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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ____________
Commission file number: 0-20784
TRIDENT MICROSYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0156584
(State or other jurisdiction of (I.R.S. Employer identification No.)
incorporation or organization)
2450 Walsh Ave., Santa Clara, California 95051-1303
(Address of principal executive offices) (Zip code)
(408) 496-1085
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of the registrant's $0.001 par value Common Stock
outstanding at March 31, 1999 was 12,997,203.
This document (including exhibits) contains 17 pages.
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TRIDENT MICROSYSTEMS, INC.
INDEX
Page
----
PART I: FINANCIAL INFORMATION
Item 1: Unaudited Financial Information
Condensed Consolidated Balance Sheet - March 31, 1999 and
June 30, 1998 (Unaudited) 3
Condensed Consolidated Statement of Operations for the Three Months
and Nine Months Ended March 31, 1999 and 1998 (Unaudited) 4
Condensed Consolidated Statement of Cash Flows for the Nine Months
Ended March 31, 1999 and 1998 (Unaudited) 5
Notes to the Condensed Consolidated Financial Statements (Unaudited) 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3: Quantitative and Qualitative Disclosures About Market Risk Not Applicable
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 15
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
Item 6: Exhibits and Reports on Form 8-K 16
Signatures 17
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TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands, Unaudited)
ASSETS
MARCH 31, JUNE 30,
1999 1998
--------- ---------
Current assets:
Cash, cash equivalents $ 29,121 $ 22,916
Short-term investments 6,139 13,970
Accounts receivable, net 12,057 8,183
Inventories 3,837 10,146
Deferred income taxes 2,266 2,266
Prepaid expenses and other assets 1,386 1,236
--------- ---------
Total current assets 54,806 58,717
Property and equipment, net 6,431 7,766
Investment in joint venture 49,289 49,289
Other assets 2,728 2,655
--------- ---------
Total assets $ 113,254 $ 118,427
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,896 $ 3,359
Accrued expenses and other liabilities 5,922 5,805
Current portion of obligation under capital lease 381 380
Income taxes payable 1,729 1,292
--------- ---------
Total current liabilities 13,928 10,836
Deferred income taxes 2,350 2,350
Obligations under capital lease 74 350
--------- ---------
Total liabilities 16,352 13,536
--------- ---------
Stockholders' equity:
Common stock and additional paid-in capital 45,918 45,352
Retained earnings 54,471 62,724
Treasury stock, at cost, 436 and 374 shares (3,487) (3,185)
--------- ---------
Total stockholders' equity 96,902 104,891
--------- ---------
Total liabilities and stockholders equity $ 113,254 $ 118,427
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands, Except Per Share Data, Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net sales $ 23,253 $ 28,249 $ 67,781 $ 93,727
Cost of sales 16,126 18,518 45,640 60,216
-------- -------- -------- --------
Gross margin 7,127 9,731 22,141 33,511
Research and development expenses 7,244 7,175 20,074 20,440
Sales, general and administrative expenses 4,142 4,414 11,872 15,015
-------- -------- -------- --------
Income from operations (4,259) (1,858) (9,805) (1,944)
Interest income, net 472 576 1,552 2,223
-------- -------- -------- --------
Income before income taxes (3,787) (1,282) (8,253) 279
Provision for income taxes - (359) -- 78
-------- -------- -------- --------
Net income (loss) $ (3,787) $ (923) $ (8,253) $ 201
======== ======== ======== ========
Basic earnings (loss) per share $ (0.29) $ (0.07) $ (0.64) $ 0.02
======== ======== ======== ========
Shares used in computing
per share amounts 12,998 13,090 12,961 13,020
======== ======== ======== ========
Diluted earnings (loss) per share $ (0.29) $ (0.07) $ (0.64) $ 0.01
======== ======== ======== ========
Shares used in computing diluted
per share amounts 12,998 13,090 12,961 14,661
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands, Unaudited)
NINE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (8,253) $ 201
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 3,119 2,830
Provision for doubtful accounts and sales returns 126 71
Changes in assets and liabilities:
Accounts receivable (4,000) 10,012
Inventories 6,309 (11,448)
Prepaid expenses and other current assets (150) (117)
Other assets (73) (2,908)
Accounts payable 2,537 (7,197)
Accrued expenses and other liabilities 117 (1,116)
Income tax payable 437 1,384
-------- --------
Net cash provided by (used in) operating activities 169 (8,288)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short-term investments, net 7,831 23,658
Purchase of property and equipment (1,784) (3,334)
Investment in joint venture - (9,658)
-------- --------
Net cash provided by investing activities 6,047 10,666
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 566 1,913
Repayment of capital leases (275) (177)
Purchase of treasury stock (302) -
-------- --------
Net cash provided by (used in) financing activities (11) 1,736
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,205 4,114
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,916 29,745
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 29,121 $ 33,859
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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TRIDENT MICROSYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
In the opinion of Trident Microsystems, Inc. (the "Company"), the
condensed consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
financial position, operating results and cash flows for those periods
presented. The condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
and are not audited. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the year ended June 30, 1998 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, 1999.
