<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 205490
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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.
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(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)
2450 Walsh Ave. Santa Clara, California 95051-1303
--------------------------------------------------
(Address of principal executive offices) (Zip code)
(408) 496-1085
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of the registrant's $0.001 par value Common Stock
outstanding at September 30, 1999 was 13,205,579.
This document (including exhibits) contains 20 pages.
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TRIDENT MICROSYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1: Unaudited Financial Information
Condensed Consolidated Balance Sheet - September 30, 1999 (Unaudited) and
June 30, 1999 3
Condensed Consolidated Statement of Operations for the Three Months
Ended September 30, 1999 and 1998 (Unaudited) 4
Condensed Consolidated Statement of Cash Flows for the Three Months
Ended September 30, 1999 and 1998 (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 17
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 19
Signatures 20
</TABLE>
<PAGE> 3
TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
ASSETS
<TABLE>
<CAPTION>
September 30,
1999 June 30,
(unaudited) 1999
------------- ---------
<S> <C> <C>
Current assets:
Cash, cash equivalents $ 31,805 $ 32,469
Accounts receivable, net 10,345 11,029
Inventories 7,189 4,681
Prepaid expenses and other assets 4,342 4,416
--------- ---------
Total current assets 53,681 52,595
Property and equipment, net 5,383 6,113
Investment in joint venture 49,289 49,289
Other assets 3,309 2,913
--------- ---------
Total assets $ 111,662 $ 110,910
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,003 $ 6,267
Accrued expenses and other liabilities 7,685 7,153
Current portion of obligations under capital leases 288 384
Income taxes payable 1,293 1,293
--------- ---------
Total current liabilities 17,269 15,097
Deferred income taxes 2,350 2,350
Obligations under capital leases 73 82
--------- ---------
Total liabilities 19,692 17,529
--------- ---------
Stockholders' equity:
Common stock and additional paid-in capital 47,584 46,977
Retained earnings 48,511 50,529
Treasury stock, at cost (4,125) (4,125)
--------- ---------
Total stockholders' equity 91,970 93,381
--------- ---------
Total liabilities and stockholders equity $ 111,662 $ 110,910
========= =========
</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
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Net sales $ 24,079 $ 23,876
Cost of sales 16,455 16,918
-------- --------
Gross margin 7,624 6,958
Research and development expenses 6,336 6,226
Sales, general and administrative expenses 3,736 3,927
-------- --------
Income (loss) from operations (2,448) (3,195)
Interest income, net 430 515
-------- --------
Income (loss) before income taxes (2,018) (2,680)
Provision for income taxes -- 29
-------- --------
Net income (loss) $ (2,018) $ (2,709)
======== ========
Basic and diluted earnings (loss) per share $ (0.15) $ (0.21)
======== ========
Shares used in computing per share amounts 13,161 12,914
======== ========
</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>
Three Months Ended
September 30,
------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,018) $ (2,709)
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 905 961
Provision for doubtful accounts and sales returns (766) 188
Changes in assets & liabilities:
Accounts receivable 1,450 (3,643)
Inventories (2,508) 6,097
Prepaid expenses and other current assets 74 (503)
Other assets (396) 10
Accounts payable 1,736 3,077
Accrued expenses and other liabilities 532 1,091
Income taxes payable -- (16)
-------- --------
Net cash used in (provided by) operating activities (991) 4,553
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short-term investments, net -- (6,686)
Purchase of property and equipment (175) (697)
-------- --------
Net cash used in investing activities (175) (7,383)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 607 --
Repayment of capital leases (105) (90)
-------- --------
Net cash provided by (used in) financing activities 502 (90)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (664) (2,920)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 32,469 22,916
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 31,805 $ 19,996
======== ========
</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, 1999 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, 2000.
