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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to __________
Commission file number: 0-20784
TRIDENT MICROSYSTEMS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 77-0156584
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
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 March 31, 2001 was 13,122,437.
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TRIDENT MICROSYSTEMS, INC.
INDEX
Page
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PART I: FINANCIAL INFORMATION
Item 1: Unaudited Financial Information
Condensed Consolidated Balance Sheet - March 31, 2001 and June 30, 2000 3
Condensed Consolidated Statement of Operations for the three months and nine months ended March 31,
2001 and 2000 4
Condensed Consolidated Statement of Cash Flows for the nine months ended March 31, 2001 and 2000 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3: Quantitative and Qualitative Disclosures About Market Risk Not Applicable
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 19
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 20
Item 6: Exhibits and Reports on Form 8-K 21
Signatures 22
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TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, UNAUDITED)
ASSETS
March 31, June 30,
2001 2000
--------- ---------
Current assets:
Cash and cash equivalents $ 23,743 $ 39,041
Short-term investments - UMC 64,088 110,665
Short-term investments - other 719 --
Accounts receivable, net 8,350 6,092
Inventories 11,960 3,376
Prepaid expenses and other assets 1,814 2,222
--------- ---------
Total current assets 110,674 161,396
Property and equipment, net 3,556 3,901
Long-term investments - UMC 26,005 48,049
Long-term investments - other 11,987 8,096
Other assets 850 934
--------- ---------
Total assets $ 153,072 $ 222,376
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,181 $ 7,324
Accrued expenses and other liabilities 12,084 12,531
Deferred income tax 8,239 24,734
Income taxes payable -- 1,596
--------- ---------
Total current liabilities 31,504 46,185
Deferred income taxes non-current 11,392 18,928
Other long-term liabilities 19 46
Minority interest in subsidiary 873 1,256
--------- ---------
Total liabilities 43,788 66,415
--------- ---------
Stockholders' equity:
Common stock and additional paid-in capital 54,578 52,254
Retained earnings 72,658 118,636
Accumulated other comprehensive loss -- (4,648)
Treasury stock, at cost (17,952) (10,281)
--------- ---------
Total stockholders' equity 109,284 155,961
--------- ---------
Total liabilities and stockholders' equity $ 153,072 $ 222,376
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- ----------------------
2001 2000 2001 2000
-------- --------- -------- ---------
Net sales $ 24,724 $ 32,144 $ 86,566 $ 91,033
Royalty and license revenue -- -- 9,267 --
-------- --------- -------- ---------
Total revenue 24,724 32,144 95,833 91,033
Cost of sales 19,714 22,867 66,322 63,246
-------- --------- -------- ---------
Gross profit 5,010 9,277 29,511 27,787
Research and development expenses 3,701 6,927 15,244 19,960
Sales, general and administrative
expenses 4,521 4,406 12,336 12,258
-------- --------- -------- ---------
Income (loss) from operations (3,212) (2,056) 1,931 (4,431)
Gain (loss) on investments (77,808) 115,135 (77,808) 115,135
Interest and other income, net 610 475 1,456 1,529
-------- --------- -------- ---------
Income (loss) before income taxes (80,410) 113,554 (74,421) 112,233
Provision (benefits) for income taxes (29,764) 46,068 (28,414) 46,072
-------- --------- -------- ---------
Net income (loss) $(50,646) $ 67,486 $(46,007) $ 66,161
======== ========= ======== =========
Basic earnings (loss) per share $ (3.87) $ 4.94 $ (3.52) $ 4.94
======== ========= ======== =========
Shares used in computing per share
amounts 13,081 13,669 13,056 13,386
======== ========= ======== =========
Diluted earnings (loss) per share $ (3.87) $ 4.28 $ (3.52) $ 4.29
======== ========= ======== =========
Shares used in computing diluted
per share amounts 13,081 15,782 13,056 15,438
======== ========= ======== =========
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)
Nine Months Ended
March 31,
----------------------
2001 2000
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(46,007) $ 66,161
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 1,797 2,606
Provision for doubtful accounts and sales returns -- 1,602
Loss (gain) on investments 77,808 (115,135)
Changes in operating assets and liabilities:
Accounts receivable, net (2,258) (620)
Inventories (8,584) (3,518)
Prepaid expenses and other current assets 408 2,312
Other assets 113 513
Accounts payable 3,857 59
Accrued expenses and other liabilities (830) 5,164
Income taxes payable (1,596) 46,072
Deferred income taxes (27,128) --
-------- ---------
Net cash (used in) provided by operating activities (2,420) 5,216
