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 SEPTEMBER 30, 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 identification No.)
incorporation or organization)
1090 East Arques Avenue, Sunnyvale, California 94085
----------------------------------------------------
(Address of principal executive offices) (Zip code)
(408) 991-8800
--------------
(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 Common Stock, $0.001 par value,
outstanding at September 30, 2001 was 13,335,593.
TRIDENT MICROSYSTEMS, INC.
INDEX
Page
--------------
PART I: FINANCIAL INFORMATION
Item 1: Unaudited Financial Information
Condensed Consolidated Balance Sheet - September 30, 2001 and June 30, 2001 3
Condensed Consolidated Statement of Operations for the three months ended
September 30, 2001 and 2000 4
Condensed Consolidated Statement of Cash Flows for the three months ended
September 30, 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 13
Item 3: Quantitative and Qualitative Disclosures About Market Risk 25
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 27
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 28
Item 6: Exhibits and Reports on Form 8-K 29
Signatures 30
TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, UNAUDITED)
ASSETS
September 30, June 30,
2001 2001
------------- ---------
Current assets:
Cash and cash equivalents $ 24,903 $ 26,677
Short-term investments - UMC 37,535 52,708
Short-term investments - other 383 791
Accounts receivable, net 7,167 9,247
Inventories 6,662 10,669
Deferred tax assets 1,656 1,656
Prepaid expenses and other assets 4,220 3,481
--------- ---------
Total current assets 82,526 105,229
Property and equipment, net 3,840 3,559
Long-term investments - UMC 12,578 26,005
Long-term investments - others 10,256 11,996
Other assets 503 630
--------- ---------
Total assets $ 109,703 $ 147,419
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,502 $ 11,829
Accrued expenses and other liabilities 12,270 13,169
Income taxes payable 438 1,040
--------- ---------
Total current liabilities 21,210 26,038
Deferred income taxes 3,478 14,947
Minority interest in subsidiary 887 1,068
--------- ---------
Total liabilities 25,575 42,053
--------- ---------
Stockholders' equity:
Common stock and additional paid-in capital 55,293 55,106
Treasury stock, at cost (17,952) (17,952)
Retained earnings 46,787 74,996
Accumulated other comprehensive loss -- (6,784)
--------- ---------
Total stockholders' equity 84,128 105,366
--------- ---------
Total liabilities and stockholders' equity $ 109,703 $ 147,419
========= =========
The accompanying notes are an integral part of these consolidated financial
statements
- 3 -
TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
September 30,
------------------------
2001 2000
-------- --------
Revenues $ 25,740 $ 36,057
Cost of revenues 19,801 26,667
-------- --------
Gross profit 5,939 9,390
Research and development expenses 5,528 5,546
Sales, general and administrative expenses 3,378 3,683
-------- --------
Income (loss) from operations (2,967) 161
Loss on investments (42,065) --
Interest income, net 229 544
-------- --------
Income (loss) before income taxes (44,803) 705
Provision for (benefit for) income taxes (16,594) 171
-------- --------
Net income (loss) $(28,209) $ 534
======== ========
Basic earnings (loss) per share $ (2.12) $ 0.04
======== ========
Shares used in computing basic per share amounts 13,297 13,105
======== ========
Diluted earnings (loss) per share $ (2.12) $ 0.04
======== ========
Shares used in computing diluted per share amounts 13,297 14,620
======== ========
The accompanying notes are an integral part of these consolidated financial
statements
- 4 -
TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)WS
Three Months Ended
September 30,
------------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(28,209) $ 534
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 409 635
Provision for doubtful accounts and sales returns 1,338 --
Loss on investments 42,065 --
Deferred income taxes (15,991) --
Changes in assets and liabilities:
Accounts receivable 742 (6,204)
Inventories 4,007 (3,420)
Prepaid expenses and other current assets (750) 772
Other assets 127 131
Accounts payable (3,327) 5,859
Accrued expenses and other liabilities (1,080) 700
Income taxes payable (602) 155
-------- --------
Net cash used in operating activities (1,271) (838)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments -- (3,800)
Purchase of property and equipment (690) (389)
-------- --------
Net cash used in investing activities (690) (4,189)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 187 1,343
Repayment of capital leases -- (9)
Purchase of treasury stock -- (7,671)
-------- --------
Net cash provided by (used in) financing activities 187 (6,337)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,774) (11,364)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 26,677 39,041
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,903 $ 27,677
======== ========
The accompanying notes are an integral part of these consolidated financial
statements
- 5 -
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, 2001 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, 2002.
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 provides reserves for returns and allowances for distributor
inventories. These reserves are based on the Company's estimates of inventories
held by its distributors and the expected sell through of its products by its
distributors. The Company has no obligation to provide any modification or
customization upgrades, enhancements or other post-sale customer support.
The Company recognizes license revenue in accordance with the revenue
recognition criteria set forth in SOP 97-2 "Software Revenue Recognition." The
Company's license revenue does not require significant production, modification
or customization of software. The Company's license revenues are recognized when
all of the following criteria are met: (1) persuasive evidence of an arrangement
exists, (2) delivery has occurred, (3) the vendor's fee is fixed or determined,
(4) collectibility is probable. Royalty revenue is recognized when the Company
is informed that the related products have been sold provided that
collectibility is assured.
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133 "Accounting for Derivatives Instruments and Hedging Activities."
This statement establishes accounting and reporting standards for derivative
instruments and requires recognition of all derivatives as assets or liabilities
in the balance sheet and measurement of those instruments at fair value. The
adoption of this standard did not have a material impact on the Company's
financial statements.
In December 1999, The Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"),"Revenue Recognition in Financial
Statements." SAB 101 provides interpretive guidance on the recognition,
presentation and disclosure of revenue in financial statements under certain
- 6 -
circumstances. The Company adopted the provisions of SAB 101 in these financial
statements for all periods presented. The adoption of SAB 101 did not have a
material impact on the Company's financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44 or FIN 44
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB Opinion No. 25. FIN 44 clarifies the application of APB
No. 25 for (a) the definition of employee for purposes of applying APB No. 25,
(b) the criteria for determining whether a plan qualifies as a noncompensatory
plan, (c) the accounting consequence for various modifications to the terms of a
previously fixed stock option or award and (d) the accounting for an exchange of
stock compensation awards in a business combination. FIN 44 is effective July 1,
2000, but certain conclusions cover specific events that occur after either
December 15, 1998, or January 12, 2000. The adoption of FIN 44 did not have a
material impact on the Company's financial position or results of operations.
In June 2001, the FASB issued two Statements: Statement No. 141 -
Business Combinations; and Statement No. 142 - Goodwill and Other Intangible
Assets.
The Statements:
- - Prohibit use of the pooling-of-interest method. All business
combinations must be accounted for using the purchase method of
accounting.
