TRIDENT MICROSYSTEMS INC
10-Q, 2000-11-14
SEMICONDUCTORS & RELATED DEVICES
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<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, 2000

                                       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
                                 --------------
              (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, 2000 was 12,902,827.

This document (including exhibits) contains 20 pages.

<PAGE>   2

                           TRIDENT MICROSYSTEMS, INC.

                                      INDEX

<TABLE>
<CAPTION>
                                                                                                 Page
                                                                                                 ----
<S>                                                                                    <C>

                          PART I: FINANCIAL INFORMATION

Item 1: Unaudited Financial  Information

        Condensed Consolidated Balance Sheet - September 30, 2000 and
             June 30, 2000                                                                          3

        Condensed Consolidated Statement of Operations for the three months
             ended September 30, 2000 and 1999                                                      4

        Condensed Consolidated Statement of Cash Flows for the three months
             ended September 30, 2000 and 1999                                                      5

        Notes to the Condensed Consolidated Financial Statements                                    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                                                                          18

Item 6: Exhibits and Reports on Form 8-K                                                           19

Signatures                                                                                         20
</TABLE>

<PAGE>   3

                           TRIDENT MICROSYSTEMS, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEET
                            (IN THOUSANDS, UNAUDITED)

                                     ASSETS


<TABLE>
<CAPTION>
                                                      September 30,      June 30,
                                                           2000            2000
                                                      -------------     ---------
<S>                                                   <C>               <C>
Current assets:
    Cash and cash equivalents                           $  27,677       $  39,041
    Short-term investments - UMC                           81,274         110,665
    Accounts receivable, net                               12,296           6,092
    Inventories                                             6,796           3,376
    Prepaid expenses and other assets                       1,450           2,222
                                                        ---------       ---------
        Total current assets                              129,493         161,396

 Property and equipment, net                                3,655           3,901
 Long-term investments - UMC                               48,049          48,049
 Long-term investments - Others                            11,896           8,096
 Other assets                                                 803             934
                                                        ---------       ---------
        Total assets                                    $ 193,896       $ 222,376
                                                        =========       =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable                                    $  13,183       $   7,324
    Accrued expenses and other liabilities                 13,230          12,531
    Deferred income tax                                    12,977          24,734
    Income taxes payable                                    1,751           1,596
                                                        ---------       ---------
        Total current liabilities                          41,141          46,185
    Deferred income taxes non-current                      18,928          18,928
    Other long-term liabilities                                37              46
    Minority interest in subsidiary                         1,256           1,256
                                                        ---------       ---------
        Total liabilities                                  61,362          66,415
                                                        ---------       ---------

 Stockholders' equity:
    Common stock and additional paid-in capital            53,597          52,254
    Retained earnings                                     119,171         118,636
    Accumulated other comprehensive loss                  (22,282)         (4,648)
    Treasury stock, at cost                               (17,952)        (10,281)
                                                        ---------       ---------
        Total stockholders' equity                        132,534         155,961
                                                        ---------       ---------
        Total liabilities and stockholders' equity      $ 193,896       $ 222,376
                                                        =========       =========
</TABLE>

              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.


                                     - 3 -
<PAGE>   4

                           TRIDENT MICROSYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                          Three Months Ended
                                                             September 30,
                                                        ----------------------
                                                          2000          1999
                                                        --------      --------
<S>                                                     <C>           <C>
Net sales                                               $ 36,057      $ 24,079

Cost of sales                                             26,667        16,455
                                                        --------      --------

Gross profit                                               9,390         7,624

Research and development expenses                          5,546         6,336

Sales, general and administrative expenses                 3,683         3,736
                                                        --------      --------

Income (loss) from operations                                161        (2,448)

Interest income, net                                         544           430
                                                        --------      --------

Income (loss) before income taxes                            705        (2,018)

Provision for income taxes                                   171            --
                                                        --------      --------

Net income (loss)                                       $    534      $ (2,018)
                                                        ========      ========

Basic earnings (loss) per share                         $   0.04      $  (0.15)
                                                        ========      ========

Shares used in computing basic per share amounts          13,105        13,161
                                                        ========      ========

Diluted earnings (loss) per share                       $   0.04      $  (0.15)
                                                        ========      ========

Shares used in computing diluted per share amounts        14,620        13,161
                                                        ========      ========
</TABLE>

              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.


