are
required. A fundamental business risk is whether or not the Company can continue
to develop products that will be accepted by a fast-changing marketplace. In
order to be able to timely introduce new products a number of obstacles have to
be overcome. The Company attempts to determine which products have a high
likelihood of marketplace acceptance and
-12-
<PAGE> 13
attempts to create functional and manufacturable designs for those products.
However, the Company cannot assure that product development, the timing of the
product introductions, the marketplace acceptance of current products under
development, and the hiring of the personnel required to support new product
introductions and new customers, including leading PC systems manufacturers,
will be successful. Should there be a shortfall in the Company's business
performance from its expected results, the Company's financial results would be
adversely impacted by the amount and timing of planned expenditures. Additional
influences on the Company's performance will be the actions of existing or
future competitors, the development of new technologies, the incorporation of
graphics functionality into other PC system components and possible claims by
third parties of infringement of patent or similar intellectual property rights.
The Company currently relies exclusively upon independent foundries to
manufacture its products either in finished or in wafer form, and orders
production either on contract or spot basis. The Company's ability to supply
product to its customers is thus dependent upon its continuing relationships
with those foundries and in turn upon their uninterrupted ability to supply the
Company's product. In calendar year 1995, there was a worldwide shortage of
advanced process technology foundry capacity. In response to this shortage, the
Company entered into a number of contracts providing for additional capacity.
Certain of such contracts require substantial advance payments. There can be no
assurance that the Company will obtain sufficient foundry capacity to meet
customer demands in the future, particularly if that demand should increase, or
that the additional capacity from current foundries and new foundry sources will
be available and will satisfy the Company's quality, delivery schedule, and/or
price requirements.
The Company's products are assembled and tested by a variety of
independent subcontractors. The Company's reliance on independent assembly and
testing houses to provide these services involves a number of risks, including
the absence of guaranteed capacity and reduced control over delivery schedules,
quality assurance and costs.
Constraints or delays in the supply of the Company's products, whether
due to the factors above or to other unanticipated factors, could have adverse
effects on the Company's results. Such adverse effects could include the Company
electing to purchase products from higher cost sources and which could result in
lower orders, or inability to fulfill orders, resulting in the loss of orders.
The market price of the Company's common stock has been, and may
continue to be, extremely volatile. Factors such as new product announcements by
the Company or its competitors, quarterly fluctuations in the Company's
operating results, the performance of leading PC manufacturers and general
conditions in the high technology and graphics controller markets may have a
significant impact on the market price of the Company's common stock.
Expansion of sales and distribution of products to numerous large system
manufacturing customers, should it occur, would require expansion of the
Company's research and development, production and marketing and sales
capabilities. Sales growth, should it occur, will require additional foundry
capacity and the Company has contracted to expand available foundry capacity.
Future results will in part depend upon and could be significantly impacted by
the Company's ability to manage its resources to support future activities and
upon its ability to finance further expanded foundry capitalization and
production costs.
The Company's principal research and development activity is conducted
in Silicon Valley where the competition for technical talent is intense. The
Company constantly reviews measures to attract and retain new and existing
employees. As a result of the foregoing, the Company expanded its operations in
East Asia with the start of a research and development facility in Shanghai,
People's Republic of China in
-13-
<PAGE> 14
the quarter ended March 31, 1998. This facility currently has fifty employees as
of September 30, 1998. The Company is considering other organizational changes
to improve its research and development and product execution efforts. There can
be no assurance that these measures will be successful.
The Company's future operating results also may be affected by various
factors which are beyond the Company's control. These include adverse changes in
general economic conditions, political instability, governmental regulation or
intervention affecting the personal computer industry, government regulation
resulting from U.S. foreign and trade policy, fluctuations in foreign exchange
rates particularly with regard to the relationship of the U.S. dollar and Asian
currencies. The Company is unable to predict future economic, political, and
regulatory and foreign exchange changes and cannot determine their impact on
future performance.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
-14-
<PAGE> 15
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Not applicable
ITEM 2: CHANGES IN SECURITIES
Not applicable
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4: SUBMISSIONS OF MATTERS TO VOTE BY SECURITY HOLDERS
Not applicable
ITEM 5: OTHER INFORMATION
Not applicable
-15-
<PAGE> 16
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation.(1)
3.2 Bylaws of Trident Delaware Corporation, a Delaware corporation.(2)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen Common Stock Certificate.(2)
4.3 Form of Rights Agreement between the Company and ChaseMellon
Shareholder Services, LLC, as Rights Agent (including as
Exhibit A the form of Certificates of Designation,
Preferences and Rights of the Terms of the Series A
Preferred Stock, as Exhibit B the form of Right Certificate,
and as Exhibit C the Summary of Terms of Rights Agreement).
(3)
10.5(*) 1990 Stock Option Plan, together with forms of Incentive Stock Option
Agreement and Non-statutory Stock Option Agreement.(2)
10.6(*) Form of the Company's Employee Stock Purchase Plan.(2)
10.7(*) Summary description of the Company's Fiscal 1992 Bonus Plan.(2)
10.8(*) Form of the Company's Fiscal 1993 Bonus Plan.(2)
10.9(*) Summary description of the Company's 401(k) plan.(2)
10.10(*) Form of Indemnity Agreement for officers, directors and agents.(2)
10.12(*) Form of Non-statutory Stock Option Agreement between the Company and
Frank C. Lin.(4)
10.13(*) Form of 1992 Stock Option Plan amending and restating the
1990 Stock Option Plan included as Exhibit 10.5.(2)
10.14 Lease Agreement dated March 23, 1994 between the Company and
Chan-Paul Partnership for the Company's principal offices
located at 189 North Bernardo Avenue, Mountain View,
California.(4)
10.16 Foundry Venture Agreement dated August 18, 1995 by and between the
Company and United Microelectronics Corporation.(6)(8)
27.1 Financial Data Schedule (EDGAR version only)(7)
</TABLE>
- --------------
(1) Incorporated by reference from exhibit of the same number to the Company's
Annual Report on Form 10-K for the year ended June 30, 1993.