- - Establish a new accounting standard for goodwill acquired in a business
combination. Goodwill will continue to be recognized as an asset but
will not be amortized as currently required by APB No. 17, "Intangible
Assets."
- - Establish a new method of testing goodwill for impairment. Goodwill must
be separately tested for impairment using a fair-value-based approach.
Goodwill must be tested for impairment at a level referred to as a
reporting unit, which is generally a level lower than that of the total
entity.
SFAS No. 141 applies to all business combinations completed after June 30, 2001.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001.
These new Statements are not expected to affect the Company's financial
statements.
NOTE 4. INVENTORIES
Inventories consisted of the following (in thousands):
September 30, 2001 June 30, 2001
------------------ -------------
Work in process $ 2,100 $ 5,867
Finished goods 4,562 4,802
------- -------
$ 6,662 $10,669
======= =======
- 7 -
NOTE 5. EARNINGS PER SHARE
Basic Earnings Per Share (EPS) is computed by dividing net income
available to common stockholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period and excludes the
dilutive effect of stock options. Diluted Earnings Per Share (EPS) gives effect
to all dilutive potential common shares outstanding during a period. In
computing Diluted 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.
Three Months Ended
September 30,
--------------------------------
2001 2000
-------- --------
(in thousands, except
per share data)
BASIC NET INCOME (LOSS) PER SHARE
Net income (loss) available to Common
Shareholders $(28,209) $ 534
======== ========
Weighted average commmon shares 13,297 13,105
======== ========
Basic net income (loss) per share $ (2.12) $ 0.04
======== ========
DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) available to Common
Shareholders $(28,209) $ 534
======== ========
Weighted average common shares 13,297 13,105
Dilutive common stock equivalents (1) -- 1,515
-------- --------
Weighted average common shares
and equivalents 13,297 14,620
======== ========
Diluted net income (loss) per share $ (2.12) $ 0.04
======== ========
(1) Dilutive common stock equivalents not included in the EPS calculation
for the period ended September 30, 2001 because the effect would be
anti-dilutive.
NOTE 6. INVESTMENT IN UMC
In August 1995, the Company made an investment of $49.3 million in
United Integrated Circuits Corporation (UICC). On January 3, 2000, United
Microelectronics Corporation (UMC) acquired UICC and, as a result of this
merger, the Company received approximately 46.5 million shares of UMC. On April
7, 2000, UMC announced a 20% stock dividend payable to shareholders of record
May 16, 2000, and a 15% stock dividend payable to shareholders of record July
21, 2001. The only change in the number of shares in UMC held by the Company
from January 3, 2000 to September 30, 2001 was the increase resulting from the
stock dividends. As of September 30, 2001, the Company owned approximately 64.2
million shares of UMC which represents about 0.5% of the outstanding stock of
UMC.
- 8 -
On January 3, 2000, the Company recognized a pre-tax gain of $117.0
million upon the receipt of UMC shares in exchange for the UICC shares. In the
quarter ended March 31, 2001 based on the decline of the UMC's stock price, the
decline in stock prices of publicly traded semiconductor companies and the
unfavorable outlook regarding the demand and operating environment of the
semiconductor industry, the Company concluded that the decline in the investment
value in UMC had become other-than-temporary. Accordingly, the difference of
$76.4 million between the carrying value on January 3, 2000 and the quoted fair
value on March 31, 2001, was written off and included in earnings as impairment
loss on investments in accordance with SFAS No. 115 and APB No. 18 for the
short-term and long-term portions of investments, respectively.
In the quarter ended September 30, 2001, we concluded that due to a
substantial decline in the market value of UMC's stock price from June 30, 2001
to September 30, 2001, the continued decline in stock prices of publicly traded
semiconductor companies and the continuing unfavorable outlook for the
semiconductor industry, that the decline in the investment value in UMC had
become other-than-temporary. Accordingly, the difference of $40.0 million
between the carrying value on March 31, 2001 and the quoted fair value on
September 30, 2001, was written off and included in earnings as an impairment
loss on investments in accordance with SFAS No. 115 and APB No. 18, for the
short-term and long-term portions of investments, respectively.
In order to preserve the 12.5% wafer capacity guarantee of the UICC
facility, which guarantees a maximum of approximately 3,000 wafers per month,
there are certain limitations on the Company's ability to sell the UMC shares.
If the Company's total shareholdings fall below one-half of the initial
percentage of shares held in UMC, the Company's production capacity will be
reduced by at least 50%, and depending on the interpretation of the foundry
capacity agreement between the parties, the Company's production capacity could
be reduced by substantially more than 50%. In addition, one-third of the shares
is subject to a two-year lock-up period in accordance with an investment
agreement entered into with UMC. After a two-year period, one-fifth of the
shares will be available for sale from the lock-up portion every six months. As
of September 30, 2001, approximately 16.1 million shares with a carrying value
of $12.6 million are subject to this lock-up restriction. These shares are
accounted for as long-term investments using the cost method in accordance with
APB No. 18. The $12.6 million reflects the write-down to the market value as of
September 30, 2001.
Shares of UMC are listed on the Taiwan Stock Exchange. In accordance
with SFAS No. 115, the 48.1 million unrestricted shares are treated as
available-for-sale securities and are classified as short-term investments.
These unrestricted shares had a market value of $37.5 million as of September
30, 2001.
NOTE 7. INVESTMENTS IN OTHER COMPANIES
During the quarter ended September 30, 2001, the Company also recognized
impairment losses of investments other than UMC totaling $2.1 million as
follows:
ADSL company $ 270,000
Communications company 66,000
Broadband communications company 750,000
Voice over DSL communications company 1,000,000
----------
Total $2,086,000
==========
- 9 -
In September 1999, the Company invested $909,000 in an ADSL company for
227,250 shares of preferred stock which were then converted into the same number
of common stock shares upon the company's initial public offering in August
2000. On March 31, 2001 the fair value of these shares as quoted was $498,000.
Because the company experienced declining earnings in relation to its
competitors in the ADSL market and erosion of its market share, the decline in
value was considered other-than-temporary. Accordingly, the difference between
the carrying value and the quoted fair value on March 31, 2001 was written off
against earnings in accordance with SFAS No. 115. On September 30, 2001 due to
deteriorating industry outlook and decreasing value in the company's shares, the
difference between the carrying value and the quoted fair value on September 30,
2001 of $270,000 was considered an other-than-temporary impairment and was
written off against earnings in accordance with SFAS No. 115.
In June 2000, the Company invested $600,000 in a communications company
which was subsequently acquired by a listed company. On March 31, 2001, the fair
value of the shares owned by the Company was $221,000. Because of the
significant losses incurred by this company, the Company concluded that the
decline in value was other-than-temporary. Accordingly, the difference between
the carrying value and the quoted fair value on March 31, 2001 was written off
against earnings in accordance with SFAS No. 115. On September 30, 2001 due to
the deteriorating industry outlook and decreasing value in the company's shares,
the difference between the carrying value and the quoted fair value on September
30, 2001 of $66,000 was considered an other-than-temporary impairment and was
written off against earnings in accordance with SFAS No. 115.