NOTE 2 REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment. Provision is
made for expected sales returns and allowances when revenue is recognized. The
Company has limited control over the extent to which products sold to
distributors are sold through to end users. Accordingly, a portion of the
Company's sales may from time to time result in increased inventory at its
distributors. The Company provides reserves for returns and allowances for
distributor inventories. These reserves are based on the Company's estimates of
inventory held by its distributors and the expected sell through of its products
by its distributors. Actual results could differ from these estimates.
NOTE 3 INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
------------------ -------------
<S> <C> <C>
Work in process $1,499 $ 850
Finished goods 5,690 3,831
------ ------
$7,189 $4,681
------ ------
</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
September 30,
----------------------
(in thousands, except per share data) 1999 1998
------- -------
<S> <C> <C>
BASIC NET INCOME (LOSS) PER SHARE
Net income (loss) available to Common
Shareholders $(2,018) $(2,709)
======= =======
Weighted average common shares 13,161 12,914
======= =======
BASIC NET INCOME (LOSS) PER SHARE $ (0.15) $ (0.21)
======= =======
Diluted Net Income (Loss) per Share
Net income (loss) available to Common
Shareholders $(2,018) $(2,709)
======= =======
Weighted average common shares 13,161 12,914
Dilutive common stock equivalents -- --
------- -------
Weighted average common shares
and equivalents 13,161 12,914
======= =======
Diluted net income (loss) per share $ (0.15) $ (0.21)
======= =======
</TABLE>
Options to purchase 4,575,978 shares of common stock were outstanding
during the three month period ended September 30, 1999 but were not included in
the computations of diluted EPS because the Company incurred a loss for the
three month period. Options to purchase 4,211,741 shares of common stock were
outstanding during the three months ended September 30, 1998 and were not
included in the computations of diluted EPS because the Company incurred a loss
for the three month period.
NOTE 5 LITIGATION
On December 14, 1998, NeoMagic Corporation ("NeoMagic") filed a patent
infringement lawsuit against the Company. The Company believes it has
meritorious defenses against NeoMagic's action and intends to defend itself
vigorously. On July 22, 1999, the Company filed a lawsuit against VIA
Technologies Inc. ("VIA") for breach of contract, fraud, misappropriation of
trade secrets, breach of fiduciary duty, specific performance, breach of
confidence, inducement of breach of contract, intentional interference with
economic relations, rescission and unfair competition, patent infringement and
copyright infringement. In response to the Company's lawsuit, VIA filed a
counter lawsuit against the Company. The Company believes it has a valid basis
for action against VIA and defenses against the counterclaims by VIA. However,
given the nature of litigation and inherent uncertainties associated with
litigation, management cannot predict with certainty the ultimate outcome of
these litigations.
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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 months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------
1999 1998
---- ----
<S> <C> <C>
Net sales 100% 100%
Cost of sales 68 71
--- ---
Gross margin 32 29
Research and development 26 26
Selling, general and administrative 16 16
--- ---
Income (loss) from operations (10) (13)
Interest income, net 2 2
--- ---
Income (loss) before income taxes (8) (11)
Provision for income taxes -- --
--- ---
Net income (loss) (8)% (11)%
=== ===
</TABLE>
Net Sales
Net sales for the three months ended September 30, 1999 were $24.1
million, an increase of 1% over the $23.9 million reported in the three months
ended September 30, 1998. Net sales for the three months ended September 30,
1999 increased $2.6 million, or 12%, from the $21.5 million reported in the
three months ended June 30, 1999. The sales increase compared to the three
months ended September 30, 1998 was due to an increase in unit shipments in 3D
notebook products. Portable and desktop products accounted for 72% and 25%,
respectively, of our sales for the three months ended September 30, 1999, and
45% and 49%, respectively, for the three months ended September 30, 1998.
Sales to North American and European customers represented 4% of net
sales in the three months ended September 30, 1999, a decrease from
approximately 15% in the three months ended September 30, 1998. This decrease is
primarily due to a decrease in OEM sales in North America and Europe. We expect
Asian customers will continue to account for a significant portion of our sales.
