<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 MARCH 31, 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 March 31, 1998 was 13,190,039.
This document (including exhibits) contains 18 pages.
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TRIDENT MICROSYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1: Unaudited Financial Information
Condensed Consolidated Balance Sheet - March 31, 1998 and
June 30, 1997 (Unaudited) 3
Condensed Consolidated Statement of Operations for the Three Months
and Nine Months Ended March 31, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Statement of Cash Flows for the Nine Months
Ended March 31, 1998 and 1997 (Unaudited) 5
Notes to the Condensed Consolidated Financial Statements (Unaudited) 6
Item 2: Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 16
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>
<PAGE> 3
TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited, In Thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 33,859 $ 29,745
Short-term investments 6,542 30,200
Accounts receivable, net 10,077 20,160
Inventories 18,744 7,296
Deferred income taxes 2,926 2,926
Prepaid expenses and other assets 1,288 1,171
----------- -----------
Total current assets 73,436 91,498
Property and equipment, net 7,967 7,463
Investment in joint venture 49,289 39,631
Long-term investment 2,000 --
Other assets 1,349 441
----------- -----------
Total assets $ 134,041 $ 139,033
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,077 $ 14,274
Accrued expenses and other liabilities 9,104 10,220
Current portion of obligation under capital lease 375 286
Income taxes payable 3,150 1,766
----------- -----------
Total current liabilities 19,706 26,546
Deferred income taxes 2,223 2,223
Obligations under capital lease 441 707
----------- -----------
Total liabilities 22,370 29,476
----------- -----------
Stockholders' equity:
Capital stock and additional paid-in capital 44,725 42,812
Retained earnings 68,031 67,830
Treasury stock, at cost, 100 shares (1,085) (1,085)
----------- -----------
Total stockholders' equity 111,671 109,557
----------- -----------
Total liabilities and stockholders equity $ 134,041 $ 139,033
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited, In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 28,249 $ 46,511 $ 93,727 $143,214
Cost of sales 18,518 29,064 60,216 92,090
-------- -------- -------- --------
Gross margin 9,731 17,447 33,511 51,124
Research and development expenses 7,175 5,423 20,440 16,163
Sales, general and administrative expenses 4,414 5,718 15,015 16,552
-------- -------- -------- --------
Income (loss) from operations (1,858) 6,306 (1,944) 18,409
Interest income, net 576 360 2,223 1,332
-------- -------- -------- --------
Income (loss) before income taxes (1,282) 6,666 279 19,741
Provision (benefit) for income taxes (359) 2,134 78 6,319
-------- -------- -------- --------
Net income (loss) $ (923) $ 4,532 $ 201 $ 13,422
======== ======== ======== ========
Basic earnings (loss) per share $ (0.07) $ 0.35 $ 0.02 $ 1.06
======== ======== ======== ========
Common shares used in computing basic
per share amounts 13,090 12,815 13,020 12,692
======== ======== ======== ========
Diluted earnings (loss) per share $ (0.07) $ 0.32 $ 0.01 $ 0.95
======== ======== ======== ========
Common and common equivalent shares used
in computing diluted per share amounts 13,090 14,280 14,661 14,128
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE> 5
TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 201 $ 13,422
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 2,830 1,999
Provision for doubtful accounts 71 174
Changes in assets and liabilities:
Accounts receivable 10,012 (6,941)
Inventories (11,448) 16,602
Prepaid expenses and other current assets (117) 6,319
Other assets (908) (2,519)
Accounts payable (7,197) (10,894)
Accrued expenses and other liabilities (1,116) 1,914
Income tax payable 1,384 310
-------- --------
Net cash provided by (used in) operating activities (6,288) 20,386
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term investments, net 23,658 4,334
Purchases of property and equipment (3,334) (2,467)
Payment from vendor under capacity agreement -- 14,400
Investment in joint venture (9,658) (25,915)
Long-term investment (2,000) --
-------- --------
Net cash provided by investing activities 8,666 (9,648)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations (177) --
Principal repayment by stockholder of note receivable -- 585
Issuance of common stock 1,913 1,959
-------- --------
Net cash provided by financing activities 1,736 2,544
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,114 13,282
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 29,745 16,894
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 33,859 $ 30,176
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<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, 1997 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, 1998.