In April 2000, the Company invested $650,000 in a private company
engaged in broadband communication technology. In June 2000, an additional
$100,000 was invested in the company. In the quarter ended September 30, 2001,
the Company determined that the prospects for recovery of the investment were
unfavorable given the market position of the company and the company's operating
losses. Therefore, the Company concluded that the impairment was
other-than-temporary. Accordingly, the full investment of $750,000 was written
off against earnings in accordance with APB No. 18.
In September 2000, the Company invested $1,500,000 in a private company
engaged in "voice over DSL" communication technology. In the quarter ended
September 30, 2001, the Company determined that this communications company was
in a product reengineering process. It is likely that the company would cease
operations. The Company assessed the estimated cash recoverable from this
investment and concluded that the estimated shortfall was an
other-than-temporary impairment. Accordingly, $1,000,000 of the investment was
written off against earnings in accordance with APB No. 18.
NOTE 8. OTHER CURRENT ASSETS
Included in other current assets is a $500,000 loan to Mr. Frank Lin,
the Company's President and Chief Executive Officer. In accordance with an
agreement dated April 27, 2000, this loan was provided to Mr. Lin for his
personal use. It is payable in full on the earlier of cessation of employment or
April 27, 2002. The interest rate is 6.46% compounded annually and the accrued
interest is payable at maturity. Mr. Lin used shares of the Company's stock he
acquired several years ago as collateral for the loan. This loan was not
provided in relation to any purchase of the Company's stock or the exercise of
the Company's stock options.
- 10 -
NOTE 9. CONTINGENCIES
On December 14, 1998, NeoMagic Corporation ("NeoMagic") filed a patent
infringement lawsuit in the U.S. District Court, District of Delaware, 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 the
Company believes the appeal is premature. The Company expects to move to dismiss
the appeal unless the Court permits NeoMagic to pursue the appeal before the
Company's antitrust counterclaim is resolved in the trial court. The Company
asserted an antitrust counterclaim against NeoMagic, seeking compensatory
damages, trebled damages, costs and attorney fees, which was stayed pending
resolution of NeoMagic's infringement claims at the District Court level. After
the District Court granted summary judgment, the Company moved to lift the stay
on its antitrust counterclaim. The briefing on this motion is completed and the
parties are awaiting oral argument. On May 7, 2001, NeoMagic filed its opening
appeal brief. On May 17, 2001, the Company filed a motion to dismiss NeoMagic's
appeal for lack of jurisdiction because there is no final appealable order and
the Company's antitrust counterclaim remains pending. On June 15, 2001, the
Company filed its opposition appeal brief and renewed its request that the
appeal be dismissed for lack of jurisdiction. On July 2, 2001, NeoMagic filed
its reply brief. On July 31, 2001, the Federal Circuit dismissed NeoMagic's
appeal without prejudice as premature. NeoMagic subsequently moved the District
Court to certify the Company's summary judgment for immediate appeal pursuant to
Federal Rules of Civil Procedure Rule 54(b). That motion was granted, as was the
Company's motion to lift the stay on its antitrust counterclaim so it could take
limited discovery. The Company is currently taking antitrust discovery in the
district court and preparing its opposition to NeoMagic's Federal Circuit appeal
of the Company's summary judgment of non-infringement.
On May 26, 2000, NeoMagic filed a second patent infringement lawsuit in
the U.S. District Court, District of Delaware, asserting that the Company
infringes a patent issued in March 2000 that is related to the two patents at
issue in the first case. NeoMagic is seeking a permanent injunction, damages,
including enhanced damages, pre-judgment and post-judgment interest, cost and
attorney fees. This case has been stayed pending resolution of the first case.
Given the nature of litigation, the lack of any discovery to date, and inherent
uncertainties associated with litigation, management cannot predict with
certainty the ultimate outcome of this litigation.
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 in the U.S. District Court, Northern District of California 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 in March 2001, 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. Given
the nature of litigation and inherent uncertainties associated with litigation,
management cannot predict with certainty whether FIC will bring suit or the
ultimate outcome of any such litigation.
On April 26, 2001, the Company filed a lawsuit against VIA Technologies,
Inc. (of Taiwan and California) and S3 Graphics (of California) in the Superior
Court for the State of California, Santa Clara County. The Company alleges that
VIA and S3 Graphics, together with former Company engineering senior managers,
conspired to misappropriate the Company's trade secrets about products in
- 11 -
development. The Company further alleges that the corporate and individual
defendants used the Company's confidential information to systematically recruit
key engineers away from the Company as part of a scheme to gain a competitive
advantage by undermining the Company's product development and design win
capabilities. The Company also alleges that VIA and S3 Graphics may be planning
to use the Company's trade secrets to unfairly compete against the Company. The
Company is seeking the following relief: (1) preliminary and/or permanent
injunctive relief prohibiting defendants from (a) using, disclosing or
transmitting the Company's trade secrets, and (b) employing any person solicited
with the use of the Company'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 accused wrongful acts; (4) punitive damages; (5)
reasonable attorneys' fees; (6) costs; and (7) such further relief as the court
deems just and proper. Since filing the lawsuit, the Company has defeated two
attempts by certain defendants to dismiss or stay the action against them, and
the parties have engaged in extensive discovery practice. On November 1, 2001,
the Santa Clara County Superior Court entered a Stipulation and Order Staying
Case ("Stay Order") staying all litigation activity in the lawsuit through
January 31, 2002. The court entered the Stay Order so that the parties could
pursue settlement discussions during the period of the stay.
On May 4, 2001, VIA Technologies, Inc. sued the Company in the U.S.
District Court, Northern District of California for breach of contract and
related claims arising out of the companies' agreements with respect to the
manufacture and sale of Cbi-1 and Cbi-7 chipsets. The complaint seeks payment in
an unspecified amount (but later asserted to be approximately $6.3 million) for
686,675 Cbi-7 chipsets the Company allegedly ordered but did not pay for. On May
29, 2001, the Company answered and counterclaimed, asserting claims for breach
of the same agreements, interference with the Company's relationships with its
customers, and related claims. On July 9, 2001, the Company moved for a
preliminary injunction to require VIA to live up to its agreements with the
Company. At the August 13, 2001 scheduled hearing on the Company's motion for
preliminary injunction, the Court continued the hearing to September 13 and
ordered the parties to mediate their dispute in the interim. The mediation was
not successful, but Trident nevertheless withdrew its motion for preliminary
injunction. Given the nature of litigation and inherent uncertainties associated
with litigation, management cannot predict with certainty the ultimate outcome
of this 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.
