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 DECEMBER 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 identification No.)
incorporation or organization)
1090 E. 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 $0.001 par value Common Stock
outstanding at December 31, 2001 was 13,405,481.
TRIDENT MICROSYSTEMS, INC.
INDEX
Page
----
PART I: FINANCIAL INFORMATION
Item 1: Unaudited Financial Information
Condensed Consolidated Balance Sheet - December 31, 2001 and
June 30, 2001 3
Condensed Consolidated Statement of Operations for the three months and
six months ended December 31, 2001 and 2000 4
Condensed Consolidated Statement of Cash Flows for the six months
ended December 31, 2001 and 2000 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
Item 3: Quantitative and Qualitative Disclosures About Market Risk 23
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 25
Item 2: Changes in Securities and Use of Proceeds Not Applicable
Item 3: Defaults upon Senior Securities Not Applicable
Item 4: Submission of Matters to a Vote of Security Holders 27
Item 5: Other Information Not Applicable
Item 6: Exhibits and Reports on Form 8-K 28
Signatures 29
TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, UNAUDITED)
ASSETS
December 31, June 30,
2001 2001
------------ ---------
Current assets:
Cash and cash equivalents $ 25,327 $ 26,677
Short-term investments - UMC 70,165 52,708
Short-term investments - other 710 791
Accounts receivable, net 7,859 9,247
Inventories 8,877 10,669
Deferred income tax assets 1,656 1,656
Prepaid expenses and other assets 3,491 3,481
--------- ---------
Total current assets 118,085 105,229
Property and equipment, net 3,932 3,559
Long-term investments - UMC 12,578 26,005
Long-term investments - other 9,956 11,996
Other assets 391 630
--------- ---------
Total assets $ 144,942 $ 147,419
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,611 $ 11,829
Accrued expenses and other liabilities 12,743 13,169
Deferred income taxes 7,085 --
Income taxes payable 201 1,040
--------- ---------
Total current liabilities 33,640 26,038
Deferred income taxes, non-current 9,576 14,947
Minority interest in subsidiary 894 1,068
--------- ---------
Total liabilities 44,110 42,053
--------- ---------
Stockholders' equity:
Common stock and additional paid-in capital 55,556 55,106
Treasury stock, at cost (17,952) (17,952)
Retained earnings 43,453 74,996
Accumulated other comprehensive gain (loss) 19,775 (6,784)
--------- ---------
Total stockholders' equity 100,832 105,366
--------- ---------
Total liabilities and stockholders' equity $ 144,942 $ 147,419
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- 3 -
TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net sales $ 30,178 $ 25,785 $ 55,918 $ 61,842
Royalty and license revenue -- 9,267 -- 9,267
-------- -------- -------- --------
Total revenue 30,178 35,052 55,918 71,109
Cost of sales 24,523 19,941 44,325 46,608
-------- -------- -------- --------
Gross profit 5,655 15,111 11,593 24,501
Research and development expenses 5,765 5,997 11,292 11,543
Sales, general and administrative expenses 3,570 4,132 6,948 7,815
-------- -------- -------- --------
Income (loss) from operations (3,680) 4,982 (6,647) 5,143
Gain (loss) on investments 150 -- (41,915) --
Interest and other income (expense), net (41) 302 188 846
-------- -------- -------- --------
Income (loss) before income taxes (3,571) 5,284 (48,374) 5,989
Provision (benefit) for income taxes (237) 1,179 (16,831) 1,350
-------- -------- -------- --------
Net income (loss) $ (3,334) $ 4,105 $(31,543) $ 4,639
======== ======== ======== ========
Basic earnings (loss) per share $ (0.25) $ 0.32 $ (2.36) $ 0.36
======== ======== ======== ========
Shares used in computing basic
per share amounts 13,380 12,984 13,339 13,044
======== ======== ======== ========
Diluted earnings (loss) per share $ (0.25) $ 0.29 $ (2.36) $ 0.33
======== ======== ======== ========
Shares used in computing diluted
per share amounts 13,380 13,935 13,339 14,263
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- 4 -
TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
Six Months Ended
December 31,
-----------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(31,543) $ 4,639
Adjustments to reconcile net income (loss) to cash provided
by (used in) operating activities:
Depreciation and amortization 821 1,217
Provision for doubtful accounts and sales returns 542 --
Loss on investments 41,915 --
Deferred income taxes, net (15,991) --
Changes in assets and liabilities:
Accounts receivable 846 (4,821)
Inventories 1,792 (7,069)
Prepaid expenses and other current assets (10) 972
Other assets 239 129
Accounts payable 1,782 5,882
Accrued expenses and other liabilities (609) (1,062)
Income taxes payable (839) 1,333
-------- --------
Net cash (used in) provided by operating activities (1,055) 1,220
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales (purchases) of investments 450 (4,742)
Purchase of property and equipment (1,195) (886)
-------- --------
Net cash used in investing activities (745) (5,628)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 450 2,016
Purchase of treasury stock -- (7,671)
-------- --------
Net cash provided by (used in) financing activities 450 (5,655)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,350) (10,063)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 26,677 39,041
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,327 $ 28,978
======== ========
The accompanying notes are an integral part of these condensed 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.