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (6,050) (3,646)
Purchases of property and equipment (1,454) (772)
-------- ---------
Net cash used in investing activities (7,504) (4,418)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 2,324 2,959
Repayment of capital lease obligations (27) (320)
Minority interest in subsidiary -- 726
Purchase of treasury stock (7,671) --
-------- ---------
Net cash (used in) provided by financing activities (5,374) 3,365
-------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (15,298) 4,163
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 39,041 32,469
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,743 $ 36,632
======== =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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TRIDENT MICROSYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
In the opinion of Trident Microsystems, Inc. (the "Company"), the
condensed consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments necessary for a fair presentation of the
financial position, operating results and cash flows for those periods
presented. The condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
and are not audited. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the year ended June 30, 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):
March 31, 2001 June 30, 2000
-------------- -------------
Work in process $ 4,819 $ 346
Finished goods 7,141 3,030
------- ------
$11,960 $3,376
======= ======
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NOTE 4 EARNINGS (LOSS) PER SHARE
Basic Earnings (loss) Per Share is computed by dividing net income
(loss) available to common stockholders (numerator) by the weighted average
number of common shares outstanding (denominator) during the period and excludes
the dilutive effect of stock options. Diluted Earnings Per Share (EPS) gives
effect to all dilutive potential common shares outstanding during a period. In
computing Diluted EPS, the average stock price for the period is used in
determining the number of shares assumed to be purchased from exercise of stock
options.
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted earnings (loss) per share computations for the periods
presented below.
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- -----------------------
(in thousands, except per share data) 2001 2000 2001 2000
-------- -------- -------- --------
BASIC NET INCOME (LOSS) PER SHARE
Net income (loss) available to Common
Shareholders $(50,646) $ 67,486 $(46,007) $ 66,161
======== ======== ======== ========
Weighted average common shares 13,081 13,669 13,056 13,386
======== ======== ======== ========
Basic net income (loss) per share $ (3.87) $ 4.94 $ (3.52) $ 4.94
======== ======== ======== ========
DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) available to Common
Shareholders $(50,646) $ 67,486 $(46,007) $ 66,161
======== ======== ======== ========
Weighted average common shares 13,081 13,669 13,056 13,386
Dilutive common stock equivalents -- 2,113 -- 2,052
-------- -------- -------- --------
Weighted average common shares
and equivalents 13,081 15,782 13,056 15,438
======== ======== ======== ========
Diluted net income (loss) per share $ (3.87) $ 4.28 $ (3.52) $ 4.29
-------- -------- -------- --------
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NOTE 5 CONTINGENCIES
On December 14, 1998, NeoMagic Corporation ("NeoMagic") filed a patent
infringement lawsuit asserting infringement of two patents against the Company.
On February 1, 2001, the Court granted summary judgment in favor of the Company
that it did not infringe either patent. Other motions for summary judgment
relating to damages issues remain unresolved. The Company expects the Court to
enter judgment in its favor. NeoMagic has appealed the summary judgment on its
infringement claims but Trident believes the appeal is premature. Trident
expects to move to dismiss the appeal unless the Court permits NeoMagic to
pursue the appeal before Trident's antitrust counterclaim is resolved in the
trial court. The Company asserted an antitrust counterclaim against NeoMagic,
which was stayed pending resolution of NeoMagic's infringement claims. Now that
they have been resolved, the Company has moved to lift the stay on its antitrust
counterclaim. While fully briefed, that motion has been neither argued nor
resolved. 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 recognized $10.2 million in
royalty revenue during the quarter ended December 31, 2000, offset by costs of
$903,000, related to the lawsuit settlement with VIA. 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. By letters dated April 20 and 30, 2001, VIA demanded that
the Company pay it $11,4 million for products the Company allegedly purchased
from VIA but for which it has not taken delivery. The company disputes this
claim.