                                     - 4 -
<PAGE>   5

                           TRIDENT MICROSYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                            (IN THOUSANDS, UNAUDITED)


<TABLE>
<CAPTION>
                                                                               Three Months Ended
                                                                                  September 30,
                                                                             -----------------------
                                                                               2000           1999
                                                                             --------       --------
<S>                                                                          <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income (loss)                                                       $    534       $ (2,018)
     Adjustments to reconcile net income to cash provided
             by operating activities:
             Depreciation and amortization                                        635            905
             Provision for doubtful accounts and sales returns                     --           (766)
             Changes in assets & liabilities:
                Accounts receivable                                            (6,204)         1,450
                Inventories                                                    (3,420)        (2,508)
                Prepaid expenses and other current assets                         772             74
                Other assets                                                      131           (396)
                Accounts payable                                                5,859          1,736
                Accrued expenses and other liabilities                            700            532
                Income taxes payable                                              155             --
                                                                             --------       --------
                    Net cash used in operating activities                        (838)          (991)
                                                                             --------       --------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of investments                                                  (3,800)            --
     Purchase of property and equipment                                          (389)          (175)
                                                                             --------       --------
                    Net cash used in investing activities                      (4,189)          (175)
                                                                             --------       --------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Issuance of common stock                                                   1,343            607
     Repayment of capital leases                                                   (9)          (105)
     Purchase of treasury stock                                                (7,671)            --
                                                                             --------       --------
                    Net cash (used in) provided by financing activities        (6,337)           502
                                                                             --------       --------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                     (11,364)          (664)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                               39,041         32,469
                                                                             --------       --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                   $ 27,677       $ 31,805
                                                                             ========       ========
</TABLE>


              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.



                                     - 5 -
<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, 2000 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, 2001.

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. The
Company has no obligation to provide any modification or customization upgrades,
enhancements or other post-sale customer support.

NOTE 3  INVENTORIES

         Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                          September 30,        June 30,
                                              2000               2000
                                          -------------        --------
<S>                                       <C>                  <C>
           Work in process                   $1,120            $  346
           Finished goods                     5,676             3,030
                                             ------            ------
                                             $6,796            $3,376
                                             ------            ------
</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)


              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.


                                     - 6 -
<PAGE>   7

gives effect to all dilutive potential common shares outstanding during a
period. In computing Diluted EPS, the average stock price for the period is used
in determining the number of shares assumed to be purchased from exercise of
stock options.

        Following is a reconciliation of the numerators and denominators of the
Basic and Diluted EPS computations for the periods presented below.

<TABLE>
<CAPTION>
                                                          Three Months Ended
                                                             September 30,
                                                       ------------------------
(in thousands, except per share data)                    2000            1999
                                                       --------        --------
<S>                                                    <C>             <C>
BASIC NET INCOME (LOSS) PER SHARE
Net income  (loss) available to Common
  Shareholders                                         $    534        $ (2,018)
Weighted average common shares                           13,105          13,161
                                                       ========        ========
Basic net income (loss) per share                      $   0.04        $  (0.15)
                                                       ========        ========

DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) available to Common
  Shareholders                                         $    534        $ (2,018)
                                                       ========        ========
Weighted average common shares                           13,105          13,161
Dilutive common stock equivalents                         1,515              --
                                                       --------        --------
Weighted average common shares
  and equivalents                                        14,620          13,161
                                                       ========        ========
Diluted net income (loss) per share                    $   0.04        $  (0.15)
                                                       ========        ========
</TABLE>



                                     - 7 -
<PAGE>   8

NOTE 5 CONTINGENCIES

        On December 14, 1998, NeoMagic Corporation ("NeoMagic") filed a patent
infringement lawsuit against the Company. The management believes the Company
has meritorious defenses against NeoMagic's action and intends to defend
ourselves vigorously. However, given the nature of litigation and inherent
uncertainties associated with litigation, management cannot predict with
certainty the ultimate outcome of this litigation.

