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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[ X ] Quarterly report pursuant to section 13 or 15(d) of the Securities Act
of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
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)
189 North Bernardo Avenue, Mountain View, CA 94043-5216
(Address of principal executive offices) (Zip code)
(415) 691-9211
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares of the registrant's $0.001 par value Common Stock
outstanding at September 30, 1996 was 12,615,124
This document (including exhibits) contains 17 pages.
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TRIDENT MICROSYSTEMS, INC.
INDEX
Page
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PART I: FINANCIAL INFORMATION
Item 1: Unaudited Financial Information
Condensed Consolidated Balance Sheet - September 30, 1996 and
June 30, 1996 3
Condensed Consolidated Statement of Operations for the Three Months
Ended September 30, 1996 and 1995 4
Condensed Consolidated Statement of Cash Flows for the Three Months
Ended September 30, 1996 and 1995 5
Notes to the Unaudited Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition 7
and Results of Operations
PART II: OTHER INFORMATION:
Item 1: Legal Proceedings Not Applicable
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 14
Item 6: Exhibits and Reports on Form 8-K 15
Signatures 16
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TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
ASSETS
SEPTEMBER 30,
1996 JUNE 30,
(UNAUDITED) 1996
------------- --------
Current assets:
Cash and cash equivalents $ 27,301 $ 16,894
Short-term investments 17,577 24,334
Accounts receivable, net 18,714 16,872
Inventories 22,653 26,866
Deferred income taxes 3,767 3,838
Prepaid expenses & other assets 5,363 7,140
-------- --------
Total current assets 95,375 95,944
Property and equipment, net 5,260 5,628
Investment in joint ventures 13,716 13,716
Other assets 10,957 12,222
-------- --------
Total assets $125,308 $127,510
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,120 $ 24,084
Accrued expenses & other liabilities 7,705 7,632
Income taxes payable 5,612 5,610
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Total current liabilities 31,437 37,326
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Stockholders' equity:
Capital stock 38,441 38,279
Notes receivable from stockholders (585) (585)
Retained earnings 56,015 52,490
-------- --------
Total stockholders' equity 93,871 90,184
-------- --------
Total liabilities and stockholders' equity $125,308 $127,510
======== ========
See accompanying notes to the condensed consolidated financial statements
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TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA, UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
------- -------
Net sales $44,838 $36,566
Cost of sales 29,575 22,998
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Gross margin 15,263 13,568
Research and development expenses 5,035 3,878
Selling, general and administrative expenses 5,398 3,595
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Income from operations 4,830 6,095
Interest income, net 354 530
------- -------
Income before provision for income taxes 5,184 6,625
Provision for income taxes 1,659 2,120
------- -------
Net income $ 3,525 $ 4,505
======= =======
Net income per share $ 0.26 $ 0.34
======= =======
Common and common equivalent shares used in
computing per share amount 13,626 13,314
======= =======
See accompanying notes to the condensed consolidated financial statements
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TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS, UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1995
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,525 $ 4,505
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation & amortization 707 428
Provision for doubtful accounts and sales returns -- (10)
Gain on disposal of fixed assets -- (111)
Amortization of deferred compensation -- 58
Changes in assets & liabilities:
Accounts receivable (1,842) (6,366)
Inventories 4,213 1,898
Prepaid expenses and other current assets 1,848 310
Other assets 1,265 (413)
Accounts payable (5,964) 1,392
Accrued expenses & other liabilities 73 (406)
Income tax payable 2 1,132
------- --------
Net cash provided by operating activities 3,827 2,417
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment to vendor under capacity agreement -- (16,800)
Sales (purchases) of short-term investments, net 6,757 9,241
Proceeds from disposal of fixed assets -- 1,000
Purchase of property and equipment (339) (1,127)
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Net cash provided by (used in) investing activities 6,418 (7,686)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Stock 162 483
------- --------
Net cash provided by financing activities 162 483
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,407 (4,786)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,894 30,609
------- --------
CASH AND CASH EQUIVALENT AT END OF PERIOD $27,301 $ 25,823
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See accompanying notes to the condensed consolidated financial statements
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TRIDENT MICROSYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
In the opinion of Trident Microsystems, Inc. (the "Company"), the
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, 1996 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, 1997.