On April 27, 2001 the Company announced that it filed a lawsuit against
VIA Technologies, Inc. and S3 Graphics of Fremont, California, in the Superior
Court for the State of California, Santa Clara County. Trident alleges that VIA
and S3 Graphics, together with former Trident engineering senior managers,
conspired to misappropriate Trident's trade secrets. Trident alleges that VIA
and S3 Graphics used Trident's confidential information to systematically
recruit key engineers away from Trident as part of a scheme to gain a
competitive advantage by undermining Trident's product development and design
win capabilities. Trident also alleges that VIA and S3 Graphics may be planning
to use Trident's trade secrets to unfairly compete against Trident. Trident
intends to vigorously pursue this lawsuit to protect its business and
intellectual property. The Company is seeking the following relief: (1)
preliminary and permanent injunctive relief prohibiting defendants from (a)
using, disclosing or transmitting Trident's trade secrets, and (b) employing any
person solicited with the use of Trident's trade secrets, (2) general monetary
damages in an amount to be determined at trial, (3) disgorgement by the
defendants of any monies acquired by means of the acts complained of, (4)
punitive damages, (5) reasonable attorneys' fees, (6) costs and (7) such further
relief as the court deems just and proper.
In January 2001, FIC Corporation's motion to add the Company as a
third-party defendant in a patent infringement case brought against FIC by Intel
Corporation was denied. FIC had attempted to add the Company as a third-party
defendant because the Company allegedly supplied to FIC the devices which Intel
claims infringe its patents. FIC then demanded that the Company assume FIC's
defense in the Intel action, which demand the Company rejected. FIC settled its
case with Intel and renewed its
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demand that the Company reimburse it for its costs of defense. The Company
rejected this demand, and FIC has threatened to file suit against the Company
seeking recovery of its costs of defense.
NOTE 6 IMPAIRMENT LOSS ON INVESTMENTS
During the quarter ended March 31, 2001, the Company expensed an
impairment loss on investments of $77.8 million. Of this loss, $76.4 million was
due to a decline in the stock price of the Company's investment in United
Microelectronics Corporation. The remaining $1.4 million of the loss related to
a decline in market valuations of other investments.
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ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
When used in this discussion, the words "expects," "anticipates,"
"estimates" and similar expressions are intended to identify forward-looking
statements. Such statements, which include statements concerning the Company's
plans for expenses and investments, and expectations regarding the development
of existing and new business, are subject to risks and uncertainties, including
those set forth below under "Factors That May Affect Our Results," that could
cause actual results to differ materially from those projected. These
forward-looking statements speak only as of the date hereof. We expressly
disclaim any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in our expectations with regard thereto or any change in events,
conditions or circumstances on which any statement is based.
RESULTS OF OPERATIONS
The following table sets forth the results of operations expressed as
percentages of total revenues for the three and nine months ended March 31, 2001
and 2000:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ ------------------
2001 2000 2001 2000
---- ---- ---- ----
Net sales 100% 100% 90% 100%
Royalty and license revenue -- -- 10 --
---- ---- ---- ----
Total revenue 100 100 100 100
Cost of sales 80 71 69 69
---- ---- ---- ----
Gross margin 20 29 31 31
Research and development expenses 15 21 16 22
Selling, general and administrative expenses 18 14 13 14
---- ---- ---- ----
Income (loss) from operations (13) (6) 2 (5)
Gain (loss) on investments (314) 358 (82) 127
Interest and other income, net 2 1 2 2
---- ---- ---- ----
Income (loss) before income taxes (325) 353 (78) 124
Provision for income taxes (120) 143 (30) 51
---- ---- ---- ----
Net income (loss) (205)% 210% (48)% 73%
---- ---- ---- ----
Revenue
Revenue for the three months ended March 31, 2001 was $24.7 million.
Net sales for the three months ended March 31, 2001 decreased 23% from the $32.1
million reported in the three months ended March 31, 2000. Revenue for the nine
months ended March 31, 2001 was $95.8 million of which product sales equaled
$86.6 million and royalty revenue equaled $9.3 million. Net sales for the nine
months ended March 31, 2001 decreased 5% from the $91 million reported in the
nine months ended
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March 31, 2000. The decrease in net sales in the three months ended March 31,
2001 from the three months ended March 31, 2000 is attributed to a decline in
sales of notebook and desktop computers for the quarter. Net sales decreased
during the nine months ended March 31, 2001 compared to the nine months ended
March 31, 2000 primarily due to a decrease in the sales of desktop products.
Notebook, desktop, and digital process television products accounted
for 85%, 9% and 2% of net sales, respectively, in the three months ended March
31, 2001, and 85%, 9% and 2% of net sales for the nine months ended March 31,
2001. Notebook and desktop products accounted for 83% and 15% of net sales,
respectively, for the three months ended March 31, 2000 and 77% and 20% of net
sales, respectively, for the nine months ended March 31, 2000.
