<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 DECEMBER 31, 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.
--------------------------
(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
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(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, 1999 was 13,428,451.
This document (including exhibits) contains 20 pages.
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TRIDENT MICROSYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1: Unaudited Financial Information
Condensed Consolidated Balance Sheet - December 31, 1999 (Unaudited) and
June 30, 1999 3
Condensed Consolidated Statement of Operations for the Three Months and Six Months
Ended December 31, 1999 and 1998 (Unaudited) 4
Condensed Consolidated Statement of Cash Flows for the Six Months
Ended December 31, 1999 and 1998 (Unaudited) 5
Notes to the Condensed Consolidated Financial Statements (Unaudited) 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
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
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------ -----------
<S> <C> <C>
Current assets:
Cash, cash equivalents $ 35,972 $ 32,469
Accounts receivable, net 12,138 11,029
Inventories 5,854 4,681
Prepaid expenses and other assets 2,082 4,416
--------- ---------
Total current assets 56,046 52,595
Property and equipment, net 4,288 6,113
Investment in joint venture 49,289 49,289
Other assets 4,764 2,913
--------- ---------
Total assets $ 114,387 $ 110,910
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,723 $ 6,267
Accrued expenses and other liabilities 9,046 7,153
Current portion of obligation under capital lease 192 384
Income taxes payable 1,293 1,293
--------- ---------
Total current liabilities 18,254 15,097
Deferred income taxes 2,350 2,350
Obligations under capital lease 64 82
--------- ---------
Total liabilities 20,668 17,529
--------- ---------
Stockholders' equity:
Common stock and additional paid-in capital 48,640 46,977
Retained earnings 49,204 50,529
Treasury stock, at cost (4,125) (4,125)
--------- ---------
Total stockholders' equity 93,719 93,381
--------- ---------
Total liabilities and stockholders' equity $ 114,387 $ 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 Data, Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 34,811 $ 20,652 $ 58,889 $ 44,528
Cost of sales 23,924 12,596 40,379 29,514
-------- -------- -------- --------
Gross margin 10,887 8,056 18,510 15,014
Research and development expenses 6,697 6,604 13,034 12,830
Sales, general and administrative expenses 4,117 3,774 7,852 7,701
-------- -------- -------- --------
Income (loss) from operations 73 (2,322) (2,376) (5,517)
Interest income, net 620 565 1,051 1,080
-------- -------- -------- --------
Income (loss) before income taxes 693 (1,757) (1,325) (4,437)
Provision for income taxes -- -- -- 29
-------- -------- -------- --------
Net income (loss) $ 693 $ (1,757) $ (1,325) $ (4,466)
======== ======== ======== ========
Basic earnings (loss) per share $ 0.05 $ (0.14) $ (0.10) $ (0.35)
======== ======== ======== ========
Shares used in computing
per share amounts 13,333 12,972 13,247 12,943
======== ======== ======== ========
Diluted earnings (loss) per share $ 0.05 $ (0.14) $ (0.10) $ (0.35)
======== ======== ======== ========
Shares used in computing diluted
per share amounts 15,265 12,972 13,247 12,943
======== ======== ======== ========
</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,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,325) $ (4,466)
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 1,888 1,954
Provision for doubtful accounts and sales returns (524) 154
Changes in assets & liabilities:
Accounts receivable (585) (375)
Inventories (1,173) 4,929
Prepaid expenses and other current assets 2,334 (375)
Other assets (1,851) 10
Accounts payable 1,456 1,769
Accrued expenses and other liabilities 1,893 (1,078)
Income tax payable -- 437
-------- --------
Net cash provided by (used in) operating activities 2,113 2,959
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short-term investments, net -- (7,891)
Purchase of property and equipment (63) (1,642)
-------- --------
Net cash provided by (used in) investing activities (63) (9,533)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 1,663 566
Repayment of capital leases (210) (181)
Purchase of treasury stock -- (297)
-------- --------
Net cash provided by financing activities 1,453 88
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,503 (6,486)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 32,469 22,916
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 35,972 $ 16,430
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE> 6
TRIDENT MICROSYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
In the opinion of Trident Microsystems, Inc. (the "Company"), the
condensed consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
financial position, operating results and cash flows for those periods
presented. The condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
and are not audited. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the year ended June 30, 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>
December 31, 1999 June 30, 1999
----------------- -------------
<S> <C> <C>
Work in process $ 944 $ 850
Finished goods 4,910 3,831
------ ------
$5,854 $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 Six Months Ended
December 31, December 31,
---------------------- -----------------------
(in thousands, except per share data) 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BASIC NET INCOME (LOSS) PER SHARE
Net income (loss) available to Common
Shareholders $ 693 $ (1,757) $ (1,325) $ (4,466)
======== ======== ======== ========
Weighted average common shares 13,333 12,972 13,247 12,943
======== ======== ======== ========
Basic net income (loss) per share $ 0.05 $ (0.14) $ (0.10) $ (0.35)
======== ======== ======== ========
DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) available to Common
Shareholders $ 693 $ (1,757) $ (1,325) $ (4,466)
======== ======== ======== ========
Weighted average common shares 13,333 12,972 13,247 12,943
Dilutive common stock equivalents 1,932 -- -- --
-------- -------- -------- --------
Weighted average common shares
and equivalents 15,265 12,972 13,247 12,943
======== ======== ======== ========
Diluted net income (loss) per share $ 0.05 $ (0.14) $ (0.10) $ (0.35)
======== ======== ======== ========
</TABLE>
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<PAGE> 8
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, recission 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.