NOTE 2: INVENTORIES
Inventories consisted of the following (in thousands):
September 30, 1996 June 30, 1996
------------------ -------------
Finished goods $12,470 $15,150
Work in process 10,183 11,716
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$22,653 $26,866
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ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the percentages that statement of
operations items are to net sales for the three months ended September 30, 1996
and 1995:
Three Months Ended
September 30,
------------------
1996 1995
---- ----
Net sales 100% 100%
Cost of sales 66 63
--- ---
Gross margin 34 37
Research and development 11 10
Selling, general and administrative 12 10
--- ---
Income from operations 11 17
Interest income, net 1 1
--- ---
Income before income taxes 12 18
Provision for income taxes 4 6
--- ---
Net income 8% 12%
=== ===
Net Sales
Net sales for the three months ended September 30, 1996 were $44.8
million or 23% over the $36.6 million reported in the three months ended
September 30, 1995. The increases in net sales were attributable to increases in
unit volume of higher performance graphical user interface (GUI) accelerator
products both for desktop and mobile computers. Higher average selling prices
(ASPs) of notebook products approximately balanced lower ASPs from other
products, especially 64-bit desktop video graphics products. Sales of notebook
graphics controllers and 64-bit graphics controllers rose to 33% and 32% of
total sales for the three months ended September 30, 1996 period from 9% and
22%, respectively, for the year earlier period.
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The Company continues to make major efforts to design products to fill
the needs of leading PC systems manufacturers and adapter card manufacturers.
Sales to North American and European customers increased to 34% in the three
months ended September 30, 1996 from 19% in the three months ended September 30,
1995. The Company expects Asian customers will continue to account for a
significant portion of the Company's sales. Sales to Asian customers, primarily
in Hong Kong, Taiwan, Korea and Japan, accounted for approximately 66% in the
three months ended September 30, 1996, down from 70% in the same quarter of
fiscal 1995. Sales to three customers and their affiliates accounted for
approximately 23%, 15% and 12% of net sales for the three months ended September
30, 1996. Sales to three customers and their affiliates accounted for
approximately 14%, 12% and 11% of net sales, respectively, for the same period
of the prior fiscal year. Substantially all of the sales transactions were
denominated in U.S. dollars during both periods.
The Company plans to continuously introduce new and higher performance
desktop and notebook graphics controller and multimedia video products which it
will seek to sell to existing customers as well as new customers in Asia, North
America and Europe. The Company's future success depends upon the regular and
timely introduction of these and other new products and upon those products
meeting customer requirements. There can be no assurance that the Company will
be able to successfully complete the development of these products or to
commence shipments of these products in a timely manner, or that product
specifications will not be changed during the development period. In addition,
even if regularly and timely developed and shipped, there can be no assurance
that the products described above will be well accepted in the market place.
Gross Margin
Trident's gross margin decreased to 34% of net sales for the three
months ended September 30, 1996 from 37% for the three months ended September
30, 1995. The decrease in the gross margin was primarily the result of price
declines on 64-bit video graphics products which had become a larger percentage
of sales in the September 30, 1996 period.
The Company believes that it is common for the prices of high
technology products to decline over time as availability and competition
increase and new, advanced products are introduced. The Company expects ASPs of
existing products to continue to decline although overall ASPs may remain
constant or increase as a result of introductions of new higher performance
products with higher gross margin. The Company's strategy is to maintain gross
margins through the introduction of new products with higher margins, the
reduction in manufacturing costs accomplished through the Company's custom
design methodology and the migration to the newest process technology and taking
advantage of the economies of scale of volume production. As a result, the
Company depends upon the success of new product development and the timely
introduction of new products, as well as upon the achievement of its
manufacturing cost reduction efforts. There can be no assurance that the Company
can successfully or timely develop and introduce new products or that it can
continue to successfully reduce manufacturing costs.
