1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 1999 Commission file number 0-20784
TRIDENT MICROSYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0156584
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2450 Walsh Avenue
Santa Clara, California 95051-1303
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (408) 496-1085
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.001 Par Value
(Title of class)
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 __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing price of the Common Stock on August 31,
1999 ($9.125 per share), as reported on the NASDAQ National Market was
approximately $97,759,100. Shares of Common Stock held by executive officers and
directors and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliate. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
The number of shares of the registrant's $0.001 par value Common Stock
outstanding on August 31, 1999, was 13,200,454.
Part III incorporates by reference from the definitive proxy statement
for the registrant's 1999 annual meeting of stockholders to be filed with the
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this Form.
1
2
TABLE OF CONTENTS Page
----
PART I..................................................................................... 3
Item 1. Business...............................................................3
Item 2. Properties............................................................12
Item 3. Legal Proceedings.....................................................12
Item 4. Submission of Matters to a Vote of Securities Holders.................13
PART II.................................................................................... 16
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters...................................................16
Item 6. Selected and Supplementary Financial Data.............................17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................18
Item 7A. Quantitative and Qualitative Disclosures About Risk...................26
Item 8. Financial Statements and Supplementary Data...........................26
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................26
PART III....................................................................................27
Item 10. Directors and Executive Officers of the Registrant....................27
Item 11. Executive Compensation................................................27
Item 12. Security Ownership of Certain Beneficial Owners and Management........27
Item 13. Certain Relationships and Related Transactions........................27
PART IV.................................................................................... 28
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......28
POWER OF ATTORNEY...........................................................................45
SIGNATURES..................................................................................45
INDEX TO EXHIBITS FILED TOGETHER WITH THIS ANNUAL REPORT....................................46
2
3
PART I
ITEM 1. BUSINESS
When used in this report, the words "expects," "anticipates,"
"estimates" and similar expressions are intended to identify forward-looking
statements. Such statements, which include statements concerning the timing of
availability and functionality of products under development, product mix,
trends in average selling prices, the percentage of export sales and sales to
strategic customers and the availability and cost of products from the Company's
suppliers, are subject to risks and uncertainties, including those set forth
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- 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.
The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any such statement
is based.
Trident Microsystems, Inc. ("Trident" or the "Company") designs,
develops and markets very large scale integrated circuit ("IC") videographics
and audio products for the desktop and portable personal computer (PC) market.
The Company's graphics, video and audio controllers typically are sold with
software drivers, a BIOS and related system integration support. The Company's
strategy is to apply its design expertise, which helped it succeed in the market
for Super Video Graphics Array ("SVGA") graphics controllers and GUI
accelerators, to other high volume graphics and multimedia markets such as
Digital Media for the general mass public, flat-panel LCD controllers for
notebooks, acceleration of Digital Versatile Disc ("DVD") based live-video
playback, and three-dimensional ("3D") display for game and entertainment
applications.
The overall PC marketplace is characterized by extreme price competition
and rapid technological change as leading PC systems manufacturers compete among
themselves and other PC clone makers for market share. As a result, PC systems
manufacturers require low-cost, feature-rich, advanced graphics and multimedia
solutions. The Company believes that the systems manufacturers are moving
towards reducing system cost to the sub-$1000 level by purchasing IC graphics
and multimedia solutions that integrate functions formerly performed by several
separate components. Moreover, as DVD and video processing capabilities become
more popular, an increasing percentage of computer users require a
high-performance, low-cost graphics system that can display photo-realistic
images or display full-motion video on a sub-$1000 PC system.
The Company's overall strategy is to capture these market opportunities
by using its design expertise to develop and manufacture videographics and
multimedia products that offer a superior combination of price, performance and
features. The Company is employing this strategy in the fast-growing graphics
and multimedia markets with significant volume potential and is focusing on
providing high performance and feature-rich products that it believes will
appeal to leading PC systems manufacturers.
MARKETS AND PRODUCTS
Trident has targeted the PC desktop, portable, and multimedia markets.
The desktop market is the largest segment of the PC industry for the Company's
graphics and multimedia products and is characterized by intense price
competition and rapid technological advances. The desktop market includes
adapter card manufacturers, who build graphics controllers onto adapter cards
that serve as graphics subsystems, and PC systems manufacturers and motherboard
suppliers, who may either include adapter cards in their systems or design
graphics controllers onto their motherboards. Following the first two 3D
products of 3DImage975 and 3DImage985, the Company introduced the third 3D
product, Blade 3D.