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.
NOTE 3: INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1997
-------------- -------------
<S> <C> <C>
Work in process $ 5,457 $ 3,154
Finished goods 13,287 4,142
------- -------
$18,744 $ 7,296
======= =======
</TABLE>
NOTE 4: JOINT VENTURE AGREEMENT
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 Corporation (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. At
March 31, 1998, the Company held a 9.3% equity ownership in UICC. On October 3,
1997, a fire at UICC's fabrication plant in Hsin Chu, Taiwan, Republic of China,
completely destroyed its fabrication equipment. The fabrication plant, and the
destroyed equipment, was insured. Trident was not utilizing the UICC fabrication
plant as a primary source for wafers, 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.
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<PAGE> 7
NOTE 5: 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 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 Three Months Ended
March 31, 1998 March 31, 1997
-------------------------------------------- --------------------------------------------
Income (loss) Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income (loss) available to common
stockholders $ (923) 13,090 $ (0.07) $ 4,532 12,815 $ 0.35
============= =============
Effect of Dilutive Securities
Common stock equivalents -- -- -- 1,465
------------- ------------- ------------- -------------
Diluted EPS
Net income (loss) available to common
stockholders and assumed
conversions $ (923) 13,090 $ (0.07) $ 4,532 14,280 $ 0.32
============= ============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
March 31, 1998 March 31, 1997
-------------------------------------------- --------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income available to common
stockholders $ 201 13,020 $ 0.02 $ 13,422 12,692 $ 1.06
============= =============
Effect of Dilutive Securities
Common stock equivalents -- 1,641 -- 1,436
------------- ------------- ------------- -------------
Diluted EPS
Net income available to common
stockholders and assumed
conversions $ 201 14,661 $ 0.01 $ 13,422 14,128 $ 0.95
============= ============= ============= ============= ============= =============
</TABLE>
Options to purchase 4,167,841 shares of common stock were outstanding
during the three month period ended March 31, 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 61,301 shares of common stock were outstanding
during the nine month period ended March 31, 1998 but 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. Options to purchase 61,301 and
118,801 shares of common stock were outstanding during the three and nine months
ended March 31, 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.
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<PAGE> 8
NOTE 6: NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (FAS No. 130), "Reporting
Comprehensive Income" and No. 131 (FAS No. 131), "Disclosures About Segments of
an Enterprise and Related Information." FAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements and is effective for fiscal years
beginning after December 15, 1997. FAS No. 131 supercedes FAS No. 14 and
requires segment information be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments in quarterly and annual reports. FAS No. 131 is effective for annual
reports for fiscal years beginning after December 15, 1997 and applicable to
interim financial statements beginning in the second year of application. The
Company believes that the effect of adopting the new standards will not be
material to its consolidated financial statements.
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<PAGE> 9
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 and nine months ended March 31, 1998 and
1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 65.6 62.5 64.2 64.3
-------- -------- -------- --------
Gross margin 34.4 37.5 35.8 35.7
Research and development 25.4 11.7 21.8 11.3
Selling, general and administrative 15.6 12.3 16.0 11.5
-------- -------- -------- --------
Income (loss) from operations (6.6) 13.5 (2.0) 12.9
Interest income, net 2.0 0.8 2.4 0.9
-------- -------- -------- --------
Income (loss) before income taxes (4.6) 14.3 0.4 13.8
Provision (benefit) for income taxes (1.3) 4.6 0.1 4.4
-------- -------- -------- --------
Net income (loss) (3.3)% 9.7% 0.3% 9.4%
======== ======== ======== ========
</TABLE>
Net Sales
Net sales for the three months ended March 31, 1998 were $28.2 million
or 39% less than the $46.5 million reported in the three months ended March 31,
1997, and increased $1.3 million, or 5%, from the $26.9 million reported in the
three months ended December 31, 1997. The sales increase from the three months
ended December 31, 1997 was predominantly due to an increase in unit shipments
in 3D desktop products which offset declines in all other desktop and notebook
product lines. Net sales for the nine months ended March 31, 1998 were $93.7
million or 35% less than the $143.2 million reported in the nine months ended
March 31, 1997. For the three and nine months ended March 31, 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 67% and 30%, respectively, of the Company's sales for the three
months ended March 31, 1998, and 53% and 41%, respectively, for the three months
ended March 31, 1997. In the nine month period ended March 31, 1998, desktop and
portable products accounted for 57% and 40% of total sales, respectively. In the
nine month period ended March 31, 1997, desktop and portable products accounted
for 57% and 36% of total sales, respectively.