NOTE 2 REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment. Provision is
made for expected sales returns and allowances when revenue is recognized. The
Company has limited control over the extent to which products sold to
distributors are sold through to end users. Accordingly, a portion of the
Company's sales may from time to time result in increased inventory at its
distributors. The Company provides reserves for returns and allowances for
distributor inventories. These reserves are based on the Company's estimates of
inventory held by its distributors and the expected sell through of its products
by its distributors. Actual results could differ from these estimates.
NOTE 3 INVENTORIES
Inventories consisted of the following (in thousands):
MARCH 31, 1999 JUNE 30, 1998
-------------- -------------
Work in process $ 522 $ 2,615
Finished goods 3,315 7,531
------- -------
$ 3,837 $10,146
======= =======
NOTE 4 EARNINGS PER SHARE
Basic Earnings Per Share (EPS) is computed by dividing net income
available to common stockholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period and excludes the
dilutive effect of stock options and other potential common shares. Diluted
Earnings Per Share (EPS) gives effect to all dilutive potential common shares
outstanding during a
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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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------ ------------------------------
(in thousands, except per share data) 1999 1998 1999 1998
---------- ---------- ---------- ----------
BASIC NET INCOME (LOSS) PER SHARE
Net income (loss) available to Common
Shareholders $ (3,787) $ (923) $ (8,253) $ 201
========== ========== ========== ==========
Weighted average common shares 12,998 13,090 12,961 13,020
========== ========== ========== ==========
Basic net income (loss) per share $ (0.29) $ (0.07) $ (0.64) $ 0.02
========== ========== ========== ==========
DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) available to Common
Shareholders $ (3,787) $ (923) $ (8,253) $ 201
========== ========== ========== ==========
Weighted average common shares 12,998 13,090 12,961 13,020
Dilutive common stock equivalents - - - 1,641
---------- ---------- ---------- ----------
Weighted average common shares
and equivalents 12,998 13,090 12,961 14,661
========== ========== ========== ==========
Diluted net income (loss) per share $ (0.29) $ (0.07) $ (0.64) $ 0.01
========== ========== ========== ==========
Options to purchase 4,633,997 shares of common stock were outstanding at
the end of March 31, 1999 but were not included in the computations of diluted
EPS for the three and nine month periods ended March 31, 1999 because the
Company incurred a loss. Options to purchase 4,167,841 shares of common stock
were outstanding during the three month period ended March 31, 1998 but were not
included in the computations of diluted EPS because the Company incurred a loss.
Options to purchase 61,301 shares of common stock were outstanding during the
nine month period ended March 31, 1998 but were not included in the computations
of diluted EPS because the options' price was greater than the average market
price of the common shares.