- 12 -
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(UNAUDITED)
When used in this report, the words "expects," "anticipates,"
"estimates" and similar expressions are intended to identify forward-looking
statements. Such statements, which include statements concerning:
- - the timing of availability and functionality of products under
development,
- - product mix,
- - trends in average selling prices,
- - the percentage of export sales and sales to strategic customers,
- - the availability and cost of products from our suppliers,
- - outcome of pending litigation
- - closing of transactions relating to sale of 23.5% of our common stock,
- - future investments in and acquisitions of businesses, products or
technologies,
- - demand for our products
- - demand for PCs and notebooks
- - future spin-offs of subsidiaries and/or other facilities
- - devotion of resources and control of expenses related to new products,
markets and internal business strategies,
are subject to risks and uncertainties, including those set forth below under
"Factors That May Affect Our Results" and elsewhere in this report, 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 revenues for the three months ended September 30, 2001 and 2000:
Three Months Ended
September 30,
------------------------
2001 2000
----- -----
Revenues 100.0% 100.0%
Cost of revenues 76.9 74.0
----- -----
Gross margin 23.1 26.0
Research and development expenses 21.5 15.4
Selling, general and administrative expenses 13.1 10.2
----- -----
Income (loss) from operations (11.5) 0.4
Loss on investments (163.4) --
Interest income, net 0.8 1.6
----- -----
Income (loss) before income taxes (174.1) 2.0
Provision for (benefit for) income taxes (64.5) 0.5
----- -----
Net income (loss) (109.6)% 1.5%
===== =====
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Revenues
Revenues for the three months ended September 30, 2001 were $25.7
million, a decrease of 29% from the $36.1 million reported in the three months
ended September 30, 2000. The revenues decrease from the three months ended
September 30, 2000 was predominantly due to decreased sales of 3D notebook
products which was due to declining economic conditions and increased
competitive pressure. In the three months ended September 30, 2001 notebook and
desktop products accounted for 87% and 3% of revenues, respectively, compared to
89% and 8% of revenues, respectively, in the three months ended September 30,
2000. Revenues for digital process television (DPTV) chips in the three months
ended September 30, 2001 totaled $1.0 million and accounted for 4% of total
revenues, compared to 0% of total revenues in the three months ended September
30, 2000.
Sales to Asian customers, primarily in Taiwan and Japan, accounted for
almost all of our revenues in the three months ended September 30, 2001, which
is essentially unchanged from the three months ended September 30, 2000. We
expect Asian customers will continue to account for a significant portion of our
sales. Sales to North American and European customers represented 0.4% of
revenues in the three months ended September 30, 2001, an increase from
approximately 0.2% in the three months ended September 30, 2000. In the three
months ended September 30, 2001, sales to four customers Inno Micro (a supplier
to Toshiba), Quanta (a supplier to Compaq), Toshiba, and Acer accounted for 43%,
16%, 11%, and 11% of revenues, respectively. In the three months ended September
30, 2000, sales to three customers Arima and Quanta (suppliers to Compaq), and
VIA accounted for 28%, 21%, and 13% of revenues, respectively.
We plan from time to time to introduce new and higher performance
graphics controllers, multimedia products, and non-PC graphics products which we
will seek to sell to our existing customers as well as new customers in Asia,
North America and Europe. We are also expanding our product focus into markets
outside the PC area, including digital TV applications. Our future success
depends upon the regular and timely introduction of these and other new products
and upon those products meeting customer requirements, and in significant part,
upon the results of our expansion into new product markets. There can be no
assurance that we will be able to successfully complete the development of these
products or to commence shipments of these products in a timely manner, or that
product specifications will not be changed during the development period. In
addition, even if 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 decreased to $5.9 million for the three months ended
September 30, 2001, down from $9.4 million in the three months ended September
30, 2000. The decrease was primarily the result of lower sales of 3D notebook
products. The gross margin as a percentage of revenues for the three months
ended September 30, 2001, decreased to 23.1% of revenues as compared to 26.0%
for the three months ended September 30, 2000. The decrease in gross margin as a
percentage of revenues was primarily attributed to a decrease in the sales of
discrete notebook chips which have higher margins.
We believe that the prices of high-technology products will decline over
time as competition increases and new and more advanced products are introduced.
We expect average selling prices of existing products to continue to decline,
although the average selling prices of our entire product line may remain
constant or increase as a result of introductions of new higher-performance
products which often have additional functionality and which are planned to have
higher margins. Our strategy is to maintain and improve gross margins by (1)
developing new products that have higher margins, and (2) reducing manufacturing
costs by improving production yield and utilizing newer process technology.
There is no
- 14 -
assurance that we will be able to develop and introduce new products on a timely
basis or that we can reduce manufacturing costs.
Research and Development
Research and development expenses for the three months ended September
30, 2001 remained essentially flat at $5.5 million from the September 30, 2000
three month period. As a percent of revenues, research and development expenses
increased to 21.5% for the three months ended September 30, 2001, from 15.4% of
revenues for the three months ended September 30, 2000. The increase in research
and development expenses as a percentage of sales can be attributed to the
proportional decrease in sales for the three months ended September 30, 2001
compared to the three months ended September 30, 2000.
We are in the process of developing our next generation 3D graphics
technology. The new technology will be used in both the discrete and integrated
products. Our graphics product development strategy is to focus on a totally
balanced design with consideration of not only high performance, but also low
cost and low power consumption. We also plan to continue developing the next
generation DPTV(TM) product as well as other advanced products for digital TV
and digital STB for the digital television market in China, Japan, Korea and
Taiwan. However, there can be no assurance that these products will be quickly
or widely accepted by consumers in the market place, or that the new products
will be developed and shipped in a timely manner. For the quarters ended
September 30, 2001 and 2000, the percentage of revenues contributed by the
digital media segment accounted for 4% and 0%, respectively.
Selling, General and Administrative
Selling, general and administrative expenses decreased to $3.4 million
in the three months ended September 30, 2001 from $3.7 million in the three
months ended September 30, 2000. The decrease in selling, general and
administrative expenditures in actual dollars was attributed primarily to our
cost reduction efforts. We will continue to monitor and control our selling,
general and administrative expenses.
Interest Income, Net
The amount of interest income earned by us varies directly with the
amount of our cash and cash equivalents and the prevailing interest rates.
Interest income decreased to $229,000 in the three months ended September 30,
2001, from $544,000 in the same prior year period. The decrease was primarily
the result of lower interest rates and lower average cash levels invested during
the three months ended September 30, 2001.
Benefit for Income Taxes
A benefit for income taxes for the three months ended September 30, 2001
was recorded in the amount of $16.6 million. This benefit for income taxes
related to our loss on investments for the quarter ended September 30, 2001.
- 15 -
Loss on investment in UMC
In August 1995, we made an investment of $49.3 million in United
Integrated Circuits Corporation (UICC). On January 3, 2000, United
Microelectronics Corporation (UMC) acquired UICC and, as a result of this
merger, we received approximately 46.5 million shares of UMC. On April 7, 2000,
UMC announced a 20% stock dividend payable to shareholders of record May 16,
2000, and a 15% stock dividend payable to shareholders of record July 21, 2001.
