<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 DECEMBER 31, 1997
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
incorporation or organization) identification No.)
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 December 31, 1997 was 13,072,741.
This document (including exhibits) contains 17 pages.
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TRIDENT MICROSYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1: Unaudited Financial Information
Condensed Consolidated Balance Sheet - December 31, 1997 and
June 30, 1997 (Unaudited) 3
Condensed Consolidated Statement of Operations for the Three Months
and Six Months Ended December 31, 1997 and 1996 (Unaudited) 4
Condensed Consolidated Statement of Cash Flows for the Six Months
Ended December 31, 1997 and 1996 (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)
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 33,215 $ 29,745
Short-term investments 15,419 30,200
Accounts receivable, net 10,126 20,160
Inventories 22,479 7,296
Deferred income taxes 2,926 2,926
Prepaid expenses and other assets 1,760 1,171
---------- ----------
Total current assets 85,925 91,498
Property and equipment, net 8,392 7,463
Investment in joint venture 49,331 39,631
Long-term investment 2,000 --
Other assets 766 441
---------- ----------
Total assets $ 146,414 $ 139,033
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,714 $ 14,274
Accrued expenses and other liabilities 9,005 10,220
Current portion of obligation under capital lease 359 286
Income taxes payable 3,201 1,766
---------- ----------
Total current liabilities 31,279 26,546
Deferred income taxes 2,223 2,223
Obligations under capital lease 475 707
---------- ----------
Total liabilities 33,977 29,476
---------- ----------
Stockholders' equity:
Capital stock and additional paid-in capital 44,568 42,812
Retained earnings 68,954 67,830
Treasury stock, at cost, 100 shares (1,085) (1,085)
---------- ----------
Total stockholders' equity 112,437 109,557
---------- ----------
Total liabilities and stockholders equity $ 146,414 $ 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 Six Months Ended
December 31, December 31,
----------------------- -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 26,939 $ 51,865 $ 65,478 $ 96,703
Cost of sales 18,705 33,452 41,698 63,027
-------- -------- -------- --------
Gross margin 8,234 18,413 23,780 33,676
Research and development expenses 6,674 5,706 13,265 10,741
Sales, general and administrative expenses 5,089 5,434 10,601 10,832
-------- -------- -------- --------
Income (loss) from operations (3,529) 7,273 (86) 12,103
Interest income, net 822 618 1,647 972
-------- -------- -------- --------
Income (loss) before income taxes (2,707) 7,891 1,561 13,075
Provision (benefit) for income taxes (758) 2,526 437 4,185
-------- -------- -------- --------
Net income (loss) $ (1,949) $ 5,365 $ 1,124 $ 8,890
======== ======== ======== ========
Basic earnings (loss) per share $ (0.15) $ 0.42 $ 0.09 $ 0.70
======== ======== ======== ========
Common shares used in computing basic
per share amounts 13,036 12,683 12,986 12,649
======== ======== ======== ========
Diluted earnings (loss) per share $ (0.15) $ 0.38 $ 0.08 $ 0.64
======== ======== ======== ========
Common and common equivalent shares used
in computing diluted per share amounts 13,036 14,225 14,581 13,926
======== ======== ======== ========
</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 CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,124 $ 8,890
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 1,805 1,386
Provision for doubtful accounts 675 114
Changes in assets and liabilities:
Accounts receivable 9,359 (1,873)
Inventories (15,183) 7,224
Prepaid expenses and other current assets (589) 1,737
Other assets (325) 2,404
Accounts payable 4,440 (3,381)
Accrued expenses and other liabilities (1,215) 2,903
Income tax payable 1,435 (1,611)
-------- --------
Net cash provided by operating activities 1,526 17,793
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term investments, net 14,781 23,859
Purchases of property and equipment (2,734) (1,161)
Investment in joint venture (9,700) --
Long-term investment (2,000) --
-------- --------
Net cash provided by investing activities 347 22,698
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations (159) --
Issuance of common stock 1,756 726
-------- --------
Net cash provided by financing activities 1,597 726
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,470 41,217
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 29,745 16,894
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 33,215 $ 58,111
======== ========
</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>
December 31, 1997 June 30, 1997
----------------- -------------
<S> <C> <C>
Work in process $ 6,583 $3,154
Finished goods 15,896 4,142
------- ------
$22,479 $7,296
======= ======
</TABLE>
NOTE 4: JOINT VENTURE AGREEMENT
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
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, amounting to U.S. $9.7 million, was made in December 1997. 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
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<PAGE> 7
no existing Trident products on UICC's production lines. The UICC foundry is
being rebuilt and is expected to be in production in 1999.