Sales to Asian customers, primarily in Japan, Taiwan, Hong Kong, and the
Philippines, accounted for approximately 96% of net sales in the three months
ended September 30, 1999, up from approximately 85% in the three months ended
September 30, 1998. In the three months ended September 30, 1999, sales to two
customers, Inno Micro and Toshiba accounted for 31%, and 17% of net sales,
respectively. In the three months ended September 30, 1998, sales to three
customers, Union Computer, Fujitsu, and Jaton Corporation, accounted for 16%,
15%, and 15% of net sales, respectively.
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We plan from time to time to introduce new and higher performance
graphics controller, multimedia products, and non-PC graphics products which we
will seek to sell to existing customers as well as new customers in Asia, North
America and Europe. We are also expanding our product focus into markets outside
the PC area. Our future success depends upon the regular and timely introduction
of these and other new products and upon those products meeting customer
requirements, and in significant part upon the results of our expansion into new
product markets. There can be no assurance that we 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, or that we will experience
success in the new product markets.
Gross Margin
Gross margin increased to $7.6 million for the three months ended
September 30, 1999, up from $7.0 million for the three months ended September
30, 1998. The gross margin as a percent of sales for the three month period
ended September 30, 1999 increased to 32% of net sales as compared to 29% for
the three months ended September 30, 1998. Gross margin for the three months
ended September 30, 1999 was positively affected by higher sales of 3D notebook
products which traditionally have been higher margin products.
We believe that prices of semiconductor products will decline over time
as availability and competition increase and advanced products are introduced.
We expect to see continued competitive pressure on gross margins in the desktop
and notebook business in the foreseeable future. We continue to maintain a
strategy based on maintaining gross margins through the introduction of new
products with higher margins, reducing manufacturing costs accomplished through
our custom design methodology and the migrating to the newest process
technology. As a result, we depend upon the success of new product development
and the timely introduction of new products, as well as upon the achievement of
our manufacturing cost reduction efforts. There can be no assurance that we can
successfully or timely develop and introduce new products, that such products
will gain market acceptance, or that we can continue to successfully reduce
manufacturing costs.
Research and Development
Research and development expenses for the three months ended September
30, 1999 increased to $6.3 million from $6.2 million for the September 30, 1998
three month period. As a percent of net sales, research and development expenses
were unchanged at 26% for both the three months ended September 30, 1999 and for
the three months ended September 30, 1998.
Selling, General and Administrative
Selling, general and administrative expenses decreased to $3.7 million
for the three months ended September 30, 1999 from $3.9 million for the three
months ended September 30, 1998. As a percent of net sales, selling, general and
administrative expenditures remained unchanged at 16% for both the three months
ended September 30, 1999, and the three months ended September 30, 1998. The
decrease in selling, general and administrative expenditures in actual dollars
is attributed primarily to our cost
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<PAGE> 10
reduction programs. We will continue to monitor and control our selling, general
and administrative expenses.
Interest Income, Net
The amount of interest income earned by us varies directly with the
amount of our cash, cash equivalents and short-term investments and the
prevailing interest rates. Interest income decreased to $430,000 in the three
months ended September 30, 1999 from $515,000 in the same prior year period. The
decrease from the three months ended September 30, 1998 is primarily the result
of lower average cash levels invested by us.
Provision for Income Taxes
Due to our current loss situation, no provision for U.S. taxes was
taken for the three months ending September 30, 1999.
Year 2000
Some computers, software, and other equipment include computer code in
which calendar year data is abbreviated to only two digits. As a result of this
design decision, some of these systems could fail to operate or fail to produce
correct results if "00" is interpreted to mean 1900, rather than 2000. These
problems are widely expected to increase in frequency and severity as the year
2000 approaches, and are referred to in this report as "Year 2000 issues."
We have a Year 2000 project designed to identify and assess the risks
associated with our 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. We are in the final implementation and testing
phase of our information systems for Year 2000 compliance. This phase is
expected to be completed by the end of November 1999.