The only change in the number of shares in UMC held by us from January 3, 2000
to September 30, 2001 was the increase resulting from the stock dividends. As of
September 30, 2001, we owned approximately 64.2 million shares of UMC which
represents about 0.5% of the outstanding stock of UMC.
On January 3, 2000, we recognized a pre-tax gain of $117.0 million upon
the receipt of UMC shares in exchange for the UICC shares. In the quarter ended
March 31, 2001 based on the decline of the UMC's stock price, the decline in
stock prices of publicly traded semiconductor companies and the unfavorable
outlook regarding the demand and operating environment of the semiconductor
industry, we concluded that the decline in the investment value in UMC had
become other-than-temporary. Accordingly, $76.4 million which represents the
difference between the carrying value on January 3, 2000 and the quoted fair
value on March 31, 2001, was written off and included in earnings as an
impairment loss on investments in accordance with SFAS No. 115 and APB No. 18
for the short-term and long-term portions of investments, respectively.
In the quarter ended September 30, 2001, we concluded that due to a
substantial decline in the market value of UMC's stock price from June 30, 2001
to September 30, 2001, the continued decline in stock prices of publicly traded
semiconductor companies and the continuing unfavorable outlook for the
semiconductor industry, that the decline in the investment value in UMC had
become other-than-temporary. Accordingly, $40.0 million, which represents the
difference between the carrying value on March 31, 2001 and the quoted fair
value on September 30, 2001, was written off and included in earnings as an
impairment loss on investments in accordance with SFAS No. 115 and APB No. 18,
for the short-term and long-term portions of investments, respectively.
In order to preserve the 12.5% wafer capacity guarantee of the UICC
facility, which guarantees a maximum of approximately 3,000 wafers per month,
there are certain limitations on our ability to sell the UMC shares. If our
total shareholdings fall below one-half of the initial percentage of shares held
in UMC, our production capacity will be reduced by at least 50%, and depending
on the interpretation of the foundry capacity agreement between the parties, our
production capacity could be reduced by substantially more than 50%. In
addition, one-third of the UMC shares are subject to a two-year lock-up period
in accordance with an investment agreement entered into with UMC on January 3,
2000. After a two-year period, one-fifth of the UMC shares will be available for
sale from the lock-up portion every six months. As of September 30, 2001,
approximately 16.1 million shares with a carrying value of $12.6 million are
subject to this lock-up restriction. These shares are accounted for as long-term
investments using the cost method in accordance with APB No. 18. The $12.6
million reflects the write-down to the market value as of September 30, 2001.
Shares of UMC are listed on the Taiwan Stock Exchange. In accordance
with SFAS No. 115, the 48.1 million unrestricted shares are treated as
available-for-sale securities and are classified as short-term investments.
These unrestricted shares had a market value of $37.5 million as of September
30, 2001.
- 16 -
Loss on investments in other companies
During the quarter ended September 30, 2001, we also recognized
impairment losses of investments other than UMC totaling $2.1 million as
follows:
ADSL company $ 270,000
Communications company 66,000
Broadband communications company 750,000
Voice over DSL communications company 1,000,000
----------
Total $2,086,000
==========
In September 1999, we invested $909,000 in an ADSL company for 227,250
shares of preferred stock which were then converted into the same number of
common stock shares upon the company's initial public offering in August 2000.
On March 31, 2001 the fair value of these shares as quoted was $498,000. Because
the company experienced declining earnings in relation to its competitors in the
ADSL market and erosion of its market share, the decline in value was considered
other-than-temporary. Accordingly, the difference between the carrying value and
the quoted fair value on March 31, 2001 was written off against earnings in
accordance with SFAS No. 115. On September 30, 2001 due to deteriorating
industry outlook and decreasing value in the company's shares, the difference
between the carrying value and the quoted fair value on September 30, 2001 of
$270,000 was considered other-than-temporary impairment and was written off
against earnings in accordance with SFAS No. 115.
In June 2000, we invested $600,000 in a communications company which was
subsequently acquired by a listed company. On March 31, 2001, the fair value of
the shares owned by us was $221,000. Because of the significant losses incurred
by this company, we concluded that the decline in value was
other-than-temporary. Accordingly, the difference between the carrying value and
the quoted fair value on March 31, 2001 was written off against earnings in
accordance with SFAS No. 115. On September 30, 2001 due to the deteriorating
industry outlook and decreasing value in the company's shares, the difference
between the carrying value and the quoted fair value on September 30, 2001 of
$66,000 was considered an other-than-temporary impairment and was written off
against earnings in accordance with SFAS No. 115.
In April 2000, we invested $650,000 in a private company engaged in
broadband communication technology. In June 2000, an additional $100,000 was
invested in the company. In the quarter ended September 30, 2001, we determined
that the prospects for recovery of the investment were unfavorable given the
market position of the company and the company's operating losses. Therefore, we
concluded that the impairment was an other-than-temporary. Accordingly, the full
investment of $750,000 of the investment was written off against earnings in
accordance with APB No. 18.
In September 2000, we invested $1,500,000 in a private company engaged
in "voice over DSL" communication technology. In the quarter ended September 30,
2001, we determined that this communications company was in a product
reengineering process. It is likely that the company would cease operations. We
assessed the estimated cash recoverable from this investment and concluded that
the estimated shortfall was an other-than-temporary impairment. Accordingly,
$1,000,000 of the investment was written off against earnings in accordance with
APB No. 18.
- 17 -
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, our principal sources of liquidity included
cash and cash equivalents of $24.9 million down from $27.7 million at September
30, 2000 and down from $26.2 million at June 30, 2001. During the three months
ended September 30, 2001, $1.3 million of cash was used by operations, compared
to the three months ended September 30, 2000, in which $838,000 of cash was used
by operations. Cash used by operations was primarily due to unprofitable
operations and a decrease in accounts payable and accrued liabilities offset by
a decrease in inventories.
Inventories decreased to $6.7 million at September 30, 2001 from $10.7
million at June 30, 2001. The primary reason for the decrease is that we have
reduced our orders for product manufacturing during the three months ended
September 30, 2001 due to declining sales for the quarter ended September 30,
2001 and poor expectations in future demands.
Accounts payable decreased to $8.5 million at September 30, 2001 from
$11.8 million at June 30, 2001. The decrease mainly reflected the decrease in
purchases during the quarter ended September 30, 2001.
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 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 our common stock to Unipac and 3,173,484 shares of our
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, our Board of
Directors approved an amendment to the existing agreement upon the request of
these corporate investors. Under the terms of the amended agreement, we 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
our 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.