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
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.
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
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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.
NOTE 4. INVENTORIES
Inventories consisted of the following (in thousands):
December 31, 2001 June 30, 2001
----------------- -------------
Work in process $ 2,520 $ 5,867
Finished goods 6,357 4,802
---------- ----------
$ 8,877 $ 10,669
========== ==========
NOTE 5. EARNINGS PER SHARE
Basic Earnings Per Share (EPS) 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 EPS computations for the periods presented below.
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- -----------------------
(in thousands, except per share amounts) 2001 2000 2001 2000
---------- -------- -------- --------
BASIC NET INCOME (LOSS) PER SHARE
Net income (loss) available to Common
Shareholders $ (3,334) $ 4,105 $(31,543) $ 4,639
========== ======== ======== ========
Weighted average common shares 13,380 12,984 13,339 13,044
========== ======== ======== ========
Basic net income (loss) per share $ (0.25) $ 0.32 $ (2.36) $ 0.36
========== ======== ======== ========
DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) available to Common
Shareholders $ (3,334) $ 4,105 $(31,543) $ 4,639
========== ======== ======== ========
Weighted average common shares 13,380 12,984 13,339 13,044
Dilutive common stock equivalents (1) -- 951 -- 1,219
---------- -------- -------- --------
Weighted average common shares
and equivalents 13,380 13,935 13,339 14,263
========== ======== ======== ========
Diluted net income (loss) per share $ (0.25) $ 0.29 $ (2.36) $ 0.33
========== ======== ======== ========
(1) Dilutive common stock equivalents not included in the EPS calculation for
the period ended December 31, 2001 because the effect would be
anti-dilutive.
- 7 -
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 December 31, 2001 was the increase resulting from the
stock dividends. As of December 31, 2001, the Company owned approximately 64.2
million shares of UMC which represents about 0.5% of the outstanding stock of
UMC.
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, the Company 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, 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.
Due to an increase in the market value of UMC's stock price from
October 1, 2001 to December 31, 2001, an unrealized gain of $19.6 million was
recorded in equity as "accumulated other comprehensive gain" in accordance with
SFAS No. 130, "Reporting Comprehensive Income." The $19.6 million is equal to a
$32.6 million increase in market value of our short-term investment in UMC for
the three months ended December 31, 2001, less deferred taxes relating to the
unrealized gain of $13.0 million.
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
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 shares will be available for sale from the lock-up portion
every six months. As of December 31, 2001, approximately 16.1 million shares
with a carrying value of $12.6 million are subject to this lock-up restriction.
These
- 8 -
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 December 31, 2001.
Shares of the Company's UMC investment 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 $70.2 million as of
December 31, 2001. Unrestricted shares include shares that may need to be held
by the Company to retain wafer capacity, as described in the prior paragraph.
NOTE 7. INVESTMENTS IN OTHER COMPANIES
During the six months ended December 31, 2001, the Company also
recognized impairment losses on investments other than UMC totaling $1.9 million
as follows:
ADSL company $ 270,000
Communications company 66,000
Broadband communications company 750,000
Voice over DSL communications company 850,000
----------
Total $1,936,000
==========
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. Due to an increase
in the market value of the ADSL company's stock price from October 1, 2001 to
December 31, 2001, an unrealized gain of $103,000 was recorded in equity as
"accumulated other comprehensive gain" in accordance with SFAS No. 130,
"Reporting Comprehensive Income." The $103,000 is equal to a $170,000 increase
in market value of the short-term investment for the three months ended December
31, 2001, less deferred taxes relating to the unrealized gain of $67,000.