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Research and Development
Research and development expenditures increased to $5.0 million in the
three months ended March 31, 1996 from $3.9 million in the three months ended
September 30, 1995. Research and development expenditures as a percentage of net
sales remained constant at 11% of sales in both the three months ended September
30, 1996 and 1995. The increases in expenditures in the three months ended
September 30, 1996 were primarily due to the increase in headcount and
associated personnel-related costs, increased depreciation, increased outside
engineering services, and increased non-recurring engineering expenses. The
Company has increased its research and development efforts to introduce new
products and intends to continue making substantial investments in research and
development.
Selling, General and Administrative
Selling, general and administrative expenditures increased to $5.4
million in the three months ended September 30, 1996 from $3.6 million in the
three months ended September 30, 1995. The increases in selling costs were
primarily due to increased personnel-related costs for increased sales staff in
the U.S. and Asia, additional commissions due to distributors and sales
representatives as a result of higher sales through such channels and increased
promotional activities. Selling, general and administrative expenditures as a
percentage of net sales increased to 12% of sales in the three months ended
September 30, 1996 from 10% of sales in the three months ended September 30,
1995 as costs increased at a faster rate than sales. The Company expects to
continue to increase selling, general and administrative expenditures in order
to support its broadening product lines to a larger number of customers and as a
result of increased sales efforts directed at leading PC systems manufacturers.
Interest Income, Net
The amount of interest income earned by the Company varies directly
with the amount of its cash, cash equivalents, short-term investments and
long-term investments and the prevailing interest rates. Interest income
decreased slightly in the three months ended September 30, 1996 from the three
months ended September 30, 1995 as a result of decreased levels of cash invested
as the Company contributed $13.7 million to a foundry venture in January 1996.
Lower interest income earned as a result of less cash invested was in part
offset by higher interest rates received as the Company invested more cash in
taxable instruments. A significant amount of the interest earned by the Company
was not subject to federal income taxes.
Provision for Income Taxes
As a percentage of income before income taxes, the provision for income
taxes was 32% for the three months ended September 30, 1996 and 1995. The
effective income tax rates were below the U. S. statutory rate primarily because
operations in foreign countries were subject to lower income tax rates and a
significant portion of earned interest was therefore not subject to U. S.
federal income tax.
Future Results
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The Company's statements regarding sales to Asian customers, plans
regarding introduction of new products, and expected increases in research and
development and selling, general and administrative expenses are forward looking
statements and actual results might vary materially from the results expected by
the Company. A number of factors could affect such results, including those
identified above and the factors discussed below.
The Company's business is influenced by a variety of factors which
include the overall market for desktop and notebook PC computers, the general
economic climate, the success of the Company's customers and their resultant net
orders, seasonal customer demand, timing of new product introductions,
marketplace acceptance of new product offerings, overall product mix,
competitors' activities and the availability of foundry and assembly capacities.
The Company's future operating results are also influenced by its dynamic
product area and by its planned growth in expenditures and the relation of
planned increased expenses to future operating results as well as by a variety
of global, political, regulatory and foreign exchange factors. These factors
will all affect the Company's results and there can be no assurance of the
Company's future operating results.
The Company supplies components to a variety of OEM customers that in
turn sell their products into the overall PC marketplace. Their success
influences the overall net orders that the Company may receive and attempt to
fill. Should there be a downturn in the overall PC business or should the
existing customers not be in a position to place orders or to accept order
fulfillment, the Company's performance would be adversely impacted and there can
be no assurance that the Company would be successful in achieving offsetting
orders. The success of the Company's marketing and sales efforts can also be
affected by changes in the global graphics marketplace. Because the Company's
customers distribute their products worldwide, such factors as shifts in market
share from Asian clone makers to other manufacturers have in the past affected
the Company's operating results. It is likely that future shifts would continue
to influence the Company's business. Since a substantial portion of the
Company's revenues has been and are expected to continue to be generated from
customers in Asia, it is likely that the Company's operating results will
fluctuate with changes in the Asian economies, particularly those of Taiwan and
Hong Kong. Past performance has indicated that seasonal performance variations
should be expected with the historic slowest PC sales occurring during the
summer. This factor influences when the Company's customers place their orders
and when delivery is required.