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
December 31, 1997 December 31, 1996
------------------------------------------ -----------------------------------------
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 $ (1,949) 13,036 $ (0.15) $ 5,365 12,683 $ 0.42
========= =========
Effect of Dilutive Securities
Common stock equivalents -- -- -- 1,542
------------- ------------- ------------- -------------
Diluted EPS
Net income (loss) available to common
stockholders and assumed
conversions $ (1,949) 13,036 $ (0.15) $ 5,365 14,225 $ 0.38
============= ============= ========= ============= ============= =========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
December 31, 1997 December 31, 1996
----------------------------------------- -----------------------------------------
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 $ 1,124 12,986 $ 0.09 $ 8,890 12,649 $ 0.70
========= =========
Effect of Dilutive Securities
Common stock equivalents -- 1,595 -- 1,277
------------- ------------- ------------- -------------
Diluted EPS
Net income available to common
stockholders and assumed
conversions $ 1,124 14,581 $ 0.08 $ 8,890 13,926 $ 0.64
============= ============= ========= ============= ============= =========
</TABLE>
Options to purchase 4,452,573 shares of common stock were outstanding
during the three month period ended December 31, 1997 but were not included in
the computations of diluted EPS because the Company incurred a loss. Options to
purchase 667,801 shares of common stock were outstanding during the six month
period ended December 31, 1997 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 157,801 shares
of common stock were outstanding during the three and six months ended December
31, 1996 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 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
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<PAGE> 8
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 six months ended December 31, 1997
and 1996:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------- -------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Cost of sales 69 64 64 65
---- ---- ---- ----
Gross margin 31 36 36 35
Research and development 25 11 20 11
Selling, general and administrative 19 11 16 11
---- ---- ---- ----
Income (loss) from operations (13) 14 -- 13
Interest income, net 3 1 3 1
---- ---- ---- ----
Income (loss) before income taxes (10) 15 3 14
Provision (benefit) for income taxes (3) 5 1 5
---- ---- ---- ----
Net income (loss) (7)% 10% 2% 9%
==== ==== ==== ====
</TABLE>
Net Sales
Net sales for the three months ended December 31, 1997 were $26.9
million or 48% less than the $51.9 million reported in the three months ended
December 31, 1996, and declined $11.6 million, or 30%, from the $38.5 million
reported in the three months ended September 30, 1997. Net sales for the six
months ended December 31, 1997 were $65.5 million or 32% less than the $96.7
million reported in the six months ended December 31, 1996. The sales decline
from the three months ended September 30, 1997 was predominantly due to a
decline in unit shipments in 3D desktop products and 2D notebook products.
Desktop and portable products accounted for 53% and 43%, respectively, of the
Company's sales for the three months ended December 31, 1997, and 59% and 35%,
respectively, for the three months ended December 31, 1996. In the six month
period ended December 31, 1997, desktop and portable products accounted for 52%
and 44% of total sales, respectively. In the six month period ended December 31,
1996, desktop and portable products accounted for 59% and 35% of total sales,
respectively.
Sales to North American and European customers represented 11% of net
sales in the three months ended December 31, 1997, a decrease from 25% in the
three months ended December 31, 1996. Sales to North American and European
customers decreased to 17% of net sales in the six months ended December 31,
1997 from 28% in the same prior fiscal year period. 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 89% of net sales in the three months ended
December 31, 1997, up from 75% in the three months ended December 31, 1996.
Sales to Asian
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<PAGE> 10
customers accounted for approximately 83% of net sales in the six months ended
December 31, 1997, up from 72% in the six months ended December 31, 1996. In the
three months ended December 31, 1997, sales to two customers accounted for 17%
and 16% of net sales, respectively. In the three months ended December 31, 1996,
sales to three customers, accounted for 16%, 15%, and 13% of net sales,
respectively. In the six months ended December 31, 1997, sales to three
customers, accounted for 15%, 13%, and 11% of net sales, respectively. In the
six months ended December 31, 1996, sales to three customers, accounted for 20%,
14%, and 11% of net sales, respectively. The Company derives a portion of its
revenues from sales to distributors. Sales to distributors represented 14% and
19% of revenues during the three months ended December 31, 1997 and 1996,
respectively, and 17% of revenues during the six months ended December 31, 1997,
down from 19% in the six months ended December 31, 1996. Sales returns from
distributors have historically not been material. However, 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.
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 $8.2 million for the three months ended
December 31, 1997, down from $18.4 million in the three months ended December
31, 1996. The gross margin as a percent of sales for the three month period
ended December 31, 1997 decreased to 31% of net sales as compared to 36% for the
three months ended December 31, 1996. Gross margin for the three months ended
December 31, 1997 was adversely affected by lower sales of 2-D notebook
products, which have historically been a high margin contributor, and a
non-recurring charge of $1.3 million for royalties. Gross margin decreased to
$23.8 million for the six months ended December 31, 1997, down from $33.7
million for the six months ended December 31, 1996. Gross margin as a percent of
net sales for the six month period ended December 31, 1997 remains flat as
compared to the six month period ended December 31, 1996.