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 of the listed company 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. Due to an increase in the market value of the
communications company's stock price from October 1, 2001 to December 31, 2001,
an unrealized gain of $94,000 was recorded in equity as "accumulated other
comprehensive gain" in accordance with SFAS No. 130, "Reporting Comprehensive
Income." The $94,000 is equal to a
- 9 -
$157,000 increase in market value of the short-term investment for the three
months ended December 31, 2001, less deferred taxes relating to the unrealized
gain of $63,000.
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 was considered 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. In December 2001,
this investment was sold for $650,000 and a gain of $150,000 was recognized as
"Gain on investments" for the three months ended December 31, 2001.
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.
NOTE 9. ACCUMULATED COMPREHENSIVE GAIN (LOSS) ON SHORT-TERM INVESTMENTS
Under SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") any
unrealized gains or losses on the short-term investments which are classified as
available-for-sale equity securities are to be reported as a separate adjustment
to equity. Between September 30, 2001 and December 31, 2001, the market value of
the Company's short-term investment in United Microelectronics Corporation
("UMC") increased by $32.6 million. The unrealized gain of $19.6 million was
equal to the $32.6 million increase in market value less deferred taxes of $13.0
million, and was included in equity as accumulated other comprehensive gain.
Also, between September 30, 2001 and December 31, 2001, the market value of the
Company's other short-term investments increased by $327,000. The unrealized
gain of $197,000, which was equal to the $327,000 increase in market value less
deferred taxes of $130,000, was included in equity as accumulated other
comprehensive gain.
- 10 -
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,
- - trends in average selling prices,
- - the percentage of export sales,
- - outcome of pending litigation,
- - demand for our products,
- - 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 total revenues for the three and six months ended December 31,
2001 and 2000:
Three Months Ended Six Months Ended
December 31, December 31,
-------------------- --------------------
2001 2000 2001 2000
------ ------ ------ ------
Net sales 100% 74% 100% 87%
Royalty and license revenue -- 26 -- 13
------ ------ ------ ------
Total revenues 100 100 100 100
Cost of sales 81 57 79 66
------ ------ ------ ------
Gross margin 19 43 21 34
Research and development expenses 19 17 20 16
Selling, general and administrative expenses 12 12 12 11
------ ------ ------ ------
Income (loss) from operations (12) 14 (11) 7
Loss on investments -- -- (75) --
Interest and other income, net -- 1 -- 1
------ ------ ------ ------
Income (loss) before income taxes (12) 15 (86) 8
Provision (benefit) for income taxes (1) 3 (30) 2
------ ------ ------ ------
Net income (loss) (11)% 12% (56)% 6%
------ ------ ------ ------
- 11 -
Revenue
Net sales for the three months ended December 31, 2001 increased 17% to
$30.2 million from the $25.8 million reported in the three months ended December
31, 2000. Net sales for the six months ended December 31, 2001 decreased 10% to
$55.9 million from the $61.8 million reported in the six months ended December
31, 2000. The increase in net sales in the three months ended December 31, 2001
over the three months ended December 31, 2000 is primarily attributed to an
increase in sales of integrated notebook products. Net sales decreased during
the six months ended December 31, 2001 compared to the six months ended December
31, 2000 due to an overall decrease in the sales of notebook and desktop
products. 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. As we reported in our press
release of January 24, 2002 we expect sales for the coming quarter to be flat
given the current business environment.
Notebook, desktop and digital process television products accounted for
94%, 3% and 3% of net sales, respectively, for both the three and six months
ended December 31, 2001. Notebook, desktop and digital process television
products accounted for 83%, 9% and 5% of net sales, respectively, in the three
months ended December 31, 2000, and 86%, 9% and 2% of net sales for the six
months ended December 31, 2000.
Sales to Asian customers, primarily in Taiwan and Japan, accounted for
almost all of our revenues in both the three months ended December 31, 2001 and
the three months ended December 31, 2000. Sales to North American and European
customers represented 0.5% of net sales in the three months ended December 31,
2001 and the three months ended December 31, 2000. Sales to Asian customers,
primarily in Taiwan and Japan, accounted for almost all of our revenues in both
the six months ended December 31, 2001 and the six months ended December 31,
2000. Sales to North American and European customers represented 0.5% of net
sales in the six months ended December 31, 2001, an increase from approximately
0.3% in the six months ended December 31, 2000. We expect Asian customers will
continue to account for a significant portion of our sales.