Because the Company operates in the increasingly competitive graphics
controller product area, timely introductions of new products are required. In
order to be able to timely introduce new products a number of risk factors have
to be overcome. A fundamental business risk is whether or not the Company can
continue to develop products that will be accepted by a fast-changing
marketplace. The Company attempts to determine which products have a high
likelihood of marketplace acceptance and attempts to create functional and
manufacturable designs for those products. However, the Company can not assure
that product development, the timing of the product introductions or the
marketplace acceptance of current products or of products to be developed will
be successful. The Company continues to invest in research and development and
in the personnel required to support new product introductions and new customers
including leading PC systems manufacturers. Should there be a shortfall in the
Company's business performance, the Company's financial results would be
adversely impacted by the planned growth in expenditures. Additional influences
on the Company's performance will be the actions of existing or future
competitors, the development of new technologies, the incorporation of graphics
functionality into other PC system components and possible claims by third
parties of infringement of patent or similar intellectual property rights.
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The Company relies upon several independent foundries to manufacture
its products either in finished or in wafer form, and orders production either
on contract or spot basis. The Company's ability to supply product to its
customers is thus dependent upon its continuing relationships with those
foundries and in turn upon their uninterrupted ability to supply the Company's
product. In calendar year 1995, there was a worldwide shortage of advanced
process technology foundry capacity. To respond to this shortage, the Company
entered into a number of contracts providing for additional capacity. Certain of
such contracts require substantial advance payments. There can be no assurance
that the Company will obtain sufficient foundry capacity to meet customer
demands in the future, particularly if that demand should increase, or that the
additional capacity from current foundries and new foundry sources will be
available and will satisfy the Company's requirements on a timely basis or at
acceptable quality or per unit prices.
The Company's products are assembled and tested by a variety of
independent subcontractors. The Company's reliance on independent assembly and
testing houses to provide these services involves a number of risks, including
the absence of guaranteed capacity and reduced control over delivery schedules,
quality assurance and costs.
Constraints or delays in the supply of the Company's products, whether
due to the factors above or to other unanticipated factors, could have adverse
effects on the Company's results. Such adverse effects could include the Company
electing to purchase products from higher cost sources and which could result in
lower orders, or inability to fulfill orders, resulting in the loss of orders.
The market price of the Company's Common Stock has been, and may
continue to be, extremely volatile. Factors such as new product announcements by
the Company or its competitors, quarterly fluctuations in the Company's
operating results, the performance of leading PC manufacturers and general
conditions in the high technology and in the graphics controller market may have
a significant impact on the market price of the Company's Common Stock.
The Company has recently experienced a period of significant growth,
which has and could continue to strain its limited personnel, financial and
other resources. In particular, the sale and distribution of products to
numerous leading PC systems manufacturers in diverse markets and the
requirements of such manufacturers for design support places substantial demands
on the Company's research and development and sales functions. Continued
expansion of sales and distribution of products to numerous large system
manufacturing customers, should it occur, would require expansion of the
Company's research and development, production and marketing and sales
capabilities. Sales growth, should it occur, will require additional foundry
capacity and the Company has contracted to expand available foundry capacity.
Future results will in part depend upon and could be significantly impacted by
the Company's ability to manage its resources to support future activities and
upon its ability to finance further expanded foundry capitalization and
production costs.
The Company's future operating results also may be affected by various
factors which are beyond the Company's control. These include adverse changes in
general economic conditions, political instability, governmental regulation or
intervention affecting the personal computer industry, government regulation
resulting from U.S. foreign and trade policy, fluctuations in foreign exchange
rates particularly with regard to the relationship of the U.S. dollar and Asian
currencies. The Company is unable to predict future economic, political,
regulatory and foreign exchange changes and cannot determine their impact on
future performance.
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company's principal sources of liquidity
included cash and cash equivalents of $27.3 million and short-term investments
of $17.6 million.
In the three months ended September 30, 1996, $3.8 million of cash was
provided by operating activities mainly as a result of profitable operations and
adjustment of non-cash expenses, an increase in accrued expenses and other
liabilities and decreases in inventories, prepaid expenses and other current
assets; offset in part by an increase in outstanding accounts receivable
balances and decreases in outstanding account payable. Capital expenditures were
$0.3 million.