Trident entered the portable market in 1995, and is now one of the
leading companies in the market. The Company's portable strategy is to leverage
its superior product positioning and continue to deliver the broadest product
offering in the industry. The Company's product line includes: a) 2D 64-bit
controllers, the Cyber9382 and Cyber9385 (with TV-Output), b) 3D portable
graphics controllers, the Cyber9397 and Cyber9397DVD
3
4
(3D/AGP/DVD integrated), c) embedded SDRAM graphics controllers, the Cyber9388
(2D/PCI/2MB integrated), the Cyber9525DVD (3D/AGP2x/DVD/2.5MB integrated), the
CyberBlade e4-128 (3D/AGP2x/DVD/4MB integrated), and d) integrated core-logic
graphics controller, the CyberBlade i7 (3D/AGP/DVD/north bridge). The Company's
development direction is a three-way technology drive with 3D, DVD, and embedded
SDRAM solutions. Trident's portable vision is to be "The only other chip on the
notebook(SM)" by integrating 2D/3D, DVD, AGP embedded memory, and audio in the
future into one product. The CyberBlade e4-128 and the Cyber9525DVD together
with the Cyber9388 are the tangible core of this vision.
The Company has made a major effort to design products to fill the needs
of leading PC systems manufacturers as well as the needs of adapter card
manufacturers. Sales to leading PC systems manufacturers represented
approximately 26% of net sales for fiscal 1999.
CURRENT PRODUCTS
Desktop Computer Market:
BLADE 3D 9880T This chip has all the features of its brother chip Blade
3D 9880, the major improvement of this turbo version coming from its
manufacturing process which give the turbo chip the capability to run the 3D
engine and memory in a higher clock rate. As a result the 9880T has a
performance improvement of 20% to 30 % over the 9880.
BLADE 3D 9880. This is the company's third 3D graphics accelerator for
the desktop market. It features new advanced 3D features including: 32 bit 3D
rendering engine, Trilinear filtering, anisotropic filtering and hardware
texture compression to deliver fine 3D quality for Gamers. This accelerator is
equipped with 4K internal texture cache with the advanced set-up engine to
deliver a performance with 2 to 3 times improved 3D benchmarks than the 3DImage
line
3DIMAGE985. The 3DImage985 is the Company's second product offering to
the 3D desktop market with 2x full AGP 3D performance.
3DIMAGE975. This is the Company's first 3D graphics accelerator for the
desktop market. It features a high performance 3D rendering engine, set-up
engine, TrueVideo(R) processor, motion video capture port, and ClearTV(TM) for
flicker-free TV-out support.
PROVIDIA9685. This is the Company's first 64-bit desktop GUI accelerator
with refined flicker removal for more effective TV display. Other features
include dual hardware windows for video conferencing, improved GUI acceleration
and improved MPEG display performance.
PROVIDIA9680 AND PROVIDIA9682. These pin-compatible products extend the
Company's first 64-bit GUI accelerator, the TGUI9660, to include video
acceleration. Both are capable of displaying full-motion MPEG I video when
matched with a Pentium 133 processor because the graphics chip offloads the
compute intensive tasks of Color-Space-Conversion (CSC) and scaling from the
Pentium processor. The ProVidia9682 can display live video from a capture port
for applications such as live TV or hardware MPEG decode. The ProVidia9682 also
includes Trident's TrueVideo logic which smoothes jagged edges in live video
images.
TVG9470. This device is the Company's first GUI accelerator that
displays to TV and computer monitors. Based on the Company's 32-bit TGUI9440 GUI
core, additional circuitry processes the display data to remove flicker and
scale the screen dimensions to those required for NTSC or PAL TV. The product
includes an integrated RAMDAC and clock for full integration.
4
5
TGUI9440. This mixed-signal 32-bit GUI accelerator is the Company's
third pin-compatible GUI accelerator in the TGUI94xx product line. The device is
a high-performance 32-bit graphics accelerator for the efficient use of memory
bandwidth by a 32-bit bus. This product was the first integrated GUI accelerator
to include a VESA Advanced Feature Connector (VAFC) digital analog converter
(DAC) for high resolution video-in-a-window.
TVGA8900D/DR. This is a higher-performance SVGA controller, offering
1024x768 resolution with up to 256 colors non-interlaced or up to 16.7 million
colors ("true color") at 640x480 resolution. The TVGA8900D supports the Trident
TKD8001, an integrated chip that includes a 24-bit DAC and a clock synthesizer.
TVGA8900DR has a BIOS ROM integrated with the controller chip.
TVGA9000I. This is the Company's first generation mixed-signal SVGA
controller, integrating an 8-bit pseudo color DAC and dual clock synthesizer
reducing component count, permitting lower cost and more compact system designs.