         On July 22, 1999, the Company filed a lawsuit against VIA Technologies
Inc. ("VIA") for breach of contract, patent infringement and other matters. In
response to the lawsuit, VIA filed a counter lawsuit against the Company. On
April 19, 2000, VIA Technologies, Inc. and the Company announced that they had
agreed to resolve all pending lawsuits. The Company is to recognize $10.17
million in royalty revenue during the quarter ended December 31, 2000 relating
to the lawsuit settlement. The agreement also continues the right of each party
to distribute a jointly developed product with the Company retaining the
exclusive right to distribute such products in the notebook market and VIA
having the exclusive right to distribute such products in the desktop market.


NOTE 6 ACCUMULATED COMPREHENSIVE LOSS ON SHORT-TERM INVESTMENTS

        Under SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") any
unrealized gains or losses on the short-term investments which are classified as
available-for-sale equity securities are to be reported as a separate adjustment
to equity. Between January 3, 2000 and September 30, 2000, the market value of
the Company's short-term investment in United Microelectronics Corporation
("UMC") declined by $22.3 million, and that unrealized loss is included in
equity as accumulated other comprehensive loss.



                                     - 8 -
<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 months ended September 30, 2000 and 1999:


<TABLE>
<CAPTION>
                                                           Three Months Ended
                                                              September 30,
                                                         ---------------------
                                                          2000           1999
                                                         ------         ------
<S>                                                      <C>            <C>
Net sales                                                 100.0%         100.0%
Cost of sales                                              74.0           68.3
                                                         ------         ------
Gross margin                                               26.0           31.7
Research and development expenses                          15.4           26.3
Selling, general and administrative expenses               10.2           15.6
                                                         ------         ------
Income (loss) from operations                               0.4          (10.2)
Interest income, net                                        1.6            1.8
                                                         ------         ------
Income (loss) before income taxes                           2.0           (8.4)
Provision for income taxes                                  0.5            0.0
                                                         ------         ------
Net income (loss)                                           1.5%          (8.4)%
                                                         ======         ======
</TABLE>


Net Sales

        Net sales for the three months ended September 30, 2000 were $36.1
million, an increase of 50% over the $24.1 million reported in the three months
ended September 30, 1999. The sales increase from the three months ended
September 30, 1999 was predominantly due to increased sales of 3D notebook
products. Notebook and desktop products accounted for 89% and 8% of net sales,
respectively, in the three months ended September 30, 2000, and 72% and 25% of
net sales, respectively, for the three months ended September 30, 1999.

        Sales to Asian customers, primarily in Taiwan and Japan, accounted for
almost all of our net sales in the three months ended September 30, 2000, up
from approximately 96% in the three months ended September 30, 1999. We expect
Asian customers will continue to account for a significant portion of our sales.
Sales to North American and European customers represented 0.2% of net sales in
the three months ended September 30, 2000, a decrease from approximately 4.0% in
the three months ended September 30, 1999. In the three months ended September
30, 2000, sales to three customers Arima, Quanta, and Via accounted for 28%,
21%, and 13% of net sales, respectively. 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.

        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



                                     - 9 -
<PAGE>   10

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 our products are
developed and shipped on a timely basis, there can be no assurance that the
products will be well accepted in the market place, or that we will experience
success in the new product markets.


Gross Profit

        Gross profit increased to $9.4 million for the three months ended
September 30, 2000, up from $7.6 million in the three months ended September 30,
1999. The increase was primarily the result of higher sales volume in 3D
notebook products. The gross margin as a percentage of net sales for the three
months ended September 30, 2000, decreased to 26% of net sales as compared to
32% for the three months ended September 30, 1999. The decrease in gross margin
as a percentage of sales can be primarily attributed to an increase in the cost
of integrated notebook chips.

        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, 2000 decreased to $5.5 million from $6.3 million for the September 30, 1999
three month period. As a percent of net sales, research and development expenses
decreased to 15% for the three months ended September 30, 2000, from 26% of net
sales for the three months ended September 30, 1999. The decrease in research
and development expenses in actual dollars for the three months ended September
30, 2000 from September 30, 1999, can be attributed primarily to a reduction in
our research and development headcount, and the concentration of our research
and development efforts on only those products with the greatest revenue
generating potential.