In order to obtain a supply of wafers sufficient to meet possible
increased demand, and especially to obtain wafers manufactured using advanced
process technologies, the Company entered into an agreement in June 1995 with
Taiwan Semiconductor Manufacturing Company ("TSMC"), the Company's major
foundry, under which the Company is committed to purchase and TSMC is committed
to provide a certain number of wafers each year through December 31, 1999. In
addition, the Company has the option to purchase an additional amount of wafers
each year during the period. The Company made a prepayment of $16.8 million in
August 1995. The payment can be applied to partially offset the price of wafers
purchased under the option, but is not refundable except in certain
circumstances. Based on the timing specified in the supply agreement, the
prepayment will be applied at a rate of $4.8 million per year for fiscal years
ending June 30, 1997 through 1999 and $2.4 million for the fiscal year ending
June 30, 2000. During the period ended September 30, 1996, $2.4 million was
applied against outstanding accounts payable to TSMC. The Company uses the
guideline of FAS 121 to assess whether the value of the prepayment is impaired
periodically.
In August 1995, the Company also entered into a joint venture agreement
with United Microelectronics Corporation ("UMC"), one of the Company's current
foundries, under which the Company is committed to invest approximately $59
million in three installments for certain equity ownership in a joint venture
with UMC and other venture partners to establish a new foundry. The Company made
the first payment amounting to $13.7 million in January 1996. Committed equity
contributions remaining under the joint venture agreement are estimated at $30
million and $15 million during fiscal year 1997 and 1998, respectively. Under
the agreement, the new foundry guarantees to Trident a certain percentage of its
total wafer supply.
These investments with TSMC and UMC are intended to secure capacity so
that the Company can meet expected increased demand, should it occur, and are an
investment in the future of Trident. However, there are certain risks associated
with these methods including the ability of the Company to utilize the capacity
for which it has made substantial investments and the ability of UMC, together
with its partners, to successfully build the new foundry. These agreements and
the risks associated with these and other foundry relationships, are described
under the caption "Business-Manufacturing" of the Form 10-K Annual Report.
In May 1996, the Company obtained a credit facility of an unsecured
revolving line of credit of $15 million with a maturity date of December 31,
1997. Under the terms of the line of credit , the Company may elect to convert a
portion or the total credit into a three-year term loan. The facility requires
the Company to comply with certain covenants regarding financial ratios and
reporting requirements. There were no borrowings under the line of credit as of
September 30, 1996.
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The Company will continue to consider possible transactions to secure
additional foundry capacity when and if circumstances warrant. The
aforementioned agreements with TSMC and UMC have utilized a significant amount
of the Company's available funds. However, the Company believes its current
resources are sufficient to meet its needs for at least the next twelve months.
In addition to the $15 million line of credit, the Company regularly considers
transactions to finance its activities, including debt and equity offerings and
new credit facilities or other financing transaction.
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PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Not applicable
ITEM 2: CHANGES IN SECURITIES
Not applicable
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4: SUBMISSION OF MATTERS TO VOTE BY SECURITY HOLDERS
Not applicable.
ITEM 5: OTHER INFORMATION
Not applicable.
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed with this Form:
Exhibit Description
3.1 Restated Certificate of Incorporation.(1)
3.2 Bylaws of Trident Delaware Corporation, a Delaware
corporation.(1)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen Common Stock Certificate.(1)
11.1 Statement Re Computation of Per Share Earnings.(2)
27.1 Financial Data Schedule.(3)
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(1) Previously filed on October 27, 1992 as an exhibit to
Registrant's Registration Statement on S-1 (File No. 33-53768).
(2) Filed herewith.
(3) Filed electronically.
The Company did not file any reports on Form 8-K during the quarter
ended September 30, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on November 14, 1996 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/ James T. Lindstrom
- -------------------------------------------
James T. Lindstrom
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
Exhibit Description
3.1 Restated Certificate of Incorporation.(1)
3.2 Bylaws of Trident Delaware Corporation, a Delaware
corporation.(1)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen Common Stock Certificate.(1)
11.1 Statement Re Computation of Per Share Earnings.(2)
27.1 Financial Data Schedule. (3)
- ---------------------------
(1) Previously filed on October 27, 1992 as an exhibit to
Registrant's Registration Statement on S-1 (File No. 33-53768).
(2) Filed herewith.
(3) Filed electronically.
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