This product supports up to 1024x768 resolution with 16 colors non-interlaced at
70Hz refresh rates.
Portable Computer Market:
CYBER9525DVD. The industry's first 3D/AGP2x/DVD graphics controller with
2.5MB of embedded memory. The space and power saving allow the notebook
designers to design high performance and full feature 3D notebook with minimum
constraints. It is forward pin compatible to the CyberBlade e4-128.
CYBER9388. The Cyber9388 is the Company's first 64-bit color LCD flat
panel graphics accelerator with 2MB embedded SDRAM. It features a single-cycle
high performance 2D engine, Time Video(R) processor, motion video capture port,
dual video windows for video conferencing, dual display support of different
resolution/color-depth/refresh-rate for presentation, and ClearTV(TM) for
flicker-free TV-output support.
CYBER9397. This is the Company's first 3D color LED flat panel graphics
accelerator for the mobile computer market. It features a hardware 3D rendering
engine with triangle set-up engine, TrueVideo processor, motion video capture
port, dual video windows for videoconferencing, and ClearTV(TM) for flicker free
TV-Output support.
CYBER9397DVD. It is the follow-on product to the 9397 with additional
integrated AGP 2X and DVD hardware assist. The product provides 3D, AGP and DVD
for the mainstream notebook market.
CYBER9382 AND CYBER9385. These are the Company's first 64-bit color LCD
flat panel graphics accelerators for the mobile computer market. Their
accelerator engines are based on the desktop ProVidia9682 with the same video
capture and display capability as well as hooks for Zoom Video capture from
products such as Trident's Omega82C094. The Cyber9385 is capable of display to
NTSC or PAL TV with enhanced flicker removal. Both products support 1.5MB frame
buffers and up to 1280x1024 displays in the latest revisions.
CYBER9320. This is the Company's first color LCD flat panel graphics
accelerator for mobile computer markets. Its accelerator engine is based on the
TGUI9440 32-bit engine and brings desktop graphics performance to the notebook
PC. Other features include high quality DSTN display quality, power-down logic,
a VAFC DAC for video playback and 1024x768 dual monitor display.
OMEGA82C722G AND OMEGA82C722GX. The Omega82C722G is the Company's first
single-chip ISA-to-PCMCIA host controller supporting two PC Card slots. The
device is optimized for use in notebook computers where the saving of power and
board space is critical. Omega82C722GX is the mixed-voltage version of
Omega82C722G device. It supports PC Cards operated at either 5v or 3.3v. Both
Omega82C722G and 82C722GX are fully compliant with PCMCIA 2.1 and JEIDA 4.1.
OMEGA82C365G. The Omega82C365 is the Company's first Intel 82365SL
pin-compatible ISA-to-PCMCIA host controller supporting two PC Card slots mainly
used for new desktop PC presentation applications
5
6
requiring PC Card read/write drives. The Omega82C365G fully complies with
industry specifications such as PCMCIA 2.1, JEIDA 4.1 and the de-facto standard
of Intel 82365SL register set. This device can be combined in sequence to
support multiple slots.
Audio Product:
4DWAVE-DX. This is the Company's first PCI audio accelerator and is
based on Microsoft's PC9x and Intel's AC'97 initiatives. It provides
acceleration of up to 64 stereo audio streams and offers audio effects, such as
reverb and chorus. Its wavetable engine provides high quality audio output
without requiring expensive external components. It also accelerates 3D
positional audio for most of today's more popular games. This product is mainly
focused on the segment zero portion of the PC market by providing high
performance at a low price.
4DWAVE-NX. This is the Company's second PCI audio accelerator and is
based on the 4DWAVE-DX. It includes all of the features of the previous device
and has added 4-speaker output, SPDIF output, Serial EEPROM Support and other PC
'98/99 requirements. This product is mainly focused on the segment zero portion
of the PC market by providing high performance at a low price.
NEW PRODUCTS
The following products are being sampled in limited quantities. The
Company's future success depends upon the successful completion of these and
other new products. There can be no assurance that the Company will be able to
commence shipment of these products in a timely manner or that they will be
successful in the marketplace.
CYBERBLADE e4-128. Pin compatible with Cyber 9525DVD, it features 4MB of
embedded SDRAM memory and has the high performance Blade 3D (desktop) core
adapted for the portable market. An LVDS transmitter is integrated. It is
implemented in a 0.25mm process.
CYBERBLADE i7. The industry's first graphics controller with integrated
north bridge that is designed to fit the entry-level notebook. CBi7 supports SMA
architecture, which eliminates the need for frame buffer memory. Further cost
saving comes from the integrated north bridge that supports Socket 7 CPU. It
shares the same 3D/AGP/DVD hardware and software with the CyberBlade e4-128.