NOTE 6 GAIN RELATED TO UICC INVESTMENT
In August 1995 we made an investment of $49.3 million in United
Integrated Circuits Corporation (UICC). On January 3, 2000 United
Microelectronics Corporation (UMC) acquired UICC. As a result of this merger we
now own approximately 46.5 million shares of UMC. Accordingly, we will report a
pretax gain of $117 million as other income in our Statement of Operations for
the quarter end March 31, 2000. The gain represents the difference between the
cost of our previous investment in UICC, and the quoted market price of the UMC
shares on the Taiwan Stock Exchange as of the date that UMC acquired UICC.
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<PAGE> 9
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
RESULTS OF OPERATIONS
The following table sets forth the results of operations expressed as
percentages of net sales for the three and six months ended December 31, 1999
and 1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------ -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Cost of sales 69 61 69 66
---- ---- ---- ----
Gross margin 31 39 31 34
Research and development 19 32 22 29
Selling, general and administrative 12 18 13 17
---- ---- ---- ----
Income (loss) from operations -- (11) (4) (12)
Interest income, net 2 3 2 2
---- ---- ---- ----
Income (loss) before income taxes 2 (8) (2) (10)
Provision for income taxes -- -- -- --
---- ---- ---- ----
Net income (loss) 2% (8)% (2)% (10)%
==== ==== ==== ====
Net Sales
</TABLE>
Net sales for the three months ended December 31, 1999 were $34.8
million, an increase of 69% over the $20.7 million reported in the three months
ended December 31, 1998, and increased $10.7 million, or 45% from the $24.1
million reported in the three months ended September 30, 1999. Net sales for the
six months ended December 31, 1999 were $58.9 million, an increase of 32% from
the $44.5 million reported in the six months ended December 31, 1998. The sales
increase from the three months ended December 31, 1998, September 30, 1999, and
six months ended December 31, 1998, was predominantly due to increased sales of
3D portable products. Portable and desktop products accounted for 76% and 22% of
net sales, respectively, in the three months ended December 31, 1999, and 46%
and 51% of net sales, respectively, for the three months ended December 31,
1998. In the six months ended December 31, 1999 portable and desktop products
accounted for 74% and 23% of net sales, respectively, and in the six months
ended December 31, 1998, and 48% and 48% of net sales, respectively.
Sales to Asian customers, primarily in Taiwan, Japan, and the
Philippines, accounted for almost all of our net sales in the three months ended
December 31, 1999, up from approximately 80% in the three months ended December
31, 1998. Sales to Asian customers, primarily in Taiwan, Japan, the Philippines,
and Hong Kong, accounted for 98% of net sales in the six months ended December
31, 1999, up from 80% of net sales in the six months ended December 31, 1998. We
expect Asian customers will continue to account for a significant portion of our
sales. Sales to North American and European customers represented 0.4% of net
sales in the three months ended December 31, 1999, a decrease from approximately
20% in the three months ended December 31, 1998. Sales to North American and
European customers represented 2% of net sales in the six months ended December
31, 1999, a decrease from approximately 20% in the six
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<PAGE> 10
months ended December 31, 1998. This decrease is primarily due to a decrease in
OEM sales in North America and Europe. In the three months ended December 31,
1999, sales to four customers, Arima, Inno Micro, Toshiba and Fujitsu accounted
for 21%, 16%, 13%, and 11% of net sales, respectively. In the three months ended
December 31, 1998 sales to one customer Fujitsu, accounted for 15% of net sales.
