<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, 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)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 77-0156584
(State or other jurisdiction of (I.R.S. Employer identification No.)
incorporation or organization)
</TABLE>
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, 1998 was 12,998,203.
This document (including exhibits) contains 17 pages.
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TRIDENT MICROSYSTEMS, INC.
INDEX
<TABLE>
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Page
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PART I: FINANCIAL INFORMATION
Item 1: Unaudited Financial Information
Condensed Consolidated Balance Sheet - December 31, 1998 and
June 30, 1998 (Unaudited) 3
Condensed Consolidated Statement of Operations for the Three Months
and Six Months Ended December 31, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Statement of Cash Flows for the Six Months
Ended December 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 8
and Results of Operations
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>
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TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands, Unaudited)
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ --------
<S> <C> <C>
Current assets:
Cash, cash equivalents $ 16,430 $ 22,916
Short-term investments 21,861 13,970
Accounts receivable, net 8,404 8,183
Inventories 5,217 10,146
Deferred income taxes 2,266 2,266
Prepaid expenses and other assets 1,611 1,236
--------- ---------
Total current assets 55,789 58,717
Property and equipment, net 7,454 7,766
Investment in joint venture 49,289 49,289
Other assets 2,645 2,655
--------- ---------
Total assets $ 115,177 $ 118,427
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,128 $ 3,359
Accrued expenses and other liabilities 4,727 5,805
Current portion of obligation under capital lease 383 380
Income taxes payable 1,729 1,292
--------- ---------
Total current liabilities 11,967 10,836
Deferred income taxes 2,350 2,350
Obligations under capital lease 166 350
--------- ---------
Total liabilities 14,483 13,536
--------- ---------
Stockholders' equity:
Common stock and additional paid-in capital 45,918 45,352
Retained earnings 58,258 62,724
Treasury stock, at cost, 435 and 374 shares (3,482) (3,185)
--------- ---------
Total stockholders' equity 100,694 104,891
--------- ---------
Total liabilities and stockholders equity $ 115,177 $ 118,427
========= =========
</TABLE>
3
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TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA, UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 20,652 $ 26,939 $ 44,528 $ 65,478
Cost of sales 12,596 18,705 29,514 41,698
-------- -------- -------- --------
Gross margin 8,056 8,234 15,014 23,780
Research and development expenses 6,604 6,674 12,830 13,265
Sales, general and administrative expenses 3,774 5,089 7,701 10,601
-------- -------- -------- --------
Income from operations (2,322) (3,529) (5,517) (86)
Interest income, net 565 822 1,080 1,647
-------- -------- -------- --------
Income before income taxes (1,757) (2,707) (4,437) 1,561
Provision for income taxes -- (758) 29 437
-------- -------- -------- --------
Net income (loss) $ (1,757) $ (1,949) $ (4,466) $ 1,124
======== ======== ======== ========
Basic earnings (loss) per share $ (0.14) $ (0.15) $ (0.35) $ 0.09
======== ======== ======== ========
Shares used in computing
per share amounts 12,972 13,036 12,943 12,986
======== ======== ======== ========
Diluted earnings (loss) per share $ (0.14) $ (0.15) $ (0.35) $ 0.08
======== ======== ======== ========
Shares used in computing diluted
per share amounts 12,972 13,036 12,943 14,581
======== ======== ======== ========
</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
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,466) $ 1,124
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 1,954 1,805
Provision for doubtful accounts and sales returns 154 675
Changes in assets & liabilities:
Accounts receivable (375) 9,359
Inventories 4,929 (15,183)
Prepaid expenses and other current assets (375) (589)
Other assets 10 (2,325)
Accounts payable 1,769 4,440
Accrued expenses and other liabilities (1,078) (1,215)
Income tax payable 437 1,435
-------- --------
Net cash provided by (used in) operating activities 2,959 (474)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short-term investments, net (7,891) 14,781
Purchase of property and equipment (1,642) (2,734)
Investment in joint venture -- (9,700)
-------- --------
Net cash provided by (used in) investing activities (9,533) 2,347
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 566 1,756
Repayment of capital leases (181) (159)
Purchase of treasury stock (297) --
-------- --------
Net cash provided by financing activities 88 1,597