Products. We have assessed the capabilities of all of our products sold
to customers. Based on the assessments made to date, year 2000 issues affect
none of our products.
Operations and Infrastructure. Office equipment and other items used in
our operations and facilities are currently in the final implementation and
testing phase for Year 2000 compliance. This phase is expected to be completed
by the end of November 1999.
Suppliers. We have evaluated our supplier base to determine whether
Year 2000 issues affecting suppliers will adversely impact our operations. We
have contacted all of our suppliers to assess their Year 2000 readiness and will
continue to monitor the progress of our key suppliers. We have assessed our key
suppliers for Year 2000 readiness and we have not found any Year 2000 issues
from suppliers which would adversely impact the Company's operations.
General and Risk Factors. We believe that our greatest potential risks
are associated with our information systems and systems embedded in our
operations and infrastructure. We are in the final stages of implementation for
all our information systems, operations and infrastructure, but cannot predict
whether
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significant problems will be identified. We have 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, we are 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.
Most likely consequences of Year 2000 issues. We expect to identify and
resolve all Year 2000 issues that could materially adversely affect our business
operations. However, we believe that it is not possible to determine with
complete certainty that all Year 2000 issues affecting us have been identified
or corrected. The number of devices that could be affected and the interactions
among these devices are simply to numerous. In addition, no one can accurately
predict how many Year 2000 issues related failures will occur or the severity,
duration, or financial consequences of these perhaps inevitable failures. As a
result, we believe that the following consequences are possible: - a significant
number of operational inconveniences and inefficiencies for us, our contract
manufacturers and our
- customers that will divert management's time and attention and
financial and human resources from ordinary business activities;
- several business disputes and claims for pricing adjustments or
penalties due to Year 2000 issues by our customers, which we believe
will be resolved in the ordinary course of business; and
- a few serious business disputes alleging that we failed to comply
with the terms of contracts or industry standards of performance,
some of which could result in litigation or contract termination.
Disclaimer. The discussion of our efforts and expectations relating to
Year 2000 compliance are forward-looking statements. Our ability to achieve Year
2000 compliance and the level of incremental costs associated therewith, could
be adversely affected by, among other things, the availability and cost of
programming and testing resources, third party suppliers' ability to modify
proprietary software, and unanticipated problems identified in the ongoing
compliance review.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, our principal sources of liquidity included
cash and cash equivalents of $31.8 million. In the three months ended September
30, 1999, $1.0 million of cash was used in operations, compared to the three
months ended September 30, 1998 in which $4.6 million of cash was provided by
operations. The decrease was mainly the result of unprofitable operations, an
increase in inventories and other assets, offset in part by a decrease in
accounts receivable for the three months ended September 30, 1999. Capital
expenditures were $0.2 million for the three months ended September 30, 1999
compared to $.7 million for the three months ended September 30, 1998.
In August 1995, we 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, we
invested $49.3 million in the joint venture and the foundry guaranteed to
Trident a certain percentage of the foundry's total wafer supply. On October 3,
1997, a fire at UICC's fabrication plant in Hsin Chu, Taiwan, completely
destroyed its fabrication equipment. The fabrication plant and the destroyed
equipment were insured. In June 1999 we announced that we had received
confirmation from UMC that, subject to the approval of the UMC shareholders and
the Taiwan government, the UICC joint venture will be consolidated with UMC by
the end of 1999. We expect to receive approximately 46.5 million shares of UMC
stock in the consolidation. These shares represent about 0.5% of the outstanding
stock of UMC. As the consolidation is subject to UMC shareholder approval, no
assurance can be given as to whether such shares will be received. We have not
determined whether or when we will sell such shares and the shares may be
subject to trading or other restrictions.
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<PAGE> 12
Following the consolidation, we will continue to have a guaranteed wafer supply
from UMC approximately the same in quantity as we had with UICC. At September
30, 1999, we held a 7.25% equity ownership in UICC.