TVXPRESS. High quality TV encoder designed and optimized for
Cyber9525DVD, CyberBlade e4-128, CyberBlade i7, Blade3D (desktop) and other
Trident graphics controllers. It features support for NSTC and PAL as well as
Macrovision protection for DVD playback.
PRODUCTS UNDER DEVELOPMENT
The Company continues to invest in product development programs which it
considers crucial to its success. In particular, the Company is investing in
extensions to its current desktop, portable and multimedia product lines in an
attempt to maintain product competitiveness particularly in the important area
of 3D graphics and multimedia including video and audio. New product development
also continues in technologies where further integration is likely to be needed
and may be applied throughout the Company's product line.
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 required by the
market will not change during the development period. In addition, even if
successfully developed and shipped, there can be no assurance that new products
will be successful in the marketplace.
SALES, MARKETING AND DISTRIBUTION
The Company sells its products primarily through direct sales efforts.
The Company has sales offices in Taipei, Taiwan; Hong Kong, China; Houston,
Texas and Santa Clara, California. The Company's offices are staffed
6
7
with sales, applications engineering, technical support, customer service and
administrative personnel to support its direct customers. The Company also
markets its products through independent sales representatives and distributors.
The Company's desktop customers have been primarily Asian adapter card
manufacturers who sell their products to PC manufacturers, VARs and
distributors. However, in the past few years leading systems manufacturers have
significantly increased their share of the PC market, displacing in part some of
the Asian adapter card manufacturers. While many manufacturers based in Asia may
sell PCs to leading systems manufacturers for resale, the choice of components
for these PCs generally is made by the leading systems manufacturers. The
Company has made a major effort to design products to fill the needs of leading
PC systems manufacturers as well as the needs of adapter card manufacturers.
The Company's notebook customers have been primarily worldwide brandname
portable PC manufacturers and Taiwanese OEM/ODM portable PC manufacturers. The
product is distributed through brandname sales channels. With long design-in
cycles, the Company has solid technical support to ensure successful product
launching and delivery.
Trident's future success depends in large part on the success of its
sales to leading systems manufacturers. The Company continues to focus its sales
and marketing efforts with the goal of increasing sales to the leading PC
systems manufacturers and OEM channels. Competitive factors of particular
importance in such markets include performance and the integration of functions
on a single IC chip.
During fiscal 1999, the Company generated 73% of its revenues from Asia
and 27% from North America and the rest of the world. Major systems
manufacturers often take delivery of their products in Asia for production
purposes, and such sales by the Company are reflected in the Company's revenues
in Asia. Sales to two customers, Fujitsu and Innoquest accounted for
approximately 13% and 12% of net sales, respectively, for fiscal 1999. A small
number of customers frequently account for a majority of the Company's sales in
any quarter. However, sales to any particular customer may fluctuate
significantly from quarter to quarter. Future operating performance may be
dependent in part on the ability to replace significant customers or win new
design-ins with current customers from one quarter to the next. Fluctuations in
sales to key customers may adversely affect the Company's operating results in
the future. For additional information on foreign and domestic operations, see
Note 9 of Notes to Financial Statements.
MANUFACTURING
Trident has adopted a "fabless" manufacturing strategy whereby Trident
contracts-out its wafer fabricating needs to qualified contractors that it
believes provide cost, technology or capacity advantages for specific products.
As a result, the Company has generally been able to avoid the significant
capital investment required for wafer fabrication facilities and to focus its
resources on product design, quality assurance, marketing and customer support.
The Company has, however, made a substantial investment in a manufacturing joint
venture as described below. Trident's wholly-owned subsidiary, Trident
Microsystems (Far East) Ltd. ("Trident Far East"), manages the manufacturing
operations of the Company.
In order to obtain an adequate supply of wafers, especially wafers
manufactured using advanced process technologies, the Company entered into a
joint venture agreement in August 1995 with United Microelectronics Corporation
("UMC"), a Taiwanese publicly traded company and one of the Company's current
foundries, under which the Company invested a certain amount of New Taiwan
dollars, equivalent to approximately U.S.$49.3 million for a 7.25% equity
interest in a joint venture with UMC and other venture partners. The Company has
been guaranteed a certain percentage of total wafer supply from the wafer
fabrication facility of the venture, United Integrated Circuits Corporation
("UICC"). The UMC agreement is expected to provide the Company with substantial
additional capacity; however, it will also expose the Company to certain
financial risk if the Company does not obtain enough purchase orders from its
customers to consume the capacity or if the joint venture is not successful in
its operations. Part of the joint venture foundry facility was destroyed in a
fire on October 3, 1997. In
7
8
June 1999 the Company announced that it had received confirmation from UMC that,
subject to the approval of the UMC shareholders and the Taiwan government, the
UICC joint venture will be consolidated with UMC by the end of 1999. Trident
expects to receive approximately 46.5 million shares of UMC stock in the
consolidation. These shares represent about 0.5% of the outstanding stock of
UMC. As the consolidation is subject to UMC shareholder approval, no assurance
can be given as to whether such shares will be received. The Company has not
determined whether or when it will sell such shares and the shares may be
subject to trading or other restrictions. Following the consolidation, Trident
will continue to have a guaranteed wafer supply from UMC approximately the same
in quantity as it had with UICC.