As of September 30, 2001, our investment in UMC, classified as
short-term investment, was valued at $37.5 million. In addition, we held $12.6
million in stock which 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 UMC. In order to preserve our wafer
capacity guarantee with UMC, there are certain limitations on our ability to
sell the shares. If our total shareholdings fall below one-half of their initial
percentage of shares, our production capacity will be reduced by at least 50%,
and depending on the interpretation of the foundry capacity agreement between
the parties, our production capacity could be reduced by substantially more than
50%. In addition, one-third of the shares is subject to a two-year lock-up
period in accordance with an investment agreement entered into with UMC. After a
two-year period, one-fifth of the shares will be available for sale from the
lock-up portion every six months. As of September 30, 2001, approximately 16.1
million shares are subject to this lock-up restriction. While we are 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 UMC stock and intend to sell all or part of the stock when it is in the
best interests of our shareholders to do so. We do not currently intend to sell
any of the UMC stock in the immediate future.
- 18 -
FACTORS THAT MAY AFFECT OUR RESULTS
OPERATING LOSS IN QUARTER ENDED SEPTEMBER 30, 2001
We incurred an operating loss of $3.0 million in the three months ended
September 30, 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.
We are trying to expedite new product launching and to control operating
expenses. However, there is no guarantee that our 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, our efforts in new
markets such as DPTV(TM) and our 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 relating 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
- 19 -
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. The significant terms of our
agreements with distributors are described as follows:
- - The products are shipped by us to a distributor with terms of F.O.B
shipping point, with risk of loss transferring to the distributor upon
delivery of the products by us to the common carrier.
- - Payment terms are net 30-days.
- - The distributors return privileges are in the form of stock rotation and
warranty and return resulting from functionality and quality issues for
one year.
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 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, processing difficulties and rapid technological change. We
anticipate 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. Also, there is intense competition in the
notebook graphics controller market. We compete in the notebook controller
market with competitors such as ATI Technologies, NVIDIA Corporation, VIA/S3,
and Intel. 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 are in the process of developing our next
generation 3D graphics technology. The new technology will be used in both the
discrete and integrated products. Our graphics product development strategy is
to focus on a totally balanced design with consideration of not only high
performance, but also low cost and low power consumption.
- 20 -
INTENSE COMPETITION IN THE MARKET FOR DIGITAL MEDIA PRODUCTS
We also plan to continue developing the next generation DPTV(TM) product
as well as other advanced products for digital TV and digital STB for the
digital television market in China, Japan, Korea and Taiwan. 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. In the digital television market our principal competitors are
Toshiba, Philips Electronics, and Siemens AG. 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.
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 delays 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-
- 21 -
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 us 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 our stock to fluctuate from time to time.
DEPENDANCE ON KEY PERSONNEL
Our success depends to a significant degree upon the continued
contributions of the principal members of our technical sales, marketing,
engineering and management personnel, many of whom perform important management
functions and would be difficult to replace. We particularly depend upon the
continued services of our executive officers, particularly Frank Lin, our
President and Chief Executive Officer, Dr. Jung-Herng Chang, Senior Vice
President, Engineering, and Peter Jen, our Senior Vice President, Asia
Operations and other key engineering, sales, marketing, finance, manufacturing
and support personnel. In addition, we depend upon the continued services of key
management personnel at our overseas subsidiaries. Our officers and key
employees are not bound by employment agreements for any specific term, and may
terminate their employment at any time. In addition, we do not have "key person"
life insurance policies covering any of our employees. In order to continue to
expand our product offerings both in the U.S. and abroad, we must hire a number
of research and development personnel. Hiring technical sales personnel in our
industry is very competitive due to the limited number of people available with
the necessary technical skills and understanding of our technologies. Our
ability to continue to attract and retain highly skilled personnel will be a
critical factor in determining whether we will be successful in the future.
Competition for highly skilled personnel is intense, particularly in Northern
California. We may also have difficulty hiring experienced and skilled engineers
at our research and development facility in Taiwan and China. If we are not
successful in attracting, assimilating or retaining qualified personnel to
fulfill our current or future needs, our business may be harmed.
DEVELOPMENT OF NEW PRODUCTS AND PRODUCT ENHANCEMENTS
The graphic controller industry is characterized by rapidly changing
technology, frequent new product introductions, changes in customer requirements
and evolving industry standards. Our future success depends on our ability to
anticipate market needs and develop products that address those needs. As a
result, our products could quickly become obsolete if we fail to predict market
needs accurately or develop new products or product enhancements in a timely
manner. Our failure to predict market needs accurately or to develop new
products or product enhancements in a timely manner will harm market acceptance
and sales of our products. If the development or enhancement of these products
or any other future products takes longer than we anticipate, or if we are
unable to introduce these products to market, our sales will not increase. Even
if we are able to develop and commercially introduce these new products, the new
products may not achieve widespread market acceptance necessary to provide an
adequate return on our investment.
- 22 -
PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
The graphic controller market is a highly competitive industry in which
we, and most other participants, rely on a combination of patent, copyright,
trademark and trade secret laws, confidentiality procedures and licensing
arrangements to establish and protect proprietary rights. The competitive nature
of our industry, rapidly changing technology, frequent new product
introductions, changes in customer requirements and evolving industry standards
heighten the importance of protecting proprietary technology rights. Since the
United States Patent and Trademark Office keeps patent applications confidential
until a patent is issued, our pending patent applications may attempt to protect
proprietary technology claimed in a third party patent application. Our existing
and future patents may not be sufficiently broad to protect our proprietary
technologies as policing unauthorized use of our products is difficult and we
cannot be certain that the steps we have taken will prevent the misappropriation
or unauthorized use of our technologies, particularly in foreign countries where
the laws may not protect our proprietary rights as fully as U.S. law. Our
competitors may independently develop similar technology, duplicate our products
or design around any of our patents or other intellectual property. If we are
unable to adequately protect our proprietary technology rights, others may be
able to use our proprietary technology without having to compensate us, which
could reduce our revenues and negatively impact our ability to compete
effectively. We have filed a number of lawsuits to enforce our intellectual
property rights or to determine the validity or scope of the proprietary rights
of others. As a result of any such litigation, we could lose our proprietary
rights and incur substantial unexpected operating costs. Any action we take to
protect our intellectual property rights could be costly and could absorb
significant management time and attention. In addition, failure to adequately
protect our trademark rights could impair our brand identity and our ability to
compete effectively.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS
Our industry is very competitive and is characterized by frequent
intellectual property litigation based on allegations of infringement of
intellectual property rights. Numerous patents in our industry have already been
issued and as the market further develops and additional intellectual property
protection is obtained by participants in our industry, litigation is likely to
become more frequent. From time to time, third parties may assert patent,
copyright, trademark and other intellectual property rights to technologies or
rights that are important to our business. In addition, we may in the future
enter into agreements to indemnify our customers for any expenses or liabilities
resulting from claimed infringements of patents, trademarks or copyrights of
third parties. Any litigation arising from claims asserting that our products
infringe or may infringe the proprietary rights of third parties, whether the
litigation is with or without merit, could be time-consuming, resulting in
significant expenses and diverting the efforts of our technical and management
personnel. We do not have insurance against our alleged or actual infringement
of intellectual property of others. These claims could cause us to stop selling
our products which incorporate the challenged intellectual property and could
also result in product shipment delays or require us to redesign or modify our
products or to enter into licensing agreements. These licensing agreements, if
required, would increase our product costs and may not be available on terms
acceptable to us, if at all. If there is a successful claim of infringement or
we fail to develop non-infringing technology or license the proprietary rights
on a timely basis, our business could be harmed.