In the six months ended December 31, 1999 sales to three customers Inno Micro,
Toshiba, and Arima accounted for 22%, 15%, and 14% of net sales, respectively.
In the six months ended December 31, 1998, sales to three customers, Union
Computer, Fujitsu, and Jaton Corporation, accounted for 15%, 13%, and 11% of net
sales, respectively.
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 including digital TV applications. 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 $10.9 million for the three months ended
December 31, 1999, up from $8.1 million in the three months ended December 31,
1998. The increase was primarily the result of higher sales volume in 3D
portable products. The gross margin as a percentage of net sales for the three
months ended December 31, 1999, decreased to 31% of net sales as compared to 39%
for the three months ended December 31, 1998. The decrease in gross margin as a
percentage of sales can be primarily attributed to lower product cost in the
three months ended December 31, 1998, changes in product mix, and the recording,
during the three months ended December 31, 1998, of certain non-recurring items
such as reversal of forfeited price rebate accruals and sales of certain
products previously reserved. Gross margin increased to $18.5 million for the
six months ended December 31, 1999, up from $15.0 million in the six months
ended December 31, 1998. The gross margin as a percentage of net sales for the
six months period ended December 31, 1999, decreased to 31% of net sales as
compared to 34% for the six months ended December 31, 1998. The six month
decrease was primarily a result of lower product cost in the six months ended
December 31, 1998, changes in product mix, and the recording of certain
non-recurring items such as reversal of forfeited price rebate accruals and
sales of certain products previously reserved during the three months ended
December 31, 1998.
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.
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<PAGE> 11
Research and Development
Research and development expenses for the three months ended December
31, 1999 increased to $6.7 million from $6.6 million for the December 31, 1998
three month period. As a percent of net sales, research and development expenses
decreased to 19% for the three months ended December 31, 1999 from 32% of net
sales for the three months ended December 31, 1998. Research and development
expenses for the six months ended December 31, 1999 increased to $13.0 million
from $12.8 million for the December 31, 1998 six month period. As a percent of
net sales, research and development expenses decreased to 22% for the six months
ended December 31, 1999 from 29% of net sales for the six months ended December
31, 1998. The increase in research and development expenses in actual dollars
for both the three and six months ended December 31, 1999 from December 31, 1998
can be attributed primarily to an increase in research and development workforce
and non-recurring engineering charges.
Selling, General and Administrative
Selling, general and administrative expenses increased to $4.1 million
in the three months ended December 31, 1999 from $3.8 million in the three
months ended December 31, 1998. As a percent of net sales, selling, general and
administrative expenditures decreased to 12% of net sales for the three months
ended December 31, 1999 from 18% of net sales in the three months ended December
31, 1998. The increase in selling, general and administrative expenditures in
actual dollars is attributed primarily to the incurrence of legal expenses for
both the three and six month periods ending December 31, 1999. The Company will
continue to monitor and control its 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 increased to $620,000 in the three
months ended December 31, 1999 from $565,000 in the same prior year period as a
result of the booking of interest on the Federal Tax refund received during the
three months ended December 31, 1999. Interest income decreased to $1,051,000 in
the six months ended December 31, 1999 from $1,080,000 in the same prior year
period. The decrease from the six months ended December 31, 1998 is primarily
the result of lower average cash levels invested during the six months ended
December 31, 1999.
Provision for Income Taxes
Due to our current loss situation, no provision for U.S. taxes was taken
for the three months and six months ended December 31, 1999.
Year 2000
We believe that we have successfully rendered our products, internal
management and other administrative systems and external information systems
year 2000 compliant. In addition, we surveyed the vendors of the third-party
technologies we incorporate into our products and services and applied updates
or arrangements to correct potential year 2000 compliance problems. Since
January 1, 2000, we have experienced no disruptions in our business operations
as a result of year 2000 compliance problems or otherwise, and we have received
no reports of any year 2000 compliance problems with our products
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<PAGE> 12
and services. We are continuing to monitor third-party vendors of incorporated
technologies for additional recommended year 2000 upgrades, which we will apply
as soon as they become available. To date, the total cost of our efforts to
address year 2000 compliance has not been material.