In fiscal 1999, the Company's primary foundries were UMC and Taiwan
Semiconductor Manufacturing Company ("TSMC"). The Company also received
additional capacity from Samsung Semiconductor, Inc. and Winbond Electronics
Corporation. In January 1997, the Company renegotiated its June 1995 wafer
purchase agreement with TSMC. This agreement committed the Company to purchase
and the supplier is to provide a certain number of wafers each year. In January
1997 TSMC reimbursed U.S.$14.4 million to Trident in conclusion of this
agreement, but the Company and TSMC continue to maintain their semiconductor
foundry relationship. The Company will continue to explore arrangements for
additional capacity commitments, although there is no assurance that any
additional agreements will be executed, or that additional capacity is required.
The Company purchases product in wafer form from the foundries and
manages the contracting with third parties for the chip packaging and testing.
In order to manage the production back-end operations, the Company has been
adding personnel and equipment to this area. The Company's goal is to increase
the quality assurance of the products while reducing manufacturing cost. To
ensure the integrity of the suppliers' quality assurance procedures, the Company
has developed and maintained test tools, detailed test procedures and test
specifications for each product and requires the foundry and third party
contractors to use those procedures and specifications before shipping finished
products. The Company has experienced few customer returns based on the quality
of its products. However, Trident's future return experience may vary because
its newer, more complex products are more difficult to manufacture and test. In
addition, some of its customers, including major PC systems manufacturers may
subject those products to more rigid testing standards than in the past.
The Company's reliance on third party foundries and assembly and testing
houses involves several risks including the absence of adequate capacity, the
unavailability of or interruptions in access to certain process technologies,
and reduced control over delivery schedules, manufacturing yields, quality
assurance and costs. The Company conducts business with certain foundries by
delivering written purchase orders specifying the particular product ordered,
quantity, price, delivery date and shipping terms and, therefore, except as set
forth in the above-mentioned contracts or agreements, such foundries are not
obligated to supply products to the Company for any specific period, in any
specific quantity or at any specified price, except as may be provided in a
particular purchase order.
While the Company has obtained and continues to seek additional
capacity, the qualification process and the production ramp-up for additional
foundries has in the past taken and could in the future take longer than
anticipated. There can be no assurance that such 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. Constraints or delays in the supply of the Company's products, whether
because of capacity constraints, unexpected disruptions at the foundries or
assembly or testing houses, delays in additional production at existing
foundries or in obtaining additional production from existing or new foundries,
shortages of raw materials, or other reasons, could result in the loss of
customers and other material adverse effects on the Company's operating results,
including effects that may result should the Company be forced to purchase
products from higher cost foundries or pay expediting charges to obtain
additional supply. In addition, to the extent the Company elects to use multiple
sources for certain products, customers may be required to qualify multiple
sources, which could adversely affect the customers' desire to design-in the
Company's products.
RESEARCH AND DEVELOPMENT
The Company conducted substantially all of its product development
in-house and had a staff of 237
8
9
research and development personnel as of June 30, 1999. The Company is focusing
its development efforts primarily on the development of more advanced graphics
controllers, including 3D graphics controllers, flat panel controller products
for notebook PCs and multimedia products. In addition, the Company intends to
continue to devote significant resources to the development of a broad range of
high-performance, proprietary software drivers. In anticipation of future market
demand, the Company is investing in a variety of new technologies through
licensing and purchase arrangements. These technologies may be incorporated in
the Company's future products, providing additional functionality and
integration.
COMPETITION
The markets in which the Company competes are highly competitive and the
Company expects that competition will increase. The principal factors of
competition in the Company's markets include, but are not limited to price,
performance, the timing of new product introductions by the Company and its
competitors, product features, the emergence of new graphics and other PC
standards, level of integration of various functions, quality and customer
support. The Company's principal current competitors in graphics include 3Dfx
Interactive, Inc., ATI Technologies, Inc., Chips and Technologies, Inc. (an
Intel subsidiary), Intel Corporation, Matrox, NVIDIA Corporation, NeoMagic,
Inc., S3 Inc. and Silicon Integrated Systems and potential competitors including
certain large semiconductor manufacturers such as National Semiconductor
Corporation, and emerging semiconductor manufacturers. Current competitors in
audio include Creative Labs, Inc., ESS Technology, Inc., and Cirrus Logic, Inc.