Our investment in the UICC joint venture is intended to secure capacity
so that we can meet expected increased demand, should it occur. However, there
are certain risks associated with the transaction including our ability,
together with our partners, to fully utilize the capacity of UICC. We will
continue to consider transactions to secure additional foundry capacity as
circumstances warrant.
The agreement with UMC has utilized a significant amount of our
available funds; however, we believe our current resources are sufficient to
meet its needs for at least the next twelve months. We regularly consider
transactions to finance our activities, including debt and equity offerings and
new credit facilities or other financing transactions. We believe our current
reserves are adequate.
In April, 1998, our Board of Directors approved a $20 million stock
repurchase program over the next twelve months. During fiscal year 1999, 161,000
shares of common stock were repurchased for $0.9 million under this Plan. During
fiscal year 1998, 274,500 shares of common stock were repurchased for $2.1
million under this Plan. During fiscal year 1997, we repurchased 100,000 shares
of common stock for $1.1 million. Our cash reserves may decline as a result of
our future use, if any, of the repurchase program.
Factors That May Affect Our Results
LOSS IN FISCAL YEAR 1999
We have experienced operating losses for the fiscal year ending June
30, 1999, and the three months ending September 30, 1999. Future performance
will substantially depend upon numerous factors, such as:
- timely introducing new products and product enhancements to the
marketplace;
- whether customers successfully incorporate our technologies into end
products with high levels of customer acceptance;
- fluctuating price levels for our products; and
- additional needed funding of research and development.
- management's ability to bring operating expenses in line with
revenues
Trident's management is diligently trying to expedite new product
launching and to control operating expenses to enable Trident to achieve
profitability. However, there is no guarantee that management's efforts will be
successful. Sales and marketing, product development and general and
administrative expenses may increase as a result of shifts in the market place
and the company's need to respond to these shifts, which could result in the
need to generate significantly higher revenue to achieve and sustain
profitability.
FLUCTUATIONS IN QUARTERLY RESULTS
We plan to control our operating expenses related to any expansion of
our sales and marketing activities, broadening of our customer support
capabilities, developing new distribution channels, and any
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<PAGE> 13
increase in our research and development capabilities. However, our quarterly
revenue and operating results have varied in the past and may fluctuate in the
future due to a number of factors including:
- fluctuations in demand for our products, including seasonality;
- unexpected product returns or the cancellation or rescheduling of
significant orders;
- our ability to develop, introduce, ship and support new products and
product enhancements and to manage product transitions;
- new product introductions by our competitors;
- our ability to achieve required cost reductions;
- our ability to attain and maintain production volumes and quality
levels for our products;
- delayed new product introductions;
- unfavorable responses to new products;
- adverse economic conditions, particularly in Asia;
- the mix of products sold and the mix of distribution channels
through which they are sold; and
- availability of foundry and assembly capacities.
RELIANCE ON FEW KEY ACCOUNTS
To date, a limited number of distributors and customers have accounted
for a significant portion of our revenue. If any of our large distributors or
customers stops or delays purchases, our revenue and profitability would be
adversely affected. Although our largest customers may vary from
period-to-period, we anticipate that our operating results for any given period
will continue to depend to a significant extent on large orders from a small
number of customers, particularly in light of the high sales price per unit of
our portable products and the length of our sales cycles.
Our Original Equipment Manufacturer (OEM) customers seldom release
quarterly purchase orders and six-month rolling forecast. In addition our
financial performance depends on large orders from a few key distributors and
other significant customers, we do not have binding long term commitments from
any of them. For example:
- our OEM customers can stop purchasing and our distributors can stop
marketing our products with thirty days notice;
- our distributor agreements generally are not exclusive and the
distributors have no obligation to renew agreements; and
- our distributor agreements generally do not require minimum
purchases.
We have established a reserve program, which, under specified
conditions, enables distributors to return products to us. The amount of
potential product returns is estimated and provided for in the period of the
sale. Actual returns could differ from our estimates.