Sales to Asian customers, primarily in Taiwan, Japan and the
Philippines accounted for almost all of our revenues in the three months ended
March 31, 2001. In the three months ended March 31, 2000, almost all of our
sales were to Asian customers, primarily in Taiwan and Japan. Sales to Asian
customers, primarily in Taiwan and Japan, accounted for almost all of our
revenues in the nine months ended March 31, 2001. In the nine months ended March
31, 2000, sales to Asian customers, primarily in Taiwan, Japan and Hong Kong
accounted for almost all of our revenues. We expect Asian customers will
continue to account for a significant portion of our sales.
In the three months ended March 31, 2001, sales to three customers
Inno Micro, Toshiba and Arima accounted for 26%, 22%, and 16% of total revenues,
respectively. In the three months ended March 31, 2000, sales to three customers
Arima, Compal and Inno Micro accounted for 24%, 14%, and 14% of total revenues,
respectively. In the nine months ended March 31, 2001 sales to four customers
Arima, VIA, Inno Micro, and Quanta accounted for 19%, 18%, 15% and 15%,
respectively, and in the nine months ended March 31, 2000 sales to four
customers Arima, Inno Micro, Toshiba, and Fujitsu accounted for 17%, 19%, 13%
and 10% 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 depends, 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.
To better enable us to advance in the 3D graphics and digital TV
marketplace, we are now structured into two business units: the videographics
business unit and the digital media business unit. The videographics business
unit continues the Company's entire 3D videographics business with worldwide PC
OEMs, and intends to expand further into System-On-Chip (SOC) solutions for
state-of-the-art 3D graphics, especially the 3D video and core logic integrated
video graphic chips. This business unit 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(TM) 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
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us to rapidly grow our digital television product offerings, and continue to
expand our videographics chip markets by efficiently allocating resources
between the two divisions.
Gross Profit
Gross profit decreased to $5.0 million for the three months ended March
31, 2001, down from $9.3 million in the three months ended March 31, 2000. Gross
profit increased to $29.5 million for the nine months ended March 31, 2001, up
from $27.8 million in the nine months March 31,2000. Without the royalty revenue
of $9.3 million booked in the three months ended December 31, 2000, gross profit
for the nine months ended March 31, 2001 would have been $20.2 million a
decrease of $7.5 million from the nine months ended March 31, 2000. The gross
margin for the three months ended March 31, 2001, decreased to 20% of net sales
as compared to 29% for the three months ended March 31, 2000. The gross margin
as a percentage of net sales for the nine months ended March 31, 2001, excluding
the royalty revenue of $9.3 million, decreased to 23% of net sales as compared
to 31% for the nine months ended March 31, 2000. The decrease in gross margin as
a percentage of net sales for both the three and nine months ended March 31,
2001 can be primarily attributed to an increase in the cost of the production of
3D discrete 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 migrating to the newest process technology. As
a result, we depend upon the success of new product development and the regular
and 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 March 31,
2001 decreased to $3.7 million from $6.9 million for the March 31, 2000 three
month period. As a percent of total revenues, research and development expenses
decreased to 15% for the three months ended March 31, 2001, from 21% of total
revenues for the three months ended March 31, 2000. Research and development
expenses for the nine months ended March 31, 2001 decreased to $15.2 million
from $20.0 million for the March 31, 2000 nine month period. As a percent of
total revenues, research and development expenses decreased to 16% for the nine
months ended March 31, 2001, from 22% of total revenues for the nine months
ended March 31, 2000. The decrease in research and development expenses in
actual dollars for both the three and nine months ended March 31, 2001 from
March 31, 2000, can be attributed primarily to the restructuring of our research
and development organization, 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 increased to $4.5 million
for the three months ended March 31, 2001 from $4.4 million for the three months
ended March 31, 2000. As a percent of total
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revenues, selling, general and administrative expenditures increased to 18% for
the three months ended March 31, 2000 from 14% for the three months ended March
31, 2000. This can be primarily attributed to a larger decline in sales relative
to the increase in selling, general and administrative expenditures. Selling,
general and administrative expenses remained flat at $12.3 million for the nine
months ended March 31, 2001 and March 31, 2000. The Company intends to continue
to monitor and control its selling, general and administrative expenses.