Certain of the Company's current competitors and many potential competitors have
significantly greater technical, manufacturing, financial and marketing
resources than the Company.
Leading PC systems manufacturers have increased market share in desktop
and portable PC systems in recent years. The Company believes that performance,
features and quality are particularly important in the North American, Japanese
and European systems manufacturer markets, and that integration of various
functions on a single IC is becoming increasingly important in these markets.
While the Company has recently gained entry to these geographic markets, there
can be no assurance that the Company will continue to be able to compete
successfully as to price or any other factor or that the Company will continue
to be successful in its efforts to expand sales in these markets. The failure of
the Company to meet the technological and pricing challenges of its competition
would have an adverse effect on the Company's results of operations.
INTERNATIONAL OPERATIONS
The Company's wholly-owned subsidiary, Trident Far East, maintains
offices in Hong Kong, China and Taipei, Taiwan. Trident Far East is responsible
for the manufacturing of the Company's products and is principally responsible
for international sales activities and for operation of the Hong Kong and Taiwan
offices. The Hong Kong office provides sales and technical support for customers
in Hong Kong and logistical support for customers in Hong Kong and Taiwan. The
Taiwan office provides sales and technical support for customers in their
respective regions. The Taiwan office directly hires its own employees. The
Company has established research and development facilities in Hsinchu, Taiwan
and Shanghai, China.
During fiscal 1999, 1998 and 1997, sales to OEM, ODM, and adapter card
customers in Asia accounted for approximately 73%, 84% and 74% of the Company's
net sales, respectively, and the Company anticipates that sales to customers in
Asia will continue to account for a substantial percentage of sales. In
addition, the foundries that manufacture the Company's products are located in
Asia. Due to this concentration of international sales and manufacturing
capacity in Asia, the Company is subject to the risks of conducting business
internationally, including unexpected changes in regulatory requirements,
fluctuations in the U.S. dollar which could increase the sales price in local
currencies of the Company's products in foreign markets, tariffs and other
barriers and restrictions, and the burdens of complying with a wide variety of
foreign laws. In addition, the Company is subject to general geopolitical risks,
such as political and economic instability and changes in diplomatic and trade
relationships, in connection with its sales, support and third-party fabrication
efforts in Hong Kong, Taiwan and elsewhere. The Company's sales have been
adversely affected recently by the general economic decline in Asia. Also,
political instability or significant changes in economic policy could disrupt
the Company's operations in
9
10
foreign countries or result in the curtailment or termination of such
operations. While the Company has not experienced any other material adverse
effects on its operations as a result of other regulatory or geopolitical
factors, there can be no assurance that such factors will not adversely impact
the Company's operations in the future or require the Company to modify its
current business practices.
INTELLECTUAL PROPERTY
The Company attempts to protect its trade secrets and other proprietary
information primarily through agreements with customers and suppliers,
proprietary information agreements with employees and consultants and other
security measures. Although the Company intends to protect its rights
vigorously, there can be no assurance that these measures will be successful. We
have filed one U.S. patent application relating to our technology. There can be
no assurance that this application will be approved, that any issued patents
will protect our intellectual property or that they will not be challenged by
third parties. Furthermore, there can be no assurance that others will not
independently develop similar or competing technology or design around any
patents that may be issued.
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. From time to time, the
Company has received notices claiming that it has infringed third-party patents
or other intellectual property rights. To date, licenses generally have been
available to the Company where third-party technology was necessary or useful
for the development or production of the Company's products. However, NeoMagic
Corporation has filed suit alleging that the Company's embedded DRAM graphics
accelerators infringe their patents. The Company has responded and filed a
counterclaim, which is described in more detail under "Item 3. Legal
Proceedings." There can be no assurance that this litigation will be resolved in
favor of the Company or that third parties will not assert additional claims
against the Company with respect to existing or future products or that licenses
will be available on reasonable terms, or at all, with respect to any
third-party technology. The NeoMagic litigation or similar litigation to
determine the validity of any third-party claims could result in significant
expense to the Company and divert the efforts of the Company's technical and
management personnel, whether or not such litigation is determined in favor of
the Company. In the event of an adverse result in any such litigation, the
Company could be required to expend significant resources to develop
non-infringing technology or to obtain licenses to the technology that is the
subject of the litigation. There can be no assurance that the Company would be
successful in such development or that any such licenses would be available.