Sales to North American and European customers represented 15% of net
sales in the three months ended March 31, 1998, a decrease from approximately
22% in the three months ended March 31, 1997. Sales to North American and
European customers decreased to approximately 16% of net sales in the nine
months ended March 31, 1998 from approximately 26% in the same prior fiscal year
period. This decrease
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<PAGE> 10
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 March 31, 1998, up from approximately 78% in the three
months ended March 31, 1997. Sales to Asian customers accounted for
approximately 84% of net sales in the nine months ended March 31, 1998, up from
74% in the nine months ended March 31, 1997. In the three months ended March 31,
1998, sales to three customers accounted for 22%, 12%, and 12% of net sales,
respectively. In the three months ended March 31, 1997, sales to three
customers, accounted for 26%, 11%, and 11% of net sales, respectively. In the
nine months ended March 31, 1998, sales to two customers, accounted for 17% and
10% of net sales, respectively. In the nine months ended March 31, 1997, sales
to four customers, accounted for 22%, 11%, 10%, and 10% of net sales,
respectively. The Company derives a portion of its revenues from sales to
distributors. Sales to distributors represented 9% and 20% of revenues during
the three months ended March 31, 1998 and 1997, respectively, and 11% of
revenues during the nine months ended March 31, 1998, down from 19% in the nine
months ended March 31, 1997. Sales returns from distributors have historically
not been material. However, during the first six months of fiscal year 1998 the
Company experienced higher than usual returns resulting from certain
distributors adjusting their inventory mix and levels. These levels have
declined over the quarter ended March 31, 1998 to a level that the Company
believes is not material. The Company expects returns to remain at an immaterial
level for the remainder of calendar 1998. 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 $9.7 million for the three months ended March
31, 1998, down from $17.4 million in the three months ended March 31, 1997. The
gross margin as a percent of sales for the three month period ended March 31,
1998 decreased to 34% of net sales as compared to 38% for the three months ended
March 31, 1997. Gross margin for the three months ended March 31, 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. Gross margin decreased to $33.5 million for the
nine months ended March 31, 1998, down from $51.1 million for the nine months
ended March 31, 1997. Gross margin as a percent of net sales for the nine month
period ended March 31, 1998 remains flat as compared to the nine month period
ended March 31, 1997.
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
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<PAGE> 11
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 March 31,
1998 increased to $7.2 million from the March 31, 1997 three month period of
$5.4 million. As a percent of net sales, research and development expenses
increased to 25% for the three months ended March 31, 1998 from 12% of net sales
for the three months ended March 31, 1997. Research and development expenditures
for the nine months ended March 31, 1998 increased to $20.4 million from the
March 31, 1997 nine month period of $16.1 million. The Company has increased its
research and development efforts to introduce new products and intends to
continue making substantial investments in research and development personnel
and other expenses. In particular, the Company has increased its investment in
its multimedia development to bring stand-alone and integrated multimedia
products to the marketplace. This multimedia investment has increased by about
$0.9 million for the three months ended March 31, 1998 from the three months
ended March 31, 1997.