In the three months ended December 31, 2001, sales to two customers Inno
Micro (a supplier to Toshiba) and Acer accounted for 62%, and 19% of total
revenues, respectively. In the three months ended December 31, 2000, sales to
three customers Inno Micro (a supplier to Toshiba), Quanta and Arima (suppliers
to Compaq) accounted for 17%, 13%, and 13% of total revenues, respectively. In
the six months ended December 31, 2001 sales to three customers Inno Micro, Acer
and Quanta accounted for 56%, 15% and 11% of total revenues, respectively, and
in the six months ended December 31, 2000 sales to three customers Arima, Quanta
and Inno Micro accounted for 21%, 17% and 11%, respectively. We anticipate that
sales in future quarters will continue to depend primarily on sales to key
customers.
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 also plan to continue 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, 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.
- 12 -
Gross Profit
Gross profit decreased to $5.7 million for the three months ended
December 31, 2001, down from $15.1 million in the three months ended December
31, 2000. Excluding the December 31, 2000 royalty revenue gross profit would
have been $5.8 million for the three months ended December 31, 2000, a decrease
of $100,000 for the three months ended December 31, 2001. Gross profit decreased
to $11.6 million for the six months ended December 31, 2001, down from $24.5
million in the six months ended December 31, 2000. Excluding the royalty revenue
of $9.3 million booked in the three months ended December 31, 2000, gross profit
for the six months ended December 31, 2000 would have been $15.2 million,
resulting in a decrease of $3.6 million for the six months ended December 31,
2001. The gross margin as a percentage of net sales for the three months ended
December 31, 2001, decreased to 19% of net sales as compared to 23% for the
three months ended December 31, 2000 excluding royalty revenue. The gross margin
as a percentage of net sales for the six months ended December 31, 2001,
decreased to 21% of net sales as compared to 25% for the six months ended
December 31, 2000 excluding royalty revenue. The decrease in gross margin as a
percentage of net sales for the three months ended December 31, 2001 is
primarily due to a transition from discrete graphics (with CyberBLADE XP(TM)) to
integrated graphics and core logic with (CyberALADDiN-T(TM)), and increased
expense from substantial yield loss due to the quick ramp up of
CyberALADDiN-T(TM) initial production to meet our customer's requirements. Also,
adversely affecting gross margin in both the three and six months ended December
31, 2001 was a decrease in the sales of embedded notebook chips which have
higher margins.
We believe that the prices of our 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 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 December
31, 2001 decreased to $5.8 million from $6.0 million for the December 31, 2000
three month period. As a percent of total revenues, research and development
expenses increased to 19% for the three months ended December 31, 2001, from 17%
of total revenues for the three months ended December 31, 2000. Research and
development expenses for the six months ended December 31, 2001 decreased to
$11.3 million from $11.5 million for the December 31, 2000 six month period. As
a percent of total revenues, research and development expenses increased to 20%
for the six months ended December 31, 2001, from 16% of total revenues for the
six months ended December 31, 2000. The decrease in research and development
expenses in actual dollars for both the three and six months ended December 31,
2001 from December 31, 2000, can be attributed primarily to the restructuring of
our research and development organization, and the concentration of our research
and development efforts on only those products with the greatest revenue
generating potential.
- 13 -
Selling, General and Administrative
Selling, general and administrative expenses decreased to $3.6 million
for the three months ended December 31, 2001 from $4.1 million for the three
months ended December 31, 2000. As a percent of total revenues, selling, general
and administrative expenditures remained at 12% for both the three months ended
December 31, 2001 and the three months ended December 31, 2000. Selling, general
and administrative expenses decreased to $6.9 million in the six months ended
December 31, 2001 from $7.8 million for the six months ended December 31, 2000.
As a percent of total revenues, selling, general and administrative expenditures
increased to 12% for the six months ended December 31, 2001 from 11% for the six
months ended December 31, 2000. The decrease in selling and administrative
expenditures in actual dollars was attributed primarily to our cost reduction
efforts. The Company intends to continue to monitor and control its selling,
general and administrative expenses.
Investment in UMC and Other Investments
As of December 31, 2001, the Company owned approximately 64.2 million
shares of United Microelectronics Corporation (UMC) which represents about 0.5%
of the outstanding stock of UMC. 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. See Part I, Item 1, Notes 6 and 9 above ("Investment in UMC" and
"Accumulated comprehensive gain (loss) on short-term investments," respectively)
for discussion of this investment and related losses.