NOTE 5 LITIGATION
On December 14, 1998, NeoMagic Corporation (Nasdaq: NMGC), filed suit in
the United States District Court for the District of Delaware against Trident
Microsystems, Inc. (the "Company"). The suit alleges that the Company's embedded
DRAM graphics accelerators infringe certain patents held by NeoMagic
Corporation. The Company intends to defend the litigation vigorously. On January
25, 1999 the Company filed a counter claim in the United States District Court
for the District of Delaware against NeoMagic, Inc. The counter claim alleges an
attempted monopolization in violation of the antitrust laws, arising from
Neomagic's patent infringement filing against the Company. However, due to the
nature of the litigation, the Company cannot estimate with certainty what would
be the ultimate outcome of the litigation.
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ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
RESULTS OF OPERATIONS
The following table sets forth the results of operations expressed as
percentages of net sales for the three and nine months ended March 31, 1999 and
1998:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
Net sales 100% 100% 100% 100%
Cost of sales 69 66 67 64
---- ---- ---- ----
Gross margin 31 34 33 36
Research and development 31 25 30 22
Selling, general and administrative 18 16 18 16
---- ---- ---- ----
Income (loss) from operations (18) (7) (15) (2)
Interest income, net 2 2 2 2
---- ---- ---- ----
Income (loss) before income taxes (16) (5) (13) -
Provision for income taxes - (1) - -
---- ---- ---- ----
Net income (loss) (16)% (4)% (13)% -%
==== ==== ==== ====
Net Sales
Net sales for the three months ended March 31, 1999 were $23.3 million
or 18% less than the $28.2 million reported in the three months ended March 31,
1998, and increased $2.6 million, or 13% from the $20.7 million reported in the
three months ended December 31, 1998. Net sales for the nine months ended March
31, 1999 were $67.8 million or 28% less than the $93.7 million reported in the
nine months ended March 31, 1998. The sales increase from the three months ended
December 31, 1998 was predominantly due to a increase in unit shipments in 3D
portable products. For the three and nine months ended March 31, 1999, sales
have declined compared to the prior year as product revenue from the newly
introduced 3D products in both the portable and desktop area were not enough to
offset declines in the older, less in demand 2D products and general declines in
average selling prices in desktop products. Portable and desktop products
accounted for 65% and 31% respectively, of the Company's sales for the three
months ended March 31, 1999, and 30% and 67%, respectively, for the three months
ended March 31, 1998. In the nine month period ended March 31, 1999, portable
and desktop products accounted for 54% and 42% of total sales, respectively. In
the nine month period ended March 31, 1998, portable and desktop products
accounted for 40% and 57% of total sales, respectively.
Sales to North American and European customers represented 36% of net
sales in the three months ended March 31, 1999, an increase from approximately
15% in the three months ended March 31, 1998. Sales to North American and
European customers represented 25% of net sales in the nine months ended March
31, 1999, an increase from approximately 16% in the nine months ended March 31,
1998. The
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increase in the percentage of net sales for North American and European
customers for both the three months and nine months ended March 31, 1999, is
primarily due to a greater decrease in Asian sales relative to North American
and European sales. 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 64%
of net sales in the three months ended March 31, 1999, down from approximately
85% in the three months ended March 31, 1998. Sales to Asian customers,
primarily in Hong Kong, Taiwan, Korea and Japan, accounted for approximately 75%
of net sales in the nine months ended March 31, 1999, down from approximately
84% in the nine months ended March 31, 1998. In the three months ended March 31,
1999, sales to three customers accounted for 19%, 17%, and 10% of net sales
respectively. In the three months ended March 31, 1998, sales to three customers
accounted for 22%, 12%, and 12% of net sales, respectively. In the nine months
ended March 31, 1999 sales to two customers accounted for 16%, and 10% of net
sales, respectively. In the nine months ended March 31, 1998, sales to two
customers accounted for 17% and 10% of net sales, respectively. The Company
derives a portion of its revenues from sales to distributors. Sales to
distributors represented 17% and 9% of revenues during the three months ended
March 31, 1999 and 1998, respectively, and 16% of revenues during the nine
months ended March 31, 1999, up from 11% in the nine months ended March 31,
1998. During the first half of fiscal year 1998 the Company experienced higher
than usual returns resulting from certain distributors adjusting their inventory
mix and levels. Sales returns from distributors have historically not been
material. Substantially all of the sales transactions were denominated in U.S.
dollars during both periods.