Nonetheless, some problems related to year 2000 risks may not appear
until several months after January 1, 2000. Year 2000 issues could include
problems with our own products and services or with third-party products or
technology that we use or with which our products exchange data. Any problems
that are not identified and corrected successfully and completely could
adversely affect our business. We expect that the cost to fix any year 2000
problems that may be identified, however, will involve internal labor-hours and
will not be material.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, our principal sources of liquidity included
cash and cash equivalents of $36.0 million. In the six months ended December 31,
1999, $2.1 million of cash was used in operations, compared to the six months
ended December 31, 1998 in which $3.0 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
prepaid expenses and an increase in accounts payable and accrued expenses and
other liabilities for the six months ended December 31, 1999. Capital
expenditures were $0.1 million for the six months ended December 31, 1999
compared to $1.6 million for the six months ended December 31, 1998.
In August 1995 we made an investment of $49.3 million in United
Integrated Circuits Corporation (UICC). On January 3, 2000 United
Microelectronics Corporation (UMC) acquired UICC. As a result of this merger we
now own approximately 46.5 million shares of UMC. Accordingly, we will report a
pretax gain of $117 million as other income in our Statement of Operations for
the quarter end March 31, 2000. The gain represents the difference between the
cost of our previous investment in UICC, and the quoted market price of the UMC
shares on the Taiwan Stock Exchange as of the date that UMC acquired UICC. At
such time as we choose to sell any UMC shares it is likely the amount of any
gain will have changed. As of today, a portion of the UMC shares received by us
as a result of the merger may now be sold at our discretion, however, in order
to preserve the 12.5% wafer capacity guarantee there are certain limitations on
our ability to sell the shares.
We believe our current resources are sufficient to meet our 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 a twelve month period. 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.
In October, 1999, our Board of Directors authorized the President and
the officers of the Company a one year budget of $20,000,000 to make
investments, with no more that $3,000,000 in any one company or technology.
Investments can be made within this authorization without further approval by
the Board, on terms and agreements as the officers consider appropriate, with
the President of the Company to report at each Board meeting on such activities.
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<PAGE> 13
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 six months ending December 31, 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;
- availability of additional funding needed for research and
development; and
- management's ability to bring operating expenses in line with
revenues
Trident's management is trying to expedite new product launching and to
control operating expenses to enable Trident to continue the profitability
achieved in the three months ended December 31, 1999. 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 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-
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<PAGE> 14
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 efforts to expand our
revenue base 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 in the sub-$1,000 PC segment has
experienced reduced margins due to a number of factors including: competitive
pricing pressures, increasing wafer cost and rapid technological change. We
anticipated that the discrete graphics controller demand from sub-$1,000 PC's
will decrease in the future, while the demand for integrated graphics
controllers will increase. Therefore,
- 14 -
<PAGE> 15
to maintain our revenue and gross margin, we must develop and introduce on a
timely basis new products and product enhancements and continually reduce our
product cost. Our failure to do so would cause our revenue and gross margins to
decline, which could have a materially adverse affect on our operating results.
The market for graphics controllers is intensely competitive. Many of
our current competitors in graphics 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 which could have a materially
adverse affect on our revenue and future profitability.
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.
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 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 result in purchasing at a higher per unit product
cost from other foundries or the payment of 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
- 15 -
<PAGE> 16
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 in general and stock in high-technology
companies in particular, could cause the price of Trident's stock to fluctuate
from time to time.
In August 1995 we made an investment of $49.3 million in United
Integrated Circuits Corporation (UICC). On January 3, 2000 United
Microelectronics Corporation (UMC) acquired UICC. As a result of this merger we
now own approximately 46.5 million shares of UMC. Accordingly, we will report a
pretax gain of $117 million as other income in our Statement of Operations for
the quarter end March 31, 2000. The gain represents the difference between the
cost of our previous investment in UICC, and the quoted market price of the UMC
shares on the Taiwan Stock Exchange as of the date that UMC acquired UICC.
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 in August,
2000 in Delaware.
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,
recission 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
Charles A. Dickinson, Board of Director since 1993, did not stand for
re-election to our Board during the December 23, 1999 annual meeting of
stockholders.
On November 19, 1999, the Board of Directors of Trident Microsystems
adopted an amendment to the Company's Bylaws to clarify the timing of a
special meeting of stockholders after a request for such a meeting from
a greater than ten percent stockholder ("Bylaws Amendment"). The new
special meeting provision sets a minimum of 120 days and a maximum of
130 days as the time frame pursuant to which the Company establishes the
date of a special meeting after a request from a greater than ten
percent stockholder.
- 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.(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 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
We filed a report on Form 8-K on November 19, 1999 relating to an
amendment of our bylaws regarding "special meeting of stockholders," as
described in Other Information, page 18.
- 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 February 14, 2000 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 -
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