THE CALIFORNIA ENERGY CRISIS COULD LEAD TO INCREASING OPERATING EXPENSES
We rely on the major Northern California public utility, Pacific Gas &
Electric Company, or PG&E, to supply electric power to our headquarters facility
in Sunnyvale, California. Due to problems associated with the deregulation of
the power industry in California and shortages in wholesale electricity
supplies, customers of PG&E have been faced with increased electricity prices,
power shortages and
- 23 -
rolling blackouts. Increased energy prices will increase our operating expenses
which will decrease our profits.
NATURAL DISASTERS THAT COULD LIMIT OUR ABILITY TO SUPPLY PRODUCTS
Our primary suppliers are located in California and Taiwan, both active
earthquake fault zones. These regions have experienced large earthquakes in the
past and may experience them in the future. A large earthquake in any of these
areas could disrupt our manufacturing operations for an extended period of time,
which would limit our ability to supply our products to our customers in
sufficient quantities on a timely basis, harming our customer relationships.
TERRORIST ATTACKS
We can not guarantee that our business will be unaffected by terrorist
attacks in the future. The impact and future effects of terrorism are currently
uncertain, and we are unable to predict the future impact that terrorist attacks
may have on our business and operations, the international markets in which we
operate and the global economy in general.
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 could harm 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.
We cannot assure you 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 harm 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 have in the past and could in the future lose our entire initial investment
in these companies. Our exposure to fluctuating market conditions could harm
our business, operating results and financial condition.
UNCERTAINTY OF BUSINESS REORGANIZATION
To better enable us to advance in the 3D graphics and digital TV
marketplace, we are now organized into two business units: the videographics
business unit and the digital media business unit. The videographics business
unit continues our entire 3D videographics business with worldwide PC
- 24 -
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 our 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 this organization will permit
us to more effectively 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. For the three months ended September 30, 2001 and
2000, the percentage of revenues contributed by the digital media segment
accounted for 4% and 0%, respectively. At both September 30, 2001 and September
30, 2000, the assets attributed to the digital media segment were negligible.
On January 18, 2000, our Board of Directors approved a spin-off of our
Trident Technologies Inc. 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 Technologies, Inc. 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 our sales
representative in the China market. Trident Technologies Inc. and Trident
Multimedia Technologies (Shanghai) Co. Ltd. have total assets equal to $4.1
million and $2.3 million respectively, as of September 30, 2001. It is our
intention to spin-off these subsidiaries during our fiscal year 2002. We own a
majority interest in Trident Technologies, Inc. However, the timing and effect
of these spin-offs will depend on a number of organizational, operational and
marketing factors and the spin-offs may not occur at the time currently
anticipated.
UNCERTAINTY OF PERFORMANCE OF EQUITY INVESTMENTS
We maintain an investment portfolio including minority equity
investments in several publicly traded companies. The values of these
investments are subject to market price volatility. For example, as a result of
recent market price volatility of our publicity traded equity investments, we
experienced a $24.3 million after-tax unrealized loss during the quarter ended
September 30, 2001. We have also made investments in a number of privately held
companies, many of which are in the start-up 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 have in the past and could in the future lose our entire
investment in these companies. For instance, we recorded a $1.8 million
after-tax unrealized loss during the quarter ended September 30, 2001 as a
result of the impairment in value of our investments in two private companies.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
We currently maintain our cash equivalents primarily in money market
funds and highly liquid marketable securities. We do not have any derivative
financial instruments. As of September 30, 2001, $24.9 million of our
investments matured in less than three months. We will continue to invest a
significant portion of our existing cash equivalents in interest bearing,
investment grade securities, with maturities of less than twelve months. We do
not believe that our investments, in the aggregate, have
- 25 -
significant exposure to interest rate risk.
EXCHANGE RATE RISK
We currently have operations in the United States, Taiwan and China. The
functional currency of all our operations is the U.S. dollar. Though some
expenses are incurred in local currencies by our Taiwan and China operations,
substantially all of our transactions are made in U.S. dollars, hence, we have
minimal exposure to foreign currency rate fluctuations relating to our
transactions.
While we expect our international revenues to continue to be denominated
predominately in U.S. dollars, an increasing portion of our international
revenues may be denominated in foreign currencies in the future. In addition, we
plan to continue to expand our overseas operations. As a result, our operating
results may become subject to significant fluctuations based upon changes in
exchange rates of certain currencies in relation to the U.S. dollar. We will
analyze our exposure to currency fluctuations and may engage in financial
hedging techniques in the future to attempt to minimize the effect of these
potential fluctuations; however, exchange rate fluctuations may adversely affect
our financial results in the future.
INVESTMENT RISK
We are exposed to market risk as it relates to changes in the market
value of our investments. We invest in equity instruments of public companies
for business and strategic purposes and we have classified these securities as
available-for-sale. These available-for-sale equity investments, primarily in
technology companies, are subject to significant fluctuations in fair market
value due to the volatility of the stock market and the industries in which
these companies participate. We have realized significant gains and losses on
our equity investments. For the fiscal year ended June 30, 2000, we recognized a
pre-tax gain on investments of $115.0 million, primarily related to a $117.0
million gain on receiving shares in UMC in exchange for shares we held in UICC,
a private company. For the fiscal year ended June 30, 2001, we recognized a
pre-tax loss of $77.8 million of which $76.4 million related to a decline in the
market value of shares in UMC that we concluded was other-than-temporary. For
the quarter ended September 30, 2001 we recognized a pre-tax loss of $42.1
million of which $40.0 million related to a decline in the market value of
shares in UMC that we concluded was other-than-temporary. As of September 30,
2001, we had available-for-sale equity investments with a fair market value of
$37.9 million including $37.5 million related to shares of UMC. Our objective in
managing our exposure to stock market fluctuations is to minimize the impact of
stock market declines to our earnings and cash flows. There are, however, a
number of factors beyond our control. Continued market volatility, as well as
mergers and acquisitions, have the potential to have a material impact on our
results of operations in future periods.