The Company plans from time to time to introduce new and higher
performance desktop and portable graphics controller and multimedia 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
Gross margin decreased to $7.1 million for the three months ended March
31, 1999, down from $9.7 million in the three months ended March 31, 1998. The
gross margin as a percentage of net sales for the three months period ended
March 31, 1999, decreased to 31% of net sales as compared to 34% for the three
months ended March 31, 1998. Gross margin for the three months ended March 31,
1999 was adversely affected by lower sales of desktop products and 2D portable
products, despite increases in sales of 3D portable products. Gross margin
decreased to $22.1 million for the nine months ended March 31, 1999, down from
$33.5 million in the nine months ended March 31, 1998. The gross margin as a
percentage of net sales for the nine months period ended March 31, 1999,
decreased to 33% of net sales as compared to 36% for the nine months ended March
31, 1998. The nine month decrease was primarily a result of lower sales and
declining ASP's of desktop products and lower sales of 2D portable products.
The Company believes that prices of semiconductor products will decline
over time as availability and competition increase and advanced products are
introduced. The Company expects to see continued competitive pressure on gross
margins in the desktop and notebook business in the foreseeable future. The
Company continues to maintain a strategy based on maintaining gross margins
through the introduction of new products with higher margins, reducing
manufacturing costs accomplished through the
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Company's custom design methodology and the migrating to the newest process
technology. 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, that such products will gain market acceptance, or that it can
continue to successfully reduce manufacturing costs.
Research and Development
Research and development expenses for the three months ended March 31,
1999 remained flat at $7.2 million compared to the March 31, 1998 three month
period. As a percent of net sales, research and development expenses increased
to 31% for the three months ended March 31, 1999 from 25% of net sales for the
three months ended March 31, 1998. Research and development expenses for the
nine months ended March 31, 1999 decreased to $20.1 million from $20.4 million
for the March 31, 1998 nine month period. As a percent of net sales, research
and development expenses increased to 30% for the nine months ended March 31,
1999 from 22% of net sales for the nine months ended March 31, 1998. The
decrease in research and development expenses in actual dollars for the nine
months ended March 31, 1999 compared to the respective nine months ended March
31, 1998 can be attributed primarily to a reduction in workforce and a decrease
in nonrecurring engineering charges resulting from the Company's cost reduction
programs.
Selling, General and Administrative
Selling, general and administrative expenses decreased to $4.1 million
in the three months ended March 31, 1999 from $4.4 million in the three months
ended March 31, 1998. As a percent of net sales, selling, general and
administrative expenditures increased to 18% of net sales for the three months
ended March 31, 1999 from 16% of net sales in the three months ended March 31,
1998. In the nine months ended March 31, 1999, selling, general and
administrative expenditures decreased to $11.8 million, from the March 31, 1998
nine month period of $15.0 million. Selling, general and administrative
expenditures increased to 17% of net sales for the nine months ended March 31,
1999 from 16% of net sales in the nine months ended March 31, 1998. The decrease
in selling, general and administrative expenditures in actual dollars is
attributed primarily to the Company's cost reduction programs and a decrease in
representative commissions due to lower sales for both the three and nine month
periods ending March 31, 1999. The Company intends to continue to monitor and
control its selling, general and administrative expenses.