Selling, General and Administrative

         Selling, general and administrative expenses remained approximately
unchanged at $3.7 million in the three months ended September 30, 2000, and in
the three months ended September 30, 1999. As a percent of net sales, selling,
general and administrative expenditures decreased to 10% of net sales for the
three months ended September 30, 2000, from 16% of net sales in the three months
ended September 30, 1999. The decrease in selling, general and administrative
expenditures as a percentage of net sales can be attributed primarily to our
cost reduction efforts. The Company will continue to monitor and control its
selling, general and administrative expenses.



                                     - 10 -
<PAGE>   11

Interest Income, Net

        The amount of interest income earned by us varies directly with the
amount of our cash and cash equivalents and the prevailing interest rates.
Interest income increased to $544,000 in the three months ended September 30,
2000, from $430,000 in the same prior year period. The increase from the three
months ended September 30, 1999 is primarily the result of higher average cash
levels invested during the three months ended September 30, 2000.


Provision for Income Taxes

        Provision for income taxes for the three months ended September 30, 2000
was $171,000. As a percentage of income before income taxes, the effective
income tax rate was approximately 24%. The effective rate was below the U.S.
statutory rate because operations in foreign countries were subject to lower
income tax rates. No provision was taken for the three months ended September
30, 1999 due to the Company's net loss.


Comprehensive Income

        Under SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") any
unrealized gains or losses on the short-term investments which are classified as
available-for-sale equity securities are to be reported as a separate adjustment
to equity. Between January 3, 2000 and September 30, 2000, the market value of
the Company's short-term investment in United Microelectronics Corporation
("UMC") declined by $22.3 million, and that unrealized loss is included in
equity as accumulated other comprehensive loss.


LIQUIDITY AND CAPITAL RESOURCES

        As of September 30, 2000, our principal sources of liquidity included
cash and cash equivalents of $27.7 million as well as short-term investments of
$81.3 million. In the three months ended September 30, 2000, $838,000 of cash
was used in operations, compared to the three months ended September 30, 1999,
in which $991,000 of cash was used in operations. The decrease in cash for the
three months ended September 30, 2000, due to operating activities, was mainly
the result of an increase in accounts receivable and inventories, offset in part
by an increase in accounts payable. Capital expenditures were $389,000 for the
three months ended September 30, 2000, compared to $175,000 for the three months
ended September 30, 1999.

        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.

        On April 13, 2000, our Board of Directors approved an extension of the
$20 million stock repurchase program, originally approved in April 1998, for
another twelve months starting from April 30, 2000 to April 30, 2001. During the
three months ended September 30, 2000, 734,000 shares of common stock were
repurchased for $7.7 million under this Plan. During fiscal years 2000, 1999 and
1998, 680,000, 161,000 and 274,500 shares of common stock were repurchased for
$6.2 million, $0.9 million and $2.1 million under this Plan, respectively.



                                     - 11 -
<PAGE>   12

        In October 1999, our Board of Directors authorized a one year budget of
$20.0 million allowing our President and executive officers to make investments,
with no more than $3.0 million in any one company or technology. For the three
months ended September 30, 2000 cumulative purchases of investments totaled
$11.9 million. Substantially all of these investments are in private companies
developing technologies in areas in which the Company is focusing. On April 13,
2000, subject to the closing of the investment in Trident described in the
paragraph immediately below, our Board of Directors approved an increase in the
annual budget of investments to $50.0 million.

        On February 10, 2000, we entered into an agreement with UMC affiliates,
Unipac Optoelectronics Corp. and Hsun Chieh Investment Co., Ltd., to sell
1,057,828 shares of the Company's common stock to Unipac and 3,173,484 shares of
the Company's common stock to Hsun Chieh representing approximately 23.5% of the
common stock that will be outstanding after the new issuance. On April 13, 2000,
the Trident board of directors approved an amendment to the existing agreement
upon the request of these corporate investors. Under the terms of the amended
agreement, the Company agreed to adjust the stock purchase price due to the
recent stock market volatility, aiming to continue the long term strategic
relationship and further strengthen the Company's cash position for future
strategic expansion. Closing of this transaction is contingent upon governmental
and NASD regulatory approval, and other customary closing conditions. To date
the conditions have not been satisfied. While the Company is working toward
completing the conditions, the Company is also considering its alternatives with
respect to this transaction, including amending the agreement. As a result the
timing of the transaction is uncertain and it is possible that the transaction
may not be completed.