- 26 -
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On December 14, 1998, NeoMagic Corporation ("NeoMagic") filed a patent
infringement lawsuit in the U.S. District Court, District of Delaware, 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 the
Company believes the appeal is premature. The Company expects to move to dismiss
the appeal unless the Court permits NeoMagic to pursue the appeal before the
Company's antitrust counterclaim is resolved in the trial court. The Company
asserted an antitrust counterclaim against NeoMagic, seeking compensatory
damages, trebled damages, costs and attorney fees, which was stayed pending
resolution of NeoMagic's infringement claims at the District Court level. After
the District Court granted summary judgment, the Company moved to lift the stay
on its antitrust counterclaim. The briefing on this motion is completed and the
parties are awaiting oral argument. On May 7, 2001, NeoMagic filed its opening
appeal brief. On May 17, 2001, the Company filed a motion to dismiss NeoMagic's
appeal for lack of jurisdiction because there is no final appealable order and
the Company's antitrust counterclaim remains pending. On June 15, 2001, the
Company filed its opposition appeal brief and renewed its request that the
appeal be dismissed for lack of jurisdiction. On July 2, 2001, NeoMagic filed
its reply brief. On July 31, 2001, the Federal Circuit dismissed NeoMagic's
appeal without prejudice as premature. NeoMagic subsequently moved the District
Court to certify the Company's summary judgment for immediate appeal pursuant to
Federal Rules of Civil Procedure Rule 54(b). That motion was granted, as was the
Company's motion to lift the stay on its antitrust counterclaim so it could take
limited discovery. The Company is currently taking antitrust discovery in the
district court and preparing its opposition to NeoMagic's Federal Circuit appeal
of the Company's summary judgment of non-infringement.
On May 26, 2000, NeoMagic filed a second patent infringement lawsuit in
the U.S. District Court, District of Delaware, asserting that the Company
infringes a patent issued in March 2000 that is related to the two patents at
issue in the first case. NeoMagic is seeking a permanent injunction, damages,
including enhanced damages, pre-judgment and post-judgment interest, costs and
attorney fees. This case has been stayed pending resolution of the first case.
Given the nature of litigation, the lack of any discovery to date, and inherent
uncertainties associated with litigation, management cannot predict with
certainty the ultimate outcome of this litigation.
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 in the U.S. District Court, Northern District of California 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 in March 2001, 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. Given
the nature of litigation and inherent uncertainties associated with litigation,
management cannot predict with certainty whether FIC will bring suit or the
ultimate outcome of any such litigation.
On April 26, 2001, the Company filed a lawsuit against VIA Technologies,
Inc. (of Taiwan and California) and S3 Graphics (of California) in the Superior
Court for the State of California, Santa Clara County. The Company alleges that
VIA and S3 Graphics, together with former Company engineering
- 27 -
senior managers, conspired to misappropriate the Company's trade secrets about
products in development. The Company further alleges that the corporate and
individual defendants used the Company's confidential information to
systematically recruit key engineers away from the Company as part of a scheme
to gain a competitive advantage by undermining the Company's product development
and design win capabilities. The Company also alleges that VIA and S3 Graphics
may be planning to use the Company's trade secrets to unfairly compete against
the Company. The Company is seeking the following relief: (1) preliminary and/or
permanent injunctive relief prohibiting defendants from (a) using, disclosing or
transmitting the Company's trade secrets, and (b) employing any person solicited
with the use of the Company'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 accused wrongful acts; (4) punitive damages; (5)
reasonable attorneys' fees; (6) costs; and (7) such further relief as the court
deems just and proper. Since filing the lawsuit, the Company has defeated two
attempts by certain defendants to dismiss or stay the action against them, and
the parties have engaged in extensive discovery practice. On November 1, 2001,
the Santa Clara County Superior Court entered a Stipulation and Order Staying
Case ("Stay Order") staying all litigation activity in the lawsuit through
January 31, 2002. The court entered the Stay Order so that the parties could
pursue settlement discussions during the period of the stay.
On May 4, 2001, VIA Technologies, Inc. sued the Company in the U.S.
District Court, Northern District of California for breach of contract and
related claims arising out of the companies' agreements with respect to the
manufacture and sale of Cbi-1 and Cbi-7 chipsets. The complaint seeks payment in
an unspecified amount (but later asserted to be approximately $6.3 million) for
686,675 Cbi-7 chipsets the Company allegedly ordered but did not pay for. On May
29, 2001, the Company answered and counterclaimed, asserting claims for breach
of the same agreements, interference with the Company's relationships with its
customers, and related claims. On July 9, 2001, the Company moved for a
preliminary injunction to require VIA to live up to its agreements with the
Company. At the August 13, 2001 scheduled hearing on the Company's motion for
preliminary injunction, the Court continued the hearing to September 13 and
ordered the parties to mediate their dispute in the interim. The mediation was
not successful, but Trident nevertheless withdrew its motion for preliminary
injunction. Given the nature of litigation and inherent uncertainties associated
with litigation, management cannot predict with certainty the ultimate outcome
of this 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
ITEM 5: OTHER INFORMATION
Not applicable
- 28 -
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
<Table>
<Caption>
Exhibit Description
------- -----------
3.1 Restated Certificate of Incorporation.(1)
3.2 Bylaws of Trident Delaware Corporation, a Delaware
Corporation.(2)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen Common Stock Certificate.(2)
4.3 Form of Rights Agreement between the Company and ChaseMellon
Shareholder Services, LLC, as Rights Agent (including as
Exhibit A the form of Certificates of Designation,
Preferences and Rights of the Terms of the Series A Preferred
Stock, as Exhibit B the form of Right Certificate, and as
Exhibit C the Summary of Terms of Rights Agreement). (3)
10.5(*) 1990 Stock Option Plan, together with forms of Incentive
Stock Option Agreement and Non-statutory Stock Option
Agreement.(2)
10.6(*) Form of the Company's Employee Stock Purchase Plan.(2)
10.7(*) Summary description of the Company's Fiscal 1992 Bonus
Plan.(2)
10.8(*) Form of the Company's Fiscal 1993 Bonus Plan.(2)
10.9(*) Summary description of the Company's 401(k) plan.(2)
10.10(*) Form of Indemnity Agreement for officers, directors and
agents.(2)
10.12(*) Form of Non-statutory Stock Option Agreement between the
Company and Frank C. Lin.(4)
10.13(*) Form of 1992 Stock Option Plan amending and restating the
1990 Stock Option Plan included as Exhibit 10.5.(2)
10.14 Lease Agreement dated May 16, 2001 between the Company and
iStar Financial , Inc. for the Company's principal offices
located at 1090 East Arques Avenue, Sunnyvale, California.(9)
10.15(*) Form of Change of Control Agreement between the Company and
Frank C. Lin.(9)
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)
</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.
(9) 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,
2001.
(*) Management contracts or compensatory plans or arrangements
covering executive officer directors of the Company.
Reports on Form 8-K
Not Applicable
- 29 -
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, 2001, 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)
- 30 -