(2) Incorporated by reference from exhibit of the same number to the Company's
Registration Statement on Form S-1 (File No. 33-53768), except that
Exhibit 3.2 is incorporated from Exhibit 3.4.
(3) Incorporated by reference from exhibit 99.1 to the Company's Report on
Form 8-K filed August 21, 1998.
(4) Incorporated by reference from exhibit of the same number to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(5) Incorporated by reference from exhibit of the same number to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
(6) Incorporated by reference from exhibit of the same number to the Company's
Annual Report on Form 10-K for the year ended June 30, 1995.
(7) Filed herewith.
(8) Confidential treatment has been requested for a portion of this document.
(*) Management contracts or compensatory plans or arrangements covering
executive officer or directors of the Company.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on August 21, 1998 relating to
the "Preferred Shares Rights Agreement" as described in Note 5, page 7.
-16-
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on November 10, 1998 on its
behalf by the undersigned thereunto duly authorized.
Trident Microsystems, Inc.
- --------------------------------------------------
(Registrant)
/s/ FRANK C. LIN
- --------------------------------------------------
Frank C. Lin
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
/s/ PETER JEN
- --------------------------------------------------
(Peter Jen)
Senior Vice President, Asia Operations and Chief
Accounting Officer (Principal Financial and
Accounting Officer)
-17-
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation.(1)
3.2 Bylaws of Trident Delaware Corporation, a Delaware corporation.(2)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen Common Stock Certificate.(2)
4.3 Form of Rights Agreement between the Company and ChaseMellon
Shareholder Services, LLC, as Rights Agent (including as
Exhibit A the form of Certificates of Designation,
Preferences and Rights of the Terms of the Series A
Preferred Stock, as Exhibit B the form of Right Certificate,
and as Exhibit C the Summary of Terms of Rights Agreement).
(3)
10.5(*) 1990 Stock Option Plan, together with forms of Incentive Stock Option
Agreement and Non-statutory Stock Option Agreement.(2)
10.6(*) Form of the Company's Employee Stock Purchase Plan.(2)
10.7(*) Summary description of the Company's Fiscal 1992 Bonus Plan.(2)
10.8(*) Form of the Company's Fiscal 1993 Bonus Plan.(2)
10.9(*) Summary description of the Company's 401(k) plan.(2)
10.10(*) Form of Indemnity Agreement for officers, directors and agents.(2)
10.12(*) Form of Non-statutory Stock Option Agreement between the Company and
Frank C. Lin.(4)
10.13(*) Form of 1992 Stock Option Plan amending and restating the
1990 Stock Option Plan included as Exhibit 10.5.(2)
10.14 Lease Agreement dated March 23, 1994 between the Company and
Chan-Paul Partnership for the Company's principal offices
located at 189 North Bernardo Avenue, Mountain View,
California.(4)
10.16 Foundry Venture Agreement dated August 18, 1995 by and between the
Company and United Microelectronics Corporation.(6)(8)
27.1 Financial Data Schedule (EDGAR version only)(7)
</TABLE>
- --------------
(1) Incorporated by reference from exhibit of the same number to the Company's
Annual Report on Form 10-K for the year ended June 30, 1993.
(2) Incorporated by reference from exhibit of the same number to the Company's
Registration Statement on Form S-1 (File No. 33-53768), except that
Exhibit 3.2 is incorporated from Exhibit 3.4.
(3) Incorporated by reference from exhibit 99.1 to the Company's Report on
Form 8-K filed August 21, 1998.
(4) Incorporated by reference from exhibit of the same number to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(5) Incorporated by reference from exhibit of the same number to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
(6) Incorporated by reference from exhibit of the same number to the Company's
Annual Report on Form 10-K for the year ended June 30, 1995.
(7) Filed herewith.
(8) Confidential treatment has been requested for a portion of this document.
(*) Management contracts or compensatory plans or arrangements covering
executive officer or directors of the Company.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 19,996
<SECURITIES> 20,656
<RECEIVABLES> 11,638
<ALLOWANCES> 0
<INVENTORY> 4,049
<CURRENT-ASSETS> 60,344
<PP&E> 7,502
<DEPRECIATION> 0
<TOTAL-ASSETS> 119,780
<CURRENT-LIABILITIES> 14,990
<BONDS> 0
0
0
<COMMON> 42,167
<OTHER-SE> 60,015
<TOTAL-LIABILITY-AND-EQUITY> 119,780
<SALES> 23,876
<TOTAL-REVENUES> 0
<CGS> 16,918
<TOTAL-COSTS> 16,918
<OTHER-EXPENSES> 17,111
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 515
<INCOME-PRETAX> (2,680)
<INCOME-TAX> 29
<INCOME-CONTINUING> (2,709)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,709)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