RELIANCE ON INTERNATIONAL SALES
Because our distributors sell our products worldwide, changes in the
global graphics marketplace, such as the shift in market share from Asian clone
makers to leading North American PC systems manufacturers, have affected and
will continue to affect our operating results. Although our revenues have
historically been generated primarily from Asian customers, particularly those
of Taiwan, Hong Kong, and Japan, we will continue to exert significant effort to
establish a meaningful revenue base
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among the leading North American OEMs. Our ability to grow will depend in part
on this expansion in North America but will continue to be heavily based on
international sales and operations which have and are expected to constitute a
significant portion of our sales. The failure of our distributors to sell our
products internationally would limit our ability to sustain and grow our
revenue. In addition, there are a number of risks arising from our international
business, including:
- potentially longer accounts receivable collection cycles;
- import or export licensing requirements;
- potential adverse tax consequences; and
- unexpected changes in regulatory requirements.
Our international sales currently are U.S. dollar-denominated. As a result, an
increase in the value of the U.S. dollar relative to foreign currencies could
make our products less competitive in international markets.
INTENSE COMPETITION IN THE MARKET FOR GRAPHICS CONTROLLERS
The graphics controller industry as a result of intense competition has
experienced rapid erosion of average selling prices due to a number of factors,
including competitive pricing pressures and rapid technological change. We may
experience period-to-period fluctuations in future operating results due to the
erosion of our average selling prices. We anticipate that the average selling
prices of desktop computers will decrease in the future, while the cost of
embedded DRAM for portable computers may increase, in response to competitive
pricing pressures, increased sales discounts, new product introductions by us or
our competitors or other factors. Therefore, to maintain our gross margins, we
must develop and introduce on a timely basis new products and product
enhancements and continually reduce our product costs. Our failure to do so
would cause our revenue and gross margins to decline, which could materially
adversely affect our operating results.
The market for graphics controllers is intensely competitive. Many of
our current competitors in both graphics and audio have longer operating
histories and substantially greater financial, technical, sales, marketing and
other resources, as well as greater name recognition and market share than we
do. To remain competitive, we believe we must, among other things, invest
significant resources in developing new products, including products for new
markets, increasing the ability of our products to integrate various functions
and enhancing quality product performance. If we fail to do so, our products may
not compete favorably with those of our competitors and our revenue and future
profitability could be materially adversely affected.
VULNERABLE TO UNDETECTED PRODUCT PROBLEMS
Although we establish and implement test specifications, impose quality
standards upon our suppliers and perform separate application-based
compatibility and system testing, our products may contain undetected defects,
which may or may not be material, and which may or may not have a feasible
solution. We have experienced such errors in the past, and we can't rule out
that such errors will be found from time to time in new or enhanced products
after commencement of commercial shipments. These problems may materially
adversely affect our business by causing us to incur significant warranty and
repair costs, diverting the attention of our engineering personnel from our
product development efforts and causing significant customer relations problems.
-14-
<PAGE> 15
In part due to pricing and other pressures in the PC graphics market
and in the desktop market in particular, we are developing products for
introduction in non-PC markets. However, there can be no assurance that we will
be successful in eliminating undetected defects in these new products which may
or may not be material.
DEPENDANCE ON INDEPENDENT FOUNDRIES
If the demand for our products grows, we will need to increase our
material purchases, contract manufacturing capacity and internal test and
quality functions. Any disruptions in product flow could limit our revenue,
adversely affect our competitive position and reputation and result in
additional costs or cancellation of orders under agreements with our customers.
We currently rely on a limited number of third-party foundries to
manufacture our products either in finished form or wafer form. Generally, these
foundries are not obligated to manufacture our products on a long term fixed
price base, however, due to the company's investment in one leading foundry, a
certain level of guaranteed wafer capacity does exist. If we encounter shortages
and delays in obtaining components, our ability to meet customer orders could be
materially adversely affected.