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.
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<PAGE> 11
Research and Development
Research and development expenditures for the three months ended
December 31, 1997 increased to $6.7 million from the December 31, 1996 three
month period of $5.7 million. Research and development expenditures for the six
months ended December 31, 1997 increased to $13.3 million from the December 31,
1996 six month period of $10.7 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.
Selling, General and Administrative
Selling, general and administrative expenditures decreased to $5.1
million in the three months ended December 31, 1997 from $5.4 million in the
three months ended December 30, 1996. As a percent of net sales, selling,
general and administrative expenditures increased to 19% of net sales for the
three months ended December 31, 1997 from 11% of net sales in the three months
ended December 31, 1996. In the six months ended December 31, 1997, selling,
general and administrative expenditures decreased to $10.6 million, from the
December 31, 1996 six month period of $10.8 million. Selling, general and
administrative expenditures increased to 16% of net sales for the six months
ended December 31, 1997 from 11% of net sales in the six months ended December
31, 1996. The decrease in selling, general and administrative expenditures in
actual dollars is attributed to a decrease in representative commissions due to
lower sales for both the three month and six month periods ending December 31,
1997.
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 $822,000 in the three
months ended December 31, 1997 from $618,000 in the same prior year period
primarily as the result of higher average cash levels invested by the Company.
In the six month period ended December 31, 1997, interest income increased to
$1,647,000 from $972,000 in the six month period ended December 31, 1996.
Provision for Income Taxes
As a percentage of income before income taxes, the provision for income
taxes is 28% for the three month and six month periods ended December 31, 1997,
and 32% for the three month and six month periods ended December 31, 1996. 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
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<PAGE> 12
funds electronically. Management has not yet assessed the Year 2000 compliance
expense and related potential effect on the Company's earnings.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company's principal sources of liquidity
included cash and cash equivalents of $33.2 million and short-term investments
of $15.4 million.
In the six months ended December 31, 1997, $1.5 million of cash was
provided by operating activities, down from $17.8 million in the six months
ended December 31, 1996. The decrease was mainly the result of less profitable
operations, an increase in inventories, and a decrease in accrued expenses;
offset in part by a decrease in accounts receivable, and an increase in accounts
payable and income tax payable. Capital expenditures were $2.7 million for the
six months ended December 31, 1997 compared to $1.1 million for the six months
ended December 31, 1996. The increase in inventories was due to the decline in
sales during the three months ended December 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
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, 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.
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<PAGE> 13
In February 1998, the Company obtained a credit facility of an unsecured
revolving line of credit of $15 million with a maturity date of October 30,
1999. Under the terms of the line of credit, the Company may elect to convert a
portion or the total credit into a three-year term loan. The facility requires
the Company to comply with certain covenants regarding financial ratios and
reporting requirements. In addition to the $15 million line of credit, the
Company regularly considers transactions to finance its activities, including
debt and equity offerings and new credit facilities or other financing
transactions.
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 in 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 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 reoccur in the future. 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
- 13 -
<PAGE> 14
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 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.
The Company had experienced significant growth, which had and could
continue to strain its personnel, financial and other resources. In particular,
the sale and distribution of products to numerous leading PC systems
manufacturers in diverse markets and the requirements of such manufacturers for
design support places substantial demands on the Company's research and
development and sales functions. Continued 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.
- 14 -
<PAGE> 15
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.
- 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 is ongoing. The Company believes that Core 2's
claims are without merit and intends to oppose them vigorously. However, no
assurance can be given that the Company will prevail in this matter.
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:
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
27.1 Financial Data Schedule. (1)
</TABLE>
- ----------
(1) Filed herewith.
The Company did not file any reports on Form 8-K during the quarter
ended December 31, 1997.
- 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 February 12, 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
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 33,215
<SECURITIES> 15,419
<RECEIVABLES> 10,126
<ALLOWANCES> 0
<INVENTORY> 22,479
<CURRENT-ASSETS> 85,925
<PP&E> 8,392
<DEPRECIATION> 0
<TOTAL-ASSETS> 146,414
<CURRENT-LIABILITIES> 31,279
<BONDS> 0
0
0
<COMMON> 43,483
<OTHER-SE> 68,954
<TOTAL-LIABILITY-AND-EQUITY> 146,414
<SALES> 26,939
<TOTAL-REVENUES> 26,939
<CGS> 18,705
<TOTAL-COSTS> 18,705
<OTHER-EXPENSES> 11,763
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (822)
<INCOME-PRETAX> (2,707)
<INCOME-TAX> (758)
<INCOME-CONTINUING> (1,949)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,949)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