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,486) 3,470
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,916 29,745
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,430 $ 33,215
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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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>
December 31, 1998 June 30, 1998
----------------- -------------
<S> <C> <C>
Work in process $ 1,271 $ 2,615
Finished goods 3,946 7,531
------- -------
$ 5,217 $10,146
------- -------
</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
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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 Six Months Ended
December 31, December 31,
-------------------------- ------------------------
(in thousands, except per share data) 1998 1997 1998 1997
--------- --------- --------- -------
<S> <C> <C> <C> <C>
BASIC NET INCOME (LOSS) PER SHARE
Net income (loss) available to Common
Shareholders $ (1,757) $ (1,949) $ (4,466) $ 1,124
========= ========= ========= =======
Weighted average common shares 12,972 13,036 12,943 12,986
========= ========= ========= =======
Basic net income (loss) per share $ (0.14) $ (0.15) $ (0.35) $ 0.09
========= ========= ========= =======
DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) available to Common
Shareholders $ (1,757) $ (1,949) $ (4,466) $ 1,124
========= ========= ========= =======
Weighted average common shares 12,972 13,036 12,943 12,986
Dilutive common stock equivalents -- -- -- 1,595
--------- --------- --------- -------
Weighted average common shares
and equivalents 12,972 13,036 12,943 14,581
========= ========= ========= =======
Diluted net income (loss) per share $ (0.14) $ (0.15) $ (0.35) $ 0.08
========= ========= ========= =======
</TABLE>
Options to purchase 4,573,991 shares of common stock were outstanding at
the end of December 31, 1998 but were not included in the computations of
diluted EPS for the three and six month periods ended December 31, 1998 because
the Company incurred a loss. 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.
NOTE 5 LITIGATION
On December 14, 1998, NeoMagic Corporation (Nasdaq: NMGC), filed suit in
the United States District Court for the District of Delaware against Trident
Microsystems, Inc. (the "Company"). The suit alleges that the Company's embedded
DRAM graphics accelerators infringe certain patents held by NeoMagic
Corporation. The Company intends to defend the litigation vigorously. On January
25, 1999 the Company filed a counter claim in the United States District Court
for the District of Delaware against NeoMagic, Inc. The counter claim alleges an
attempted monopolization in violation of the antitrust laws, arising from
Neomagic's patent infringement filing against the Company. However, due to the
nature of the litigation, the Company cannot estimate with certainty what would
be the ultimate outcome of the litigation.
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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, 1998
and 1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Cost of sales 61 69 66 64
---- ---- ---- ----
Gross margin 39 31 34 36
Research and development 32 25 29 20
Selling, general and administrative 18 19 17 16
---- ---- ---- ----
Income (loss) from operations (11) (13) (12) --
Interest income, net 3 3 2 3
---- ---- ---- ----
Income (loss) before income taxes (8) (10) (10) 3
Provision for income taxes -- (3) -- 1
---- ---- ---- ----
Net income (loss) (8)% (7)% (10)% 2%
---- ---- ---- ----
</TABLE>
Net Sales
Net sales for the three months ended December 31, 1998 were $20.7
million or 23% less than the $26.9 million reported in the three months ended
December 31, 1997, and declined $3.2 million, or 14% from the $23.9 million
reported in the three months ended September 30, 1998. Net sales for the six
months ended December 31, 1998 were $44.5 million or 32% less than the $65.5
million reported in the six months ended December 31, 1997. The sales decrease
from the three months ended September 30, 1998 was predominantly due to a
decrease in unit shipments in both desktop and portable products. For the three
and six months ended December 31, 1998, sales have declined compared to the
prior year as product revenue from the newly introduced 3D products in both the
desktop and portable area were not enough to offset declines in the older, less
in demand 2D products. Desktop and portable products accounted for 46% and 51%,
respectively, of the Company's sales for the three months ended December 31,
1998, and 53% and 43%, respectively, for the three months ended December 31,
1997. In the six month period ended December 31, 1998, desktop and portable
products accounted for 48% and 48% of total sales, respectively. In the six
month period ended December 31, 1997, desktop and portable products accounted
for 52% and 44% of total sales, respectively.