During the six months ended December 31, 2001, the Company also
recognized impairment losses on investments other than UMC totaling $1.9 million
as follows:
ADSL company $ 270,000
Communications company 66,000
Broadband communications company 750,000
Voice over DSL communications company 850,000
----------
Total $1,936,000
==========
During the three months ended December 31, 2001, the Company recognized
gains on investments of $150,000, resulting from the sale of our investment in
the voice over DSL communications company. See Part I, Item 1, Notes 7 and 9
above (" Investments in other companies" and "Accumulated comprehensive gain
(loss) on short-term investments," respectively) for discussion of these
investments and related losses.
While we cannot predict the future values of our investments, we do
anticipate that our future financial performance will be affected by future
fluctuations of such values.
- 14 -
Interest and Other Income (Expense), Net
Interest and other expense net was equal to $41,000 in the three months
ended December 31, 2001 representing interest income of $146,000 offset by
$187,000 in net other expense. This compares to interest income of $302,000 in
the three months ended December 31, 2000. In the six months ended December 31,
2001 interest and other income net equaled $188,000 representing primarily
interest income of $339,000 offset by $151,000 in net other expense. This
compares to interest income of $846,000 in the six months ended December 31,
2000. The decline in interest income for the six months ended December 31, 2001
can be primarily attributed to lower average cash balances, and lower interest
rates, for the six months ended December 31, 2001 compared to the six months
ended December 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 (Benefit) for Income Taxes
A benefit from income taxes for the three months ended December 31, 2001
was recorded in the amount of $237,000 and for the six months ended December 31,
2001 a benefit was recorded in the amount of $16.8 million. The benefit for
income taxes for the six months ended December 31, 2001 primarily related to our
loss on investments for the quarter ended September 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, our principal sources of liquidity included
cash and cash equivalents of $25.3 million, which decreased from $26.7 million
at June 30, 2001. In the six months ended December 31, 2001, $1.1 million of
cash was used by operations, compared to the six months ended December 31, 2000,
in which $1.2 million of cash was provided by operations. Cash used by
operations was primarily due to unprofitable operations offset by a decrease in
the purchases of inventories and an increase in accounts payable. Capital
expenditures were $1.2 million for the six months ended December 31, 2001,
compared to $886,000 for the six months ended December 31, 2000.
Inventories decreased to $8.9 million at December 31, 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 six months ended
December 31, 2001 due to a change in product mix to more integrated notebook
products which are purchased on a just in time basis minimizing the level of
inventory which is stored.
Accounts payable increased to $13.6 million at December 31, 2001 from
$11.8 million at June 30, 2001. The increase mainly reflected our use of
extended terms with suppliers during December 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 would be outstanding after the new issuance. We have not formally
terminated this agreement. However, 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.
- 15 -
As of December 31, 2001, the market value of our short-term investment
in UMC was $70.2 million. In addition, we held $12.6 million in stock which was
not available for resale as it is subject to certain contractual and other
restrictions. In order to preserve our wafer capacity guarantee with UMC, there
are certain limitations on our ability to sell the UMC 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 December 31, 2001, approximately 16.1 million
shares are subject to this lock-up restriction. While we are an operating
company and 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.
FACTORS THAT MAY AFFECT OUR RESULTS
OPERATING LOSS IN THE SIX MONTHS ENDED DECEMBER 31, 2001
We incurred an operating loss of $6.6 million in the six months ended
December 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.
We are trying to expedite new product launchings 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;
- 16 -
- 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.
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. Any return to profitability and long term success in the graphics
business will depend on the introduction of successive generations of products
in time to meet the design cycles as well as to specifications of PC
manufacturers. 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.
RELIANCE ON FEW KEY ACCOUNTS
To date, a limited number of distributors and customers have accounted
for a significant portion of our revenue. In recent quarters, we have depended
in particular on sales to Inno Micro, a supplier to Toshiba, and expect that
this customer will continue to account for a substantial percentage of our sales
in coming quarters. If Inno Micro or 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, 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,
- 17 -
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 is intended to 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.
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.
- 18 -
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 not 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-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 stocks in high-technology companies in
particular, could cause the price of our stock to fluctuate from time to time.
- 19 -
DEPENDENCE 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.
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.