Interest Income, Net
The amount of interest income earned by the Company varies directly with
the amount of its cash, cash equivalents and short-term investments and the
prevailing interest rates. Interest income decreased to $472,000 in the three
months ended March 31, 1999 from $576,000 in the same prior year period. In the
nine month period ended March 31, 1999 interest income decreased to $1,552,000
from $2,223,000 in the nine month period ended March 31, 1998. The decreases in
both the three month and nine month periods ending March 31, 1999 are primarily
the result of lower average cash levels invested by the Company.
Provision for Income Taxes
Due to the current loss situation of the Company, no provision for U.S.
taxes was taken for both the three and nine month periods ending March 31, 1999.
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Year 2000 Conversion Project
The Company has a Year 2000 project designed to identify and assess the
risks associated with its information systems, products, operations and
infrastructure, and suppliers that are not Year 2000 compliant and to develop,
implement, and test remediation and contingency plans to mitigate these risks.
The project is composed of four phases: (1) identification of risks, (2)
assessment of risks, (3) development of remediation and contingency plans, and
(4) implementation and testing.
Information systems. In 1997, the Company undertook a project to upgrade
all its information systems to Year 2000 compliance. The Company has upgraded
its U.S. information systems to Year 2000 compliance in January, 1999. The
Company expects to have its Asian facilities information systems upgraded to
Year 2000 compliance by the end of May fiscal year 1999.
Products. The Company has assessed the capabilities of all of its
products sold to customers. Based on the assessments made to date, none of the
Company's products are affected by Year 2000 issues.
Operations and Infrastructure. The U.S. facility has upgraded its office
equipment and other items used in its operations to year 2000 compliance in
January, 1999. The Company expects to have its Asian facilities office equipment
and other items used in its operations upgraded to Year 2000 compliance by the
end of May fiscal year 1999.
Suppliers. The Company has evaluated its supplier base to determine
whether Year 2000 issues affecting suppliers will adversely impact the Company's
operations. The Company has contacted all of its suppliers to assess their Year
2000 readiness and will continue to monitor the progress of its key suppliers.
The Company has assessed its key suppliers for Year 2000 readiness and has not
found any Year 2000 issues from suppliers which would adversely impact the
Company's operations.
General and Risk Factors. The Company believes that its greatest
potential risks are associated with its information systems and systems embedded
in its operations and infrastructure. With the upgrading of its U.S. information
systems to Year 2000 compliance in January, 1999, the Company believes it has
reduced the potential risk from Year 2000 issues affecting its information
systems and systems embedded in its operations and infrastructure. The Company
is in the final stages of implementation for all its operations and
infrastructure, but cannot predict whether significant problems will be
identified. The Company has not yet determined the extent of contingency
planning that may be required. Based on the status of the assessment made and
remediation plans developed to date, the Company is not in a position to state
the total cost of remediation of all Year 2000 issues. Costs identified to date
are expected to be not less than $100,000.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company's principal sources of liquidity
included cash and cash equivalents of $29.1 million and short-term investments
of $6.1 million. The decrease in short-term investments from $14.0 million at
June 30, 1998 was due to transfers to cash and cash equivalents from short-term
investments during the nine months ended March 31, 1999.
In the nine months ended March 31, 1999, $0.2 million of cash was
provided by operations, compared to the nine months ended March 31, 1998 in
which $8.3 million of cash was used by
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operations. The change was mainly the result of a decrease in inventories, an
increase in accounts payable and income taxes payable, offset in part by
unprofitable operations and an increase in accounts receivable for the nine
months ended March 31, 1999. The decrease in inventories reflected the Company's
effort to reduce inventory levels according to adjusted sales expectations.
Capital expenditures were $1.8 million for the nine months ended March 31, 1999
compared to $3.3 million for the nine months ended March 31, 1998.
In August 1995, the Company entered into a joint venture agreement with
United Microelectronics Corporation ("UMC") and other venture partners to
establish a foundry, United Integrated Circuits Corporation ("UICC"). Under the
agreement, the Company invested $49.3 million in the joint venture and the
foundry guarantees to Trident 12.5% of the foundry's total wafer supply. On
October 3, 1997, a fire at UICC's fabrication plant in Hsinchu, Taiwan,
completely destroyed its fabrication equipment. The fabrication plant, and the
destroyed equipment, was insured. Trident was not utilizing the UICC fabrication
plant, and there are no existing Trident products on UICC's production lines.