Impairment loss on investments
During the quarter ended March 31, 2001, the Company expensed an
impairment loss on investments of $77.8 million. Of this loss, $76.4 million was
due to a decline in the stock price of the Company's investment in United
Microelectronics Corporation. The remaining $1.4 million of the loss related to
a decline in market valuations of other investments.
Interest and Other Income, Net
Interest and other income increased to $610,000 in the three months
ended March 31, 2001 from $475,000 in the three months ended March 31, 2000, and
remained flat at $1.5 million for the nine months ended March 31, 2001 and March
31, 2000. The amount of interest income earned by us varies directly with the
amount of our cash and cash equivalents and the prevailing interest rates.
Provision for Income Taxes
A tax benefit was recorded for income taxes for the three months ended
March 31, 2001 in the amount of $29.8 million and for the nine months ended
March 31, 2001 in the amount of $28.4 million. The tax benefit primarily related
to our impairment loss on investments in the three months ended March 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001, our principal sources of liquidity included cash
and cash equivalents were $23.7 million down from $39.0 million at June 30,
2000. In the nine months ended March 31, 2001, $2.4 million of cash was used by
operations, compared to the nine months ended March 31, 2000, in which $5.2
million of cash was provided by operations. The decrease in cash for the nine
months ended March 31, 2001, due to investing and financing activities, was
mainly the purchase of long-term investments of $6.0 million and treasury stock
of $7.7 million. Capital expenditures were $1.5 million for the nine months
ended March 31, 2001, compared to $772,000 for March 31, 2000.
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, and
1999, 680,000 and 161,000 shares of common stock were repurchased for $6.2
million, and $0.9 million under this Plan, respectively.
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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 nine
months ended March 31, 2001 cumulative purchases of investments totaled $14.1
million. Substantially all of these investments are in private companies
developing technologies in areas in which the Company is focusing.
As of March 31, 2001, the Company's stock in United Microelectronics
Corporation, classified as short-term investment, was valued at $64.1 million.
While some of the stock is freely tradable, a substantial portion of the stock
is not available for resale as it is subject to certain contractual and other
restrictions, including restrictions relating to retention of our allocated
foundry capacity at United Microelectronics Corporation. While the Company is an
operating company not in the business of investing, reinvesting, owning, holding
or trading in securities, we do intend to monitor the advisability of disposing
of our United Microelectronics Corporation stock and intend to sell all or part
of the stock when it is in the best interests of our shareholders to do so,
however, at present we do not have an intent to sell any of the stock in the
immediate future.
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, and we do not expect the transaction to
close, at least not on the terms originally agreed to.
On April 19, 2000, VIA Technologies, Inc. and the Company announced
that they had agreed to resolve all pending lawsuits. The Company recognized
$10.2 million in royalty revenue during the quarter ended December 31, 2000,
offset by costs of $903,000, related to the lawsuit settlement with VIA
Technologies Inc.
FACTORS THAT MAY AFFECT OUR RESULTS
OPERATING LOSS IN FISCAL YEAR 2000 AND FOR THE THREE MONTHS ENDED MARCH 31, 2001
We experienced operating losses for the fiscal year ended June 30,
2000, and for the three months ended March 31, 2001. Future performance will
substantially depend upon numerous factors, such as:
- whether there is improvement in PC sales, and notebook sales in
particular;
- 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.
- the volume of DPTV(TM) sales, particularly sales by customers who
have designed in our DPTV(TM) products.
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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, the Company's efforts in new markets such as DPTV(TM) 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, development of 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 CUSTOMERS
Our revenues have historically been generated primarily from Asian
customers, particularly Taiwan and Japan. While we intend to continue our
marketing efforts to North American OEMs, we
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expect to be primarily dependent on international sales and operations,
particularly in Taiwan and Japan, which are expected to constitute a significant
portion of our sales in the future. There are a number of risks arising from our
international business which could adversely affect future results, 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 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) 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(TM) products will have a longer
product life cycle than other current products. Therefore we expect to devote
significant resources to the DPTV(TM) 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.
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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.
DEPENDENCE 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
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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.