We have experienced a delay in product shipments from a contract
manufacturer in the past, which in turn delayed product shipments to our
customers. Such delays often force us to purchase at a higher per unit product
cost from other foundries or to pay expediting charges so that we can obtain the
required supply in a timely manner. We may in the future experience delays in
shipments from foundries or other problems, such as inferior quality and
insufficient quantity of product, any of which could materially adversely affect
our business and operating results. There can be no assurance that these
manufacturers will meet our future requirements for timely delivery of products
of sufficient quality and quantity. The inability of our contract manufacturers
to provide us with adequate supplies of high-quality products would cause a
delay in our ability to fulfill orders while we obtain a replacement
manufacturer and would have a material adverse effect on our business, operating
results and financial condition.
UNSTABLE STOCK PRICE
The market price of our common stock has been, and may continue to be
volatile. Factors such as new product announcements by Trident or our
competitors, quarterly fluctuations in our operating results and unfavorable
conditions in the graphics controller market may have a significant impact on
the market price of our common stock. These conditions, as well as factors that
generally affect the market for stocks of high-technology companies, could cause
the price of Trident's stock to fluctuate from time to time.
We expect to receive approximately 46.5 million shares of UMC stock in
exchange for our shares of UICC by the end of 1999. This exchange may provide us
with a significantly improved balance sheet and additional capital but a portion
of these shares may be subject to certain resale restrictions and have a fair
market value that fluctuates time to time. We have not received the UMC shares
nor have we determined whether or when we will sell the UMC shares or the sales
price if the sale occurs.
-15-
<PAGE> 16
UNCERTAIN YEAR 2000 IMPACT
The year 2000 computer issue creates a risk for us. If systems do not
correctly recognize date information when the year changes to 2000, there could
be an adverse impact on our operations. The risk exists in four areas:
- potential warranty or other claims from our customers;
- systems we use to run our business;
- systems used by our distributors; and
- the potential reduced spending by other companies on networking
solutions as a result of significant information systems spending on
year 2000 remediation.
We are currently evaluating our exposure in all of these areas.
We are in the process of conducting an inventory and evaluation of the
information systems used to run our business. Systems which are identified as
non-compliant will be upgraded or replaced. For the year 2000 non-compliance
issues identified to date, the cost of remediation is not expected to be
material to our operating results. However, if implementation of replacement
systems is delayed, or if significant new non-compliance issues are identified,
our operating results or financial condition could be materially adversely
affected.
We intend to contact our critical distributors to determine that the
distributors' operations and the products and services they provide are year
2000 compliant. Where practicable, we will attempt to mitigate our risks with
respect to the failure of suppliers to be year 2000 ready. However, failures
remain a possibility and could have an adverse impact on our operating results
or financial condition.
Since all customer situations cannot be anticipated, we may see an
increase in warranty and other claims as a result of the year 2000 transition.
In addition, litigation regarding year 2000 compliance issues is expected to
escalate. For these reasons, the impact of customer claims could have a material
adverse impact on our operating results or financial condition.
Businesses that face year 2000 compliance issues may require
significant hardware and software upgrades or modifications to their computer
systems and applications. These companies may plan to devote a substantial
portion of their information systems' spending to fund such upgrades and
modifications and divert spending away from IC videographics or audio products
for the PC market. This change in customers' spending patterns could materially
adversely impact our business, operating results or financial condition.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
-16-
<PAGE> 17
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 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
Corporation. The counter claim alleges an attempted monopolization in violation
of the antitrust laws, arising from Neomagic's patent infringement filing
against the Company. On March 25, 1999 NeoMagic Corporation filed a motion for
summary judgement requesting that the Company's counter claim be dismissed. That
motion has not been ruled on. The case is currently set for trial on June 19,
2000.