The UICC Board of Directors are exploring available alternatives, and a firm
decision on the rebuilding of the fab plant should be reached before fiscal year
June 30, 1999. At March 31, 1999, the Company held a 9.3% equity ownership in
UICC.
The joint venture investment with UMC is intended to secure capacity so
that the Company can meet increased demand, should it occur. There are certain
risks associated with such an investment including the ability of UMC together
with its partners, to successfully rebuild the foundry and of the Company to
utilize the additional capacity. These agreements and the risks associated with
these and other foundry relationships are described under the caption
"Manufacturing" of the Form 10-K for the fiscal year ended June 30, 1998.
The agreement with UMC has utilized a significant amount of Trident's
available funds; however the Company believes its current resources are
sufficient to meet its needs for at least the next twelve months. The Company
regularly considers transactions to finance its activities, including debt and
equity offerings and new credit facilities or other financing transactions. The
Company believes its current reserves are adequate.
In April 1999, the Company's Board of Directors renewed a $20 million
stock repurchase program over the next twelve months. During the nine months
ended March 31, 1999, 61,100 shares of common stock were repurchased for $0.3
million under this Plan. During fiscal year 1998, 274,500 shares of common stock
were repurchased for $2.1 million under this Plan. The Company's cash reserve
may decline as a result of its future use, if any, of the repurchase provision.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements herein are forward looking statements, including
those regarding the Company's intention to continue to introduce new products,
expected sales to Asian customers, the Company's expectations regarding pricing
pressures and gross margin from new products and the Company's plan to invest in
research and development and to control selling, general, and administrative
functions. The actual results could vary from the Company's expectations, and
are subject to a number of risks and dependent on a variety of factors,
including those set forth below.
The Company's business is influenced by a variety of factors which
include the overall market for desktop and portable 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, sales
returns from distributors, competitors' activities and the availability of
foundry and assembly capacities. The Company's future
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operating results are also influenced by its dynamic product area and by the
amount and timing of planned expenditures 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 is 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. During the six months ended December 31, 1997, the Company
experienced higher than usual returns resulting from certain distributors
adjusting their inventory mix and levels. These product exchanges are the result
of the industry transition from 2D to 3D, and the Company cannot predict that
these exchanges will not re-occur in the future. However, in the nine months
ended March 31, 1999 exchanges were not significant. Past performance has
indicated that seasonal performance variations should be expected with the
historic slowest PC sales occurring during the summer. These factors influence
when the Company's customers place their orders and when delivery is required.
Because the Company currently operates in the increasingly competitive
graphics controller product area, timely introductions of new products are
required. A fundamental business risk is whether or not the Company can continue
to develop products that will be accepted by a fast-changing marketplace. In
order to be able to timely introduce new products a number of obstacles have to
be overcome. 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 cannot assure
that product development, the timing of the product introductions, the
marketplace acceptance of current products under development, and the hiring of
the personnel required to support new product introductions and new customers,
including leading PC systems manufacturers, will be successful. Should there be
a shortfall in the Company's business performance from its expected results, the
Company's financial results would be adversely impacted by the amount and timing
of planned 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.
The Company currently relies exclusively upon 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 response to a worldwide shortage of foundry capacity
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
-13-
14
and new foundry sources will be available and will satisfy the Company's
quality, delivery schedule, and/or price requirements.
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 graphics controller markets may have a
significant impact on the market price of the Company's common stock.
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 principal research and development activity is conducted
in Silicon Valley where the competition for technical talent is intense. The
Company constantly reviews measures to attract and retain new and existing
employees. As a result of the foregoing, the Company established a research and
development facility in Shanghai, People's Republic of China in the quarter
ended March 31, 1998. This facility currently has fifty employees as of March
31, 1999. The Company is considering other organizational changes to improve its
research and development and product execution efforts. There can be no
assurance that these measures will be successful.