        On April 19, 2000, VIA Technologies, Inc. and the Company announced that
they had agreed to resolve all pending lawsuits. The Company is to recognize
$10.17 million in royalty revenue during the quarter ended December 31, 2000
relating to the lawsuit settlement.

FACTORS THAT MAY AFFECT OUR RESULTS

OPERATING LOSS IN FISCAL YEAR 2000

         We have experienced operating losses for the fiscal year ending June
30, 2000. Future performance will substantially depend upon numerous factors,
such as:

        -   timely introduction of 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.

        Trident's management is trying to expedite new product launching and to
control operating expenses. 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 efforts in new markets such as DPTV 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.



                                     - 12 -
<PAGE>   13

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:

        -   uncertain demand in new markets in which we have limited experience;

        -   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;

        -   availability of foundry and assembly capacities;

        -   delay of joint development efforts due to unexpected market
            conditions; and

        -   length of sales cycle.


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. Our distributor and customer agreements generally are not
exclusive, and there is no obligation to renew agreements, and minimum purchases
are generally not required.

        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

        Although our revenues have historically been generated primarily from
Asian customers, primarily Taiwan and Japan, we will continue to exert efforts
to expand our revenue base among the leading North American OEMs and ODMs. 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, particularly
Taiwan, Japan, and China which are expected to constitute a significant portion
of our sales in the future. 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



                                     - 13 -
<PAGE>   14

        -   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 continuously decrease in the future, while the demand for integrated
graphics controllers will increase. Therefore, 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 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. We have developed a DPTV(TM)-DX product for
the digital television markets in China, Japan, Korea and Europe. We believe the
market for digital television will be competitive, and will require substantial
research and development, sales and other expenditures to stay competitive in
this market. However, we believe that DPTV products will have a longer product
life cycle than other current products. Therefore we expect to devote
significant resources to the DPTV market even though competitors are
substantially more experienced than we are in this market.

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 ensure 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.



                                     - 14 -
<PAGE>   15

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 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 the Company 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.

POTENTIAL DILUTION OF SHAREHOLDERS' INTEREST

        As part of our business strategy, we review acquisition and strategic
investment prospects that would complement our current product offerings,
augment our market coverage or enhance our technical capabilities, or that may
otherwise offer growth opportunities. We are very aggressively seeking
investment opportunities in new businesses, and we expect to make investments in
and may acquire businesses, products or technologies in the future. In the event
of any future acquisitions, we could issue equity securities which would dilute
current stockholders' percentage ownership.

         These actions by us could materially adversely affect our operating
results and/or the price of our common stock. Acquisitions and investment
activities also entail numerous risks, including: difficulties in the
assimilation of acquired operations, technologies or products; unanticipated
costs associated with the acquisition or investment transaction; adverse effects
on existing business relationships with suppliers and customers; risk associated
with entering markets in which we have no or limited prior experience; and
potential loss of key employees of acquired organizations.



                                     - 15 -
<PAGE>   16

        We cannot assure that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future, and our failure to do so could materially adversely affect our business,
operating results and financial condition.

         We are exposed to fluctuations in the market values of our investments.
We have invested in numerous privately held companies, many of which can still
be considered in the startup or development stages. These investments are
inherently risky as the market for the technologies or products they have under
development are typically in the early stages and may never materialize. We
could lose our entire initial investment in these companies. Our exposure to
fluctuating market conditions could materially adversely affect our business,
operating results and financial condition.

UNCERTAINTY OF BUSINESS RESTRUCTURING

        Continuing our strategic expansion into the internet appliance and
digital TV marketplace, Trident is now structured into two business units: the
videographics/communications business unit and the digital media business unit.
The videographics/communications business unit continues the Company's entire 3D
videographics business with worldwide PC OEMs, and intends to explore and expand
into System-On-Chip (SOC) solutions for internet appliances and visual video
communication. It is under the management of Frank Lin as business unit
president. Our other division, the digital media business unit, focuses on the
System-On-Chip (SOC) opportunities for the TV-centric digital appliance market
including internet-ready digital TVs and digital set-top boxes. Its immediate
new product sales are expected to come from the Company's single-chip digital
television video processor DPTV entering production during fiscal year 2001. The
digital media business unit is under the management of Dr. Jung-Herng Chang as
its president. We believe that such a restructuring will permit us to rapidly
grow our digital television product offerings, and continue to expand our
graphics chip markets by efficiently allocating resources between the two
divisions. However, there is no assurance that this strategy will be successful.