Patent disputes in the semiconductor industry have often been settled through
cross licensing arrangements. Because the Company currently does not have a
portfolio of patents, the Company may not be able to settle any alleged patent
infringement claim through a cross-licensing arrangement. In the event any third
party made a valid claim against the Company or its customers and a license was
not made available to the Company on commercially reasonable terms, the Company
would be adversely affected. In addition, the laws of certain countries in which
the Company's products have been or may be developed, manufactured or sold,
including the People's Republic of China, Taiwan and Korea, may not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States of America.
We may in the future initiate claims or litigation against third parties
for infringement of our proprietary rights to determine the scope and validity
of our proprietary rights. Any such claims, with or without merit, could be
time-consuming, result in costly litigation and diversion of technical and
management personnel or require us to develop non-infringing technology or enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on acceptable terms, if at all. In the event of a
successful claim of infringement and our failure or inability to develop
non-infringing technology or license the proprietary rights on a timely basis,
our business, operating results and financial condition could be materially
adversely affected.
Trident and TrueVideo are registered trademarks, and Blade 3D 9880T,
Blade 3D 9880, 3DImage985, 3DImage975, ProVidia9685, ProVidia9680, ProVidia9682,
TVG9470, TGUI9440, TVGA8900D/DR,, TVGA9000i, Cyber9525DVD, Cyber9388, Cyber9397,
Cyber9397DVD, Cyber9382, Cyber9385, Cyber9320, Omega82C722G, Omega82C722GX,
Omega82C365G, 4DWAVE-DX, 4DWAVE-NX, CyberBlade e4-128, CyberBlade i7, TVXpress
are trademarks of the Company. Windows, Windows 95, Windows NT and Video for
Windows are trademarks of Microsoft Corporation. OS/2 is a trademark of
International Business Machines Corporation. Other trademarks used herein are
the property of their respective owners.
10
11
BACKLOG
Because the Company's business is characterized by short lead-time
orders and quick delivery schedules, the Company seeks to ship products within a
few weeks of receipt of orders. As a result, the Company operates without
significant backlog, and relies on bookings each quarter to comprise a
predominant portion of its sales for that quarter. Additionally, purchase orders
may be cancelable without significant penalty or subject to price
renegotiations, changes in unit quantities or delivery schedules to reflect
changes in customers' requirements or manufacturing availability. Consequently,
the Company does not believe that backlog is a reliable indicator of future
sales.
SEGMENTS
Trident operates in the videographics and audio segments as described
above.
EMPLOYEES
As of June 30, 1999, the Company had 348 full time employees, including
237 in research and development, 40 in product testing, quality assurance and
operations functions, 47 in marketing and sales and 24 in finance, human
resources, and administration. Competition for qualified personnel in the
semiconductor, software and the PC industry in general is intense in Silicon
Valley where the Company is located. The Company's future success will depend in
great part on its ability to continue to attract, retain and motivate highly
qualified technical, marketing, engineering and management personnel. The
Company's employees are not represented by any collective bargaining agreements,
and the Company has never experienced a work stoppage. The Company believes that
its employee relations are good.
11
12
ITEM 2. PROPERTIES
The Company leases a building of approximately 63,000 square feet on
2450 Walsh Avenue in Santa Clara, California, pursuant to a lease which expires
in June 2001. This building is used as the Company's headquarters and includes
development, marketing and sales, and administrative offices. The Company also
leases a 5,400 square foot research and development facility in Chandler,
Arizona. The Company leases office space for a sales office in Houston, Texas.
This sales office totals approximately 500 square feet. Other Company leases
include a 10,000 square foot office in Kowloon, Hong Kong, China, for the Hong
Kong branch office of the Cayman Islands subsidiary, an 8,000 square foot sales
office in Taipei, Taiwan, a 32,000 square foot research and development facility
in Hsinchu, Taiwan, and an 11,000 square foot research and development facility
in Shanghai, China.
ITEM 3. LEGAL PROCEEDINGS
On December 14, 1998, NeoMagic Corporation (NASDAQ: NMGC), filed suit in
the United States District Court for the District of Delaware against 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. That
motion has not been ruled on. The case is currently set for trial on March 27,
2000.