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, and
regulatory and foreign exchange changes and cannot determine their impact on
future performance.
TEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
-14-
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PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On December 14, 1998, NeoMagic Corporation (Nasdaq: NMGC), filed suit in
the United States District Court for the District of Delaware against Trident
Microsystems, Inc. (the "Company"). The suit alleges that the Company's embedded
DRAM graphics accelerators infringe certain patents held by NeoMagic
Corporation. The Company intends to defend vigorously the litigation which was
filed against it, and the Company will take every step possible to protect the
interests of its customers and shareholders. On January 25, 1999 the Company
filed a counter claim in the United States District Court for the District of
Delaware against NeoMagic Corporation. The counter claim alleges an attempted
monopolization in violation of the antitrust laws, arising from Neomagic's
patent infringement filing against the Company. On March 25, 1999 NeoMagic
Corporation filed a motion for summary judgement requesting that the Company's
counter claim be dismissed. Statements regarding the possible outcome of
litigation and the Company's actions are forward looking statements and actual
outcomes could vary based upon future developments on the litigation.
ITEM 2: CHANGES IN SECURITIES
Not applicable
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4: SUBMISSIONS OF MATTERS TO VOTE BY SECURITY HOLDERS
Not applicable
ITEM 5: OTHER INFORMATION
Not applicable
-15-
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
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 Sublease Agreement dated November 23, 1998 between the Company and
Applied Materials, Inc. for the Company's principal offices located
at 2450 Walsh Avenue, Santa Clara, California.(6)
10.16 Foundry Venture Agreement dated August 18, 1995 by and between the
Company and United Microelectronics Corporation.(5)(7)
27.1 Financial Data Schedule (EDGAR version only)(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, 1996.
(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) Filed herewith.
(7) Confidential treatment has been requested for a portion of this
document.
(*) Management contracts or compensatory plans or arrangements covering
executive officer or directors of the Company.
(b) Reports on Form 8-K
Not Applicable
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on May 14, 1999 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)
-17-
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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.(2)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen Common Stock Certificate.(2)
4.3 Form of Rights Agreement between the Company and ChaseMellon
Shareholder Services, LLC, as Rights Agent (including as Exhibit A
the form of Certificates of Designation, Preferences and Rights of
the Terms of the Series A Preferred Stock, as Exhibit B the form of
Right Certificate, and as Exhibit C the Summary of Terms of Rights
Agreement).(3)
10.5(*) 1990 Stock Option Plan, together with forms of Incentive Stock Option
Agreement and Non-statutory Stock Option Agreement.(2)
10.6(*) Form of the Company's Employee Stock Purchase Plan.(2)
10.7(*) Summary description of the Company's Fiscal 1992 Bonus Plan.(2)
10.8(*) Form of the Company's Fiscal 1993 Bonus Plan.(2)
10.9(*) Summary description of the Company's 401(k) plan.(2)
10.10(*) Form of Indemnity Agreement for officers, directors and agents.(2)
10.12(*) Form of Non-statutory Stock Option Agreement between the Company and
Frank C. Lin.(4)
10.13(*) Form of 1992 Stock Option Plan amending and restating the 1990 Stock
Option Plan included as Exhibit 10.5.(2)
10.14 Sublease Agreement dated November 23, 1998 between the Company and
Applied Materials, Inc. for the Company's principal offices located
at 2450 Walsh Avenue, Santa Clara, California.(6)
10.16 Foundry Venture Agreement dated August 18, 1995 by and between the
Company and United Microelectronics Corporation.(5)(7)
27.1 Financial Data Schedule (EDGAR version only)(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, 1996.
(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) Filed herewith.
(7) Confidential treatment has been requested for a portion of this
document.
(*) Management contracts or compensatory plans or arrangements covering
executive officer or directors of the Company.