Selling, General and Administrative
Selling, general and administrative expenses decreased to $4.4 million
in the three months ended March 31, 1998 from $5.7 million in the three months
ended March 31, 1997. As a percent of net sales, selling, general and
administrative expenditures increased to 16% of net sales for the three months
ended March 31, 1998 from 12% of net sales in the three months ended March 31,
1997. In the nine months ended March 31, 1998, selling, general and
administrative expenditures decreased to $15.0 million, from the March 31, 1997
nine month period of $16.6 million. Selling, general and administrative
expenditures increased to 16% of net sales for the nine months ended March 31,
1998 from 12% of net sales in the nine months ended March 31, 1997. The decrease
in selling, general and administrative expenditures in actual dollars is
attributed primarily to a decrease in representative commissions due to lower
sales for both the three month and nine month periods ending March 31, 1998.
Also 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 increased to $576,000 in the three
months ended March 31, 1998 from $360,000 in the same prior year period
primarily as the result of higher average cash levels invested by the Company.
In the nine month period ended March 31, 1998, interest income increased to
$2,223,000 from $1,332,000 in the nine month period ended March 31, 1997.
- 11 -
<PAGE> 12
Provision for Income Taxes
As a percentage of income before income taxes, the provision for income
taxes is 28% for the three month and nine month periods ended March 31, 1998,
and 32% for the three month and nine month periods ended March 31, 1997. The
effective income tax rates were below the U. S. statutory rate primarily because
operations in foreign countries were subject to lower income tax rates.
Year 2000 Conversion Project
The Company has commenced, for all of its proprietary information
systems, a Year 2000 date conversion project to address all necessary code
changes, testing and implementation. The "Year 2000 Computer Problem" creates
risk for the Company from unforeseen problems in its own computer systems and
from third parties with whom the Company deals on financial transactions
worldwide. Such failures of the Company's and/or third parties' computer systems
could have a material adverse impact on the Company's ability to conduct its
business, and especially to process and account for the transfer of funds
electronically. Management's assessment of its internal Year 2000 compliance
expense is expected to be no more than $20,000.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company's principal sources of liquidity
included cash and cash equivalents of $33.9 million and short-term investments
of $6.5 million. The decline in short-term investments from $15.4 million at
December 31, 1997 was primarily the result of payments of accounts payable
during the quarter ended March 31, 1998.
In the nine months ended March 31, 1998, $6.3 million of cash was used
by operations, compared to the nine months ended March 31, 1997 in which $20.4
million of cash was provided by operations. The decrease was mainly the result
of less profitable operations, an increase in inventories, and a decrease in
accounts payable, offset in part by a decrease in accounts receivable for the
nine months ended March 31, 1998. The increase in inventories was due to the
decrease in sales relative to original expectations. Going forward, the Company
has readjusted sales expectations and is continuing to work to reduce inventory
levels. Capital expenditures were $3.3 million for the nine months ended March
31, 1998 compared to $2.5 million for the nine months ended March 31, 1997.
During the three months ended December 31, 1997, $2.0 million of cash
was invested in a privately-held semiconductor design company for an equity
interest of less than 10%. The investment is presented as a long-term investment
in the financial statements.
In August 1995, the Company entered into a joint venture agreement with
United Microelectronics Corporation (UMC), under which the Company committed to
invest an amount of New Taiwan dollars equivalent to approximately U.S. $49.3
million for a 9.3% equity ownership in a joint venture with UMC and other
venture partners to establish a new foundry, United Integrated Circuits
Corporation (UICC). Under the agreement, the new foundry guarantees to Trident
12.5% of the foundry's total wafer supply. The Company made the first payment,
amounting to U.S. $13.7 million, in January 1996. The Company made an additional
payment of U.S. $25.9 million in January 1997. The final payment under the joint
venture agreement in the amount of $9.7 million was paid in December 1997. On
October 3, 1997, a fire at UICC's fabrication plant in Hsin Chu, Taiwan,
Republic of China,
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<PAGE> 13
completely destroyed its fabrication equipment. The fabrication plant, and the
destroyed equipment, are insured. Trident is not currently using the UICC
fabrication plant as a source for wafers, and there are no existing Trident
products on UICC's production lines. Trident believes that it has secured
sufficient wafer capacities from UMC, Taiwan Semiconductor Manufacturing Company
("TSMC"), and Samsung Semiconductor Company to facilitate its new product
production. The Company feels its wafer supplies are sufficient, and currently
anticipates no shortage of wafers due to the fire. The UICC foundry is being
rebuilt and is expected to begin production in 1999.