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
To better enable us to advance in the 3D graphics and digital TV
marketplace, we are now structured into two business units: the videographics
business unit and the digital media business unit. The videographics business
unit continues the Company's entire 3D videographics business with worldwide PC
OEMs, and intends to expand further into System-On-Chip (SOC) solutions for
state-of-the-art 3D graphics, especially the 3D video and core logic integrated
video graphic chips. This business unit 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(TM) 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 videographics 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 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 March 31, 2001, 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
$4.3 million and $1.7 million respectively, as of March 31, 2001. 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.
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PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On December 14, 1998, NeoMagic Corporation ("NeoMagic") filed a patent
infringement lawsuit asserting infringement of two patents against the Company.
On February 1, 2001, the Court granted summary judgment in favor of the Company
that it did not infringe either patent. Other motions for summary judgment
relating to damages issues remain unresolved. The Company expects the Court to
enter judgment in its favor. NeoMagic has appealed the summary judgment on its
infringement claims but Trident believes the appeal is premature. Trident
expects to move to dismiss the appeal unless the Court permits NeoMagic to
pursue the appeal before Trident's antitrust counterclaim is resolved in the
trial court. The Company asserted an antitrust counterclaim against NeoMagic,
which was stayed pending resolution of NeoMagic's infringement claims. Now that
they have been resolved, the Company has moved to lift the stay on its antitrust
counterclaim. While fully briefed, that motion has been neither argued nor
resolved. 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 recognized $10.2 million in
royalty revenue during the quarter ended December 31, 2000, offset by costs of
$903,000, related to the lawsuit settlement with VIA. 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. By letters dated April 20 and 30, 2001, VIA demanded that
the Company pay it $11.4 million for products the Company allegedly purchased
from VIA but for which it has not taken delivery. The company disputes this
claim.
On April 27, 2001 the Company announced that it filed a lawsuit against
VIA Technologies, Inc. and S3 Graphics of Fremont, California, in the Superior
Court for the State of California, Santa Clara County. Trident alleges that VIA
and S3 Graphics, together with former Trident engineering senior managers,
conspired to misappropriate Trident's trade secrets. Trident alleges that VIA
and S3 Graphics used Trident's confidential information to systematically
recruit key engineers away from Trident as part of a scheme to gain a
competitive advantage by undermining Trident's product development and design
win capabilities. Trident also alleges that VIA and S3 Graphics may be planning
to use Trident's trade secrets to unfairly compete against Trident. Trident
intends to vigorously pursue this lawsuit to protect its business and
intellectual property. The Company is seeking the following relief: (1)
preliminary and permanent injunctive relief prohibiting defendants from (a)
using, disclosing or transmitting Trident's trade secrets, and (b) employing any
person solicited with the use of Trident's trade secrets, (2) general monetary
damages in an amount to be determined at trial, (3) disgorgement by the
defendants of any monies acquired by means of the acts complained of, (4)
punitive damages, (5) reasonable attorneys' fees, (6) costs and (7) such further
relief as the court deems just and proper.
In January 2001, FIC Corporation's motion to add the Company as a
third-party defendant in a patent infringement case brought against FIC by Intel
Corporation was denied. FIC had attempted to add the Company as a third-party
defendant because the Company allegedly supplied to FIC the devices which Intel
claims infringe its patents. FIC then demanded that the Company assume FIC's
defense in the Intel action, which demand the Company rejected. FIC settled its
case with Intel and renewed its demand that the Company reimburse it for its
costs of defense. The Company rejected this demand, and FIC has threatened to
file suit against the Company seeking recovery of its costs of defense.
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Statements regarding the possible outcome of litigation and our actions
are forward looking statements and actual outcomes could vary based upon future
developments in the litigation.
ITEM 2: CHANGES IN SECURITIES
Not applicable
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4: SUBMISSIONS OF MATTERS TO VOTE BY SECURITY HOLDERS
Not applicable
ITEM 5: OTHER INFORMATION
Not applicable
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Description
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3.1 Restated Certificate of Incorporation.(1)
3.2 Bylaws of Trident Microsystems, Inc., 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)(7)
10.17(*) Form of 1998 Stock Option Plan which replaces the 1992 Stock
Option Plan.(6)
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(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) 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
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on May 14, 2001, on its
behalf by the undersigned thereunto duly authorized.
Trident Microsystems, Inc.
(Registrant)
/s/ Frank Lin
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Frank C. Lin
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
/s/ Peter Jen
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Peter Jen
Senior Vice President, Asia Operations
and Chief Accounting Officer
(Principal Financial and Accounting Officer)
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