Sales to North American and European customers represented 20% of net
sales in the three months ended December 31, 1998, an increase from
approximately 11% in the three months ended December 31, 1997. Sales to North
American and European customers represented 20% of net sales in the six months
ended December 31, 1998, an increase from approximately 17% in the six months
ended December 31, 1997. The increase in the percentage of net sales for North
American and European customers for the three months ended December 31, 1998, is
primarily due to an increase in sales of 3D desktop products. The
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<PAGE> 9
increase in the percentage of net sales for North American and European
customers for the six months ended December 31, 1998, is primarily due to a
greater decrease in Asian sales relative to North American and European sales
resulting in a higher net sales percentage for North American and European
sales. 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 80% of net
sales in the three months ended December 31, 1998, down from approximately 89%
in the three months ended December 31, 1997. Sales to Asian customers, primarily
in Hong Kong, Taiwan, Korea and Japan, accounted for approximately 80% of net
sales in the six months ended December 31, 1998, down from approximately 83% in
the three months ended December 31, 1997. In the three months ended December 31,
1998, sales to one customer accounted for 15% of net sales. In the three months
ended December 31, 1997, sales to two customers, accounted for 17%, and 16% of
net sales, respectively. In the six months ended December 31, 1998, sales to
three customers accounted for 15%, 13%, and 11% 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. The Company derives a portion of
its revenues from sales to distributors. Sales to distributors represented 16%
and 14% of revenues during the three months ended December 31, 1998 and 1997,
respectively, and 15% of revenues during the six months ended December 31, 1998,
down from 17% in the six months ended December 31, 1997. 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 $8.0 million for the three months ended
December 31, 1998, down from $8.2 million in the three months ended December 31,
1997. The decrease was primarily the result of a market downturn which resulted
in declining sales volume and lower ASP's across all product lines. The gross
margin as a percentage of net sales for the three months period ended December
31, 1998, increased to 39% of net sales as compared to 31% for the three months
ended December 31, 1997. The increase in gross margin as a percentage of sales
is attributed to lower product cost, changes in product mix and certain
non-recurring items such as reversal of forfeited price rebate accruals and
sales of certain products previously reserved. Gross margin decreased to $15.0
million for the six months ended December 31, 1998, down from $23.8 million in
the six months ended December 31, 1997. The gross margin as a percentage of net
sales for the six months period ended December 31, 1998, decreased to 34% of net
sales as compared to 36% for the three months ended December 31, 1997. The six
month decrease was primarily a result of lower sales across all product lines.
The Company expects the gross margin as a percentage of net sales in future
quarters to decline to approximately the level achieved in the quarter ended
September 30, 1998 which was 29%.
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<PAGE> 10
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 December
31, 1998 decreased to $6.6 million from $6.7 million for the December 31, 1997
three month period. As a percent of net sales, research and development expenses
increased to 32% for the three months ended December 31, 1998 from 25% of net
sales for the three months ended December 31, 1997. Research and development
expenses for the six months ended December 31, 1998 decreased to $12.8 million
from $13.3 million for the December 31, 1997 six month period. As a percent of
net sales, research and development expenses increased to 29% for the six months
ended December 31, 1998 from 20% of net sales for the six months ended December
31, 1997. The decrease in research and development expenses in actual dollars
for both the three and six months ended December 31, 1998 from December 31, 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.
Selling, General and Administrative
Selling, general and administrative expenses decreased to $3.8 million
in the three months ended December 31, 1998 from $5.1 million in the three
months ended December 31, 1998. As a percent of net sales, selling, general and
administrative expenditures decreased to 18% of net sales for the three months
ended December 31, 1998 from 19% of net sales in the three months ended December
31, 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 both the
three and six month periods ending December 31, 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 $565,000 in the three
months ended December 31, 1998 from $822,000 in the same prior year period. In
the six month period ended December 31, 1998 interest income decreased to
$1,080,000 from $1,647,000 in the six month period ended December 31, 1997. The
decreases in both the three month and six month periods ending December 31, 1998
are 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 both the three and six month periods ending December 31,
1998.