        On January 18, 2000, our Board of Directors approved a spin-off of our
Trident Technology Incorporated subsidiary and our Trident Multimedia
Technologies (Shanghai) Co. Ltd. subsidiary. It is our belief that these
subsidiaries will operate more efficiently if their operations were managed as
independent entities. The Trident Technology Incorporated subsidiary will be
developing the LCD Panel Pro product. The Trident Multimedia Technologies
(Shanghai) Co. Ltd. subsidiary will be involved in the joint development with
Trident of graphic and digital media chips, and will sell digital media chips as
a sales representative for us in the China market. As of September 30, 2000, we
currently own a majority interest in both Trident Technology Incorporated and
Trident Multimedia Technologies (Shanghai) Co. Ltd. Trident Technology
Incorporated and Trident Multimedia Technologies (Shanghai) Co. Ltd. have total
assets equal to $5.0 million and $2.4 million respectively, as of September 30,
2000. It is our intention to spin-off these subsidiaries during our fiscal year
2001. However, there are organizational, operational and marketing factors that
may delay the spin-off of these subsidiaries, and no assurance can be given that
these subsidiaries will be profitable in the future.

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, but
the counterclaim was severed and will be tried only if and after Trident
prevails on NeoMagic's infringement claims. The case is currently set for trial
on January 16, 2001 in Delaware. Trident and NeoMagic each have motions for
summary judgment pending which have been fully briefed and argued but not yet
decided by the Court.

        On April 19, 2000, VIA Technologies, Inc. and the Company announced that
they have agreed to resolve all pending lawsuits. Both parties agreed to enter a
settlement agreement in order to better focus on respective businesses and avoid
the costs, time and distractions of the lengthy legal process. The Company is to
recognize $10.17 million in royalty revenue during the quarter ended December
31, 2000 relating to the lawsuit settlement. The agreement also continues the
right of each party to distribute a jointly developed product with Trident
retaining the exclusive right to distribute products in the notebook market and
VIA having the exclusive right to distribute products in the desktop market.

        In July of 1999 the Company 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 our major notebook PC customers. Real 3D moved to
dismiss Trident's complaint, which motion has been pending for nearly a year.
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
the Company is not a party to that litigation.

         Statements regarding the possible outcome of litigation and our actions
are forward looking statements and actual outcomes could vary based upon future
developments on the litigation.

ITEM 2:  CHANGES IN SECURITIES

         Not applicable

ITEM 3:  DEFAULTS UPON SENIOR SECURITIES

         Not applicable

ITEM 4:  SUBMISSIONS OF MATTERS TO VOTE BY SECURITY HOLDERS

         Not applicable



                                     - 17 -
<PAGE>   18

ITEM 5:  OTHER INFORMATION

         Continuing our strategic expansion into the internet appliance and
digital TV marketplace, Trident is now structured into two business units: the
videographics/communications business unit and the digital media business unit.
The videographics/communications business unit continues the Company's entire 3D
videographics business with worldwide PC OEMs, and intends to explore and expand
into System-On-Chip (SOC) solutions for internet appliances and visual video
communication. It is under the management of Frank Lin as business unit
president. Our other division, the digital media business unit, focuses on the
System-On-Chip (SOC) opportunities for the TV-centric digital appliance market
including internet-ready digital TVs and digital set-top boxes. Its immediate
new product sales are expected to come from the Company's single-chip digital
television video processor DPTV entering production during fiscal year 2001. The
digital media business unit is under the management of Dr. Jung-Herng Chang as
its president. We believe that such a restructuring will permit us to rapidly
grow our digital television product offerings, and continue to expand our
graphics chip markets by efficiently allocating resources between the two
divisions. However, there is no assurance that this strategy will be successful.



                                     - 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

               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 14, 2000, on its
behalf by the undersigned thereunto duly authorized.


Trident Microsystems, Inc.
--------------------------
(Registrant)




/s/ Frank 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
                                 EXHIBIT INDEX

<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.


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