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 Annual Report.
The Company will continue to consider possible transactions to secure
additional foundry capacity when and if circumstances warrant the need. The
aforementioned agreement with UMC has caused the Company to expend a significant
amount of its available capital resources. However, the Company believes its
current resources are sufficient to meet its needs for at least the next twelve
months.
The Company expects to finalize a $13.9 million unsecured bank line of
credit in the fourth quarter of fiscal 1998. Under the proposed terms of the
line of credit, the Company may elect to convert a portion or the total credit
line into a three year term loan.
The Company's Board of Directors has approved a $20 million stock
repurchase program. The Company's cash reserves may decline as a result of their
use in this program. See Subsequent Events.
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.
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 its planned growth in expenditures
and the relation of planned increased expenses 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
- 13 -
<PAGE> 14
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 March 31,
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. In order to be able to timely introduce new products a number of risk
factors have to be overcome. A fundamental business risk is whether or not the
Company can continue to develop products that will be accepted by a
fast-changing marketplace. The Company attempts to determine which products have
a high likelihood of marketplace acceptance and 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 planned growth in
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.
- 14 -
<PAGE> 15
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 is expanding its operations
in East Asia with the start of a research and development facility in Shanghai,
People's Republic of China in the quarter ended March 31, 1998. This facility
currently has thirty employees with more expected by the end of the fiscal year.
The Company is considering this expansion and 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.
SUBSEQUENT EVENTS
Dr. Leonard Liu resigned from the Company's Board of Directors effective
April 14, 1998 to pursue other business interests.
On April 22, 1998 the Company's Board of Directors announced that the
Company will repurchase, from time to time, at management's discretion its own
common stock for an aggregate price not exceeding $20,000,000 at prevailing
market prices over the next twelve months. Through May 13, 1998, the Company
repurchased 274,500 shares for $2,100,000 in cash. Purchases will be made using
the Company's own cash resources. Shares repurchased will be held as treasury
stock until reissued. Shares may be reissued to employees pursuant to the
Company's stock option and stock purchase plans or other benefit plans the
Company may adopt in the future or for other corporate purposes.
- 15 -
<PAGE> 16
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On June 24, 1996, Core 2 Electronics, Inc. ("Core 2"), a former sales
representative of Trident Microsystems, Inc. (the "Company"), filed a Demand for
Arbitration with the American Arbitration Association. Pursuant to the Demand,
Core 2 is seeking approximately $410,000 plus interest with respect to certain
breach of contract claims and unspecified punitive damages. The arbitration
commenced on October 27, 1997 and was settled in April 1998 with a payment of
$28,000.
On August 12, 1997, Michael Le, a former employee of Trident
Microsystems, Inc. (the "Company") filed an employment discrimination lawsuit
against the Company in Superior Court for the County of Santa Clara. Le is
seeking an unspecified amount of damages. The case is currently in the discovery
phase.
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
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed with this Form:
Exhibit Description
------- -----------
27.1 Financial Data Schedule.(1)
(1) Filed herewith.
The Company did not file any reports on Form 8-K during the quarter
ended March 31, 1998.
- 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 May 14, 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/ W. Steven Rowe
- ------------------------------------------
W. Steven Rowe
Vice President, Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
- 17 -
<PAGE> 18
INDEX TO EXHIBITS
Exhibit Description
------- -----------
27.1 Financial Data Schedule.(1)
(1) Filed herewith.
- 18 -
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 33,859
<SECURITIES> 6,542
<RECEIVABLES> 10,077
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0
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<CGS> 18,518
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<INTEREST-EXPENSE> 576
<INCOME-PRETAX> (1,282)
<INCOME-TAX> (359)
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