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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. The Company has upgraded
its U.S. information systems to Year 2000 compliance in January, 1999. The
Company expects to have its Asian facilities information systems upgraded to
Year 2000 compliance by the end of the third quarter of fiscal 1999.
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. The U.S. facility has upgraded its office
equipment and other items used in its operations to year 2000 compliance in
January, 1999. The Company expects to have its Asian facilities office equipment
and other items used in its operations upgraded to Year 2000 compliance by the
end of the third quarter in fiscal 1999.
Suppliers. The Company has evaluated its supplier base to determine
whether Year 2000 issues affecting suppliers will adversely impact the Company's
operations. 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 assessed its key suppliers for Year 2000 readiness and has not
found any Year 2000 issues from suppliers which would adversely impact the
Company's operations.
General and Risk Factors. The Company believes that its greatest
potential risks are associated with its information systems and systems embedded
in its operations and infrastructure. With the upgrading of its U.S. information
systems to Year 2000 compliance in January, 1999, the Company believes it has
reduced the potential risk from Year 2000 issues affecting its information
systems and systems embedded in its operations and infrastructure. The Company
is in the final stages of implementation for all its operations and
infrastructure, but 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 December 31, 1998, the Company's principal sources of liquidity
included cash and cash equivalents of $16.4 million and short-term investments
of $21.9 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 six months ended December 31, 1998.
In the six months ended December 31, 1998, $3.0 million of cash was
provided by operations, compared to the six months ended December 31, 1997 in
which $0.5 million of cash was used by operations. The increase was mainly the
result of a decrease in inventories, an increase in accounts payable and income
taxes payable, offset in part by unprofitable operations and an increase in
accounts
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<PAGE> 12
receivable and a decrease in accrued expenses for the six months ended December
31, 1998. The decrease in inventories reflected the Company's effort to reduce
inventory cost according to adjusted sales expectations. Capital expenditures
were $1.6 million for the six months ended December 31, 1998 compared to $2.7
million for the six months ended December 31, 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 calendar
year 1999. At December 31, 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.
In April, 1998, the Company's Board of Directors approved a $20 million
stock repurchase program over the next twelve months. During the six months
ended December 31, 1998, 60,100 shares of common stock were repurchased for $0.3
million under this Plan. During fiscal year 1998, 274,500 shares of common stock
were repurchased for $2.1 million under this Plan. The Company's cash reserve
may decline as a result of its future use, if any, of the repurchase provision.
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 portable 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
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<PAGE> 13
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 six months
ended December 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. 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 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 response to a worldwide shortage of foundry capacity
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.
-13-
<PAGE> 14
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 established a research and
development facility in Shanghai, People's Republic of China in the quarter
ended March 31, 1998. This facility currently has fifty employees as of December
31, 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.
SUBSEQUENT EVENT
On January 14, 1999, John Luke, President Emeritus, Taiwan National
Semiconductor Corporation, was appointed to the Company's Board of Directors.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
-14-
<PAGE> 15
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On December 14, 1998, NeoMagic Corporation (Nasdaq: NMGC), filed suit
in the United States District Court for the District of Delaware against Trident
Microsystems, Inc. (the "Company"). The suit alleges that the Company's embedded
DRAM graphics accelerators infringe certain patents held by NeoMagic
Corporation. The Company intends to defend vigorously the litigation which was
filed against it, and the Company will take every step possible to protect the
interests of its customers and shareholders. On January 25, 1999 the Company
filed a counter claim in the United States District Court for the District of
Delaware against NeoMagic, Inc. The counter claim alleges an attempted
monopolization in violation of the antitrust laws, arising from Neomagic's
patent infringement filing against the Company. Statements regarding the
possible outcome of litigation and the Company's actions are forward looking
statements and actual outcomes could very based upon future developments on the
litigation.
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
Not Applicable
-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 11, 1999 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
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number 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>
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<PERIOD-START> OCT-01-1998
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<SECURITIES> 21,861
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