In 1998 and 1999 Trident Microsystems, Inc. and VIA Technologies, Inc.
entered into written agreements for the joint development of integrated 3D
graphics and core logic devices for notebook and desktop personal computers. On
July 22, 1999, Trident Microsystems, Inc. and Trident Technologies, Inc. filed a
lawsuit against VIA Technologies, Inc., among other defendants, in the United
States District Court for the Northern District of California. On July 30, 1999,
Trident filed a first amended complaint alleging patent infringement, copyright
infringement, breach of contract, fraud, misappropriation of trade secrets,
breach of fiduciary duty, specific performance, breach of confidence, inducement
of breach of contract, intentional interference with economic relations,
rescission and unfair competition. Trident's complaint requests actual damages
sustained by Trident, which are yet to be determined, as well as $200,000,000 in
punitive damages. On August 23, 1999, VIA Technologies, Inc. filed an answer and
counterclaim against Trident Microsystems, Inc., Trident Technologies, Inc. and
Frank Lin seeking a declaratory judgment on Trident's patent and copyright
infringement claims, damages for breach of contract, intentional interference
with contractual relations, intentional interference with prospective economic
relations, misappropriation of trade secrets and unfair competition.
Due to the fast pace of the PC graphics industry and in order to
protect its intellectual property, on August 11, 1999, Trident Microsystems,
Inc. and Trident Technologies, Inc. filed a motion for preliminary injunction
seeking to prevent the shipment of any VIA products, including but not limited
to any products containing Trident's proprietary software technology. On August
31, 1999, VIA Technologies, Inc. filed its opposition and a counter-motion for a
preliminary injunction seeking to force Trident to provide software drivers and
software support to VIA Technologies, Inc.'s customers. A hearing on these
motions has been continued pending settlement discussions between the parties.
In July of 1999 Trident filed a Declaratory Judgement action in the
Federal District Court of Delaware against Real 3D Corporation seeking a ruling
by the court which would declare invalid and/or not infringed certain Real 3D
patents being asserted against major Trident notebook PC customers. This filing
of a Declaratory Judgement action follows a complaint filed by Real 3D against a
number of other graphics companies for alleged infringement of three Real 3D
patents which relate to graphics acceleration technology. Real 3D has also
asserted these patents against major OEM PC manufacturers. Currently Trident is
not a party to that litigation.
Statements regarding the possible outcome of litigation and the
Company's actions are forward looking statements and actual outcomes could vary
based upon future developments on the litigation.
-17-
<PAGE> 18
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
-18-
<PAGE> 19
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
<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.
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 Sublease Agreement dated November 23, 1998 between the
Company and Applied Materials, Inc. for the Company's
principal offices located at 2450 Walsh Avenue, Santa Clara,
California.(4)
10.16 Foundry Venture Agreement dated August 18, 1995 by and
between the Company and United Microelectronics
Corporation.(5)(8)
10.17(*) Form of 1998 Stock Option Plan which replaces the 1992 Stock
Option Plan.(6)
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, 1999.
(5) 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.
(6) Incorporated by reference to the Company's 1998 Employee Stock Purchase
Plan Individual Stock Option Agreements and 1996 Nonstatutory Stock Option
Plan on Form S-8 filed April 23, 1999 (File No. 333-76895).
(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 directors of the Company.
(b) Reports on Form 8-K
Not Applicable
-19-
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on November 12, 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)
-20-
<PAGE> 21
LIST OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
27.1 Financial Data Schedule (EDGAR version only)(7)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 31,805
<SECURITIES> 0
<RECEIVABLES> 10,345
<ALLOWANCES> 0
<INVENTORY> 7,189
<CURRENT-ASSETS> 53,681
<PP&E> 5,383
<DEPRECIATION> 0
<TOTAL-ASSETS> 111,662
<CURRENT-LIABILITIES> 17,269
<BONDS> 0
0
0
<COMMON> 43,459
<OTHER-SE> 48,511
<TOTAL-LIABILITY-AND-EQUITY> 111,662
<SALES> 24,079
<TOTAL-REVENUES> 24,079
<CGS> 16,455
<TOTAL-COSTS> 16,455
<OTHER-EXPENSES> 10,072
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 430
<INCOME-PRETAX> (2,018)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,018)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,018)
<EPS-BASIC> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