- 20 -
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 have asserted and are
likely in the future to assert patent, copyright, trademark and other
intellectual property rights to technologies or rights that are important to our
business. We are currently involved in such disputes with NeoMagic and others.
See Part II, Item 1 ("Legal Proceedings"). 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. Our pending litigation and any future 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, has
been and may in the future 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, if resolved adversely to us, 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 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.
- 21 -
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 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) which entered 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 six months ended December 31, 2001 and
2000, the percentage of revenues contributed by the digital media segment
accounted for 3% and 2%, respectively. At both December 31, 2001 and December
31, 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
- 22 -
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 video controller chip 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 $3.5 million and $2.2 million respectively, as of December
31, 2001. We own a majority interest in both Trident Technologies, Inc. and in
Trident Multimedia Technologies (Shanghai) Co. Ltd. It is our intention to
spin-off these subsidiaries during our fiscal year 2002. 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 publicly 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 December 31, 2001, $25.3 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 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 intend
to 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.
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INVESTMENT RISK
We are exposed to market risk as it relates to changes in the market
value of our investments in public companies. 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 $40.3 million of our investments in public
companies 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 December 31,
2001, we had available-for-sale equity investments with a fair market value of
$70.9 million including $70.2 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.
We are also exposed to changes in the value of our investments in
non-public companies, including start-up companies. These long-term equity
investments in technology companies are subject to significant fluctuations in
fair value due to the volatility of the industries in which these companies
participate and other factors. As of December 31, 2001 the balance of our
long-term equity investments in non-public companies was $10.0 million.
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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 arguing that there is no final appealable order
and that 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. Briefing has been completed on NeoMagic's Federal Circuit appeal
of the Company's summary judgment of non-infringement. The Federal Circuit has
set oral argument for March 6, 2002.
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
- 25 -
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 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. The stay period expired on January
31, 2002, without the parties having achieved a settlement of their dispute.
Although the parties continued to discuss settlement after January 31, 2002,
those efforts were suspended on February 11, 2002, with no settlement having
been achieved. Discovery is set to resume February 15, 2002.
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 satisfy 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 the Company nevertheless withdrew its motion for preliminary
injunction. Discovery is currently ongoing. 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 AND USE OF PROCEEDS
Not applicable
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable
- 26 -
ITEM 4: SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Trident Microsystems' Annual Stockholders' meeting held on December
10, 2001, the following proposals were adopted by the margins indicated:
Proposal 1 Directors - the following directors were elected at the meeting to
serve a term of three years
Nominees For Withheld
- -------- --- --------
Frank C. Lin 12,044,822 388,962
Glen M. Antle 12,015,482 418,302
The following directors continued to serve their terms after the meeting:
Yasushi Chikagami - whose term expires at the 2002 Annual Meeting of
Stockholders
Milliard Phelps - whose term expires at the 2003 Annual Meeting of Stockholders
John Luke - whose term expires at the 2003 Annual Meeting of Stockholders
Proposal 2 to approve an amendment to the Company's 1994 Outside Directors Stock
Option Plan to increase the number of shares reserved for issuance by 110,000
For Against Abstain Broker non-Votes
--- ------- ------- ----------------
11,073,982 1,325,058 33,644 1,100
Proposal 3 to approve the Company's 2001 employee stock purchase plan
For Against Abstain Broker non-Votes
--- ------- ------- ----------------
11,622,708 768,632 42,344 100
Proposal 4 to ratify the appointment of PricewaterhouseCoopers LLP as the
Company's independent public accountants
For Against Abstain Broker non-Votes
--- ------- ------- ----------------
12,340,505 67,943 25,336 0
The foregoing matters are described in further detail in our definitive proxy
statement dated November 2, 2001 for the Annual Meeting of Stockholders held on
December 10, 2001.
ITEM 5: OTHER INFORMATION
Not applicable
- 27 -
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
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.(8)
10.15(*) Form of Change of Control Agreement between the Company and
Frank C. Lin.(8)
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)
- --------------------
(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.
(8) 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
- 28 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on February 14, 2002, on its
behalf by the undersigned thereunto duly authorized.
Trident Microsystems, Inc.
- --------------------------
(Registrant)
/s/ Frank C. Lin
- ----------------------------------------
Frank C. Lin
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
/s/ Peter Jen
- ----------------------------------------
Peter Jen
Senior Vice President, Asia Operations and Chief
Accounting Officer (Principal Financial and
Accounting Officer)
- 29 -