In 1998 and 1999 Trident Microsystems, Inc. and VIA Technologies, Inc.
entered into written agreements for the joint development of integrated 3D
graphics and core logic devices for notebook and desktop personal computers. On
July 22, 1999, Trident Microsystems, Inc. and Trident Technologies, Inc. filed a
lawsuit against VIA Technologies, Inc., among other defendants, in the United
States District Court for the Northern District of California. On July 30, 1999,
Trident filed a first amended complaint alleging patent infringement, copyright
infringement, breach of contract, fraud, misappropriation of trade secrets,
breach of fiduciary duty, specific performance, breach of confidence, inducement
of breach of contract, intentional interference with economic relations,
recission and unfair competition. Trident's complaint requests actual damages
sustained by Trident, which are yet to be determined, as well as $200,000,000 in
punitive damages. On August 23, 1999, VIA Technologies, Inc. filed an answer and
counterclaim against Trident Microsystems, Inc., Trident Technologies, Inc. and
Frank Lin seeking a declaratory judgment on Trident's patent and copyright
infringement claims, damages for breach of contract, intentional interference
with contractual relations, intentional interference with prospective economic
relations, misappropriation of trade secrets and unfair competition.
Due to the fast pace of the PC graphics industry and in order to protect
its intellectual property, on August 11, 1999, Trident Microsystems, Inc. and
Trident Technologies, Inc. filed a motion for preliminary injunction seeking to
prevent the shipment of any VIA products, including but not limited to any
products containing Trident's proprietary software technology. On August 31,
1999, VIA Technologies, Inc. filed its opposition and a counter-motion for a
preliminary injunction seeking to force Trident to provide software drivers and
software support to VIA Technologies, Inc.'s customers. A hearing on these
motions has been continued pending settlement discussions between the parties.
In July of 1999 Trident filed a Declaratory Judgement action in the
Federal District Court of Delaware against Real 3D Corporation seeking a ruling
by the court which would declare invalid and/or not infringed certain Real 3D
patents being asserted against major Trident notebook PC customers. This filing
of a Declaratory Judgement action follows a complaint filed by Real 3D against a
number of other graphics companies for alleged infringement of three Real 3D
patents which relate to graphics acceleration technology. Real 3D has also
asserted these patents against major OEM PC manufacturers. Currently Trident is
not a party to that litigation.
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.
12
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None.
13
14
EXECUTIVE OFFICERS OF THE REGISTRANT
As of June 30, 1999, the executive officers of the Company, who are
elected by and serve at the discretion of the Board of Directors, were as
follows:
Name Age Position Employed Since
- ---- --- -------- --------------
Frank C. Lin 54 President, Chief Executive 1987
Officer and Chairman of the Board
Jung-Herng Chang, Ph.D. 43 Senior Vice President, Engineering 1992
Peter Jen 52 Senior Vice President, Asia 1988
Operations and Chief Accounting
Officer
Gerald Liu, Ph.D. 42 Senior Vice President, Marketing 1996
W. Steven Rowe, J.D. 49 Vice President of 1995
Administration/Human Resources
and Acting Chief Financial Officer
Mr. Lin founded Trident in July 1987 and has served in his present
position since that time. His career spans 25 years in the computer and
communications industries. Prior to Trident, he was Vice President of
Engineering and co-founder of Genoa Systems, Inc., a graphics and storage
product company. Before Genoa, Mr. Lin worked for GTE, ROLM, and was a senior
manager at Olivetti Advanced Technical Center in Cupertino, CA. He holds a
M.S.E.E. from the University of Iowa and an B.S.E.E. from National Chiao Tung
University, Taiwan. Mr. Lin is also a board member of Monte Jade Science and
Technology Association and United Integrated Circuits Corporation ("UICC"). UICC
is a joint venture among UMC, Trident and other fabless semiconductor companies.
Dr. Chang joined the Company in July 1992. He was appointed to his
present position in January 1998. He was appointed Vice President, Engineering
in July 1994, and served as Chief Technical Officer from July 1992 through June
1994. From October 1988 through July 1992, he was a hardware design manager at
Sun Microsystems, Inc., a workstation company. From September 1985 through
September 1988, he was a research member at IBM's Thomas J. Watson Research
Center. Dr. Chang holds a Ph.D. in Computer Science and a M.S. in Electrical
Engineering and Computer Science from the University of California, Berkeley,
and a B.S. in Electrical Engineering from the National Taiwan University.
Mr. Jen joined the Company in August 1988. He was appointed to the
position of Chief Accounting Officer in September 1998 and Senior Vice
President, Asia Operations in January 1998. He was appointed to the position of
Vice President, Asia Operations in April 1995, and served as General Manager of
Asia Operations from April 1994 to April 1995. He served as Vice President,
Operations from September 1992 to March 1994, and served as Vice President,
Finance from October 1990 through August 1992. From September 1985 to July 1988,
he was Controller at Genoa Systems, Inc., a graphics chipset design company.
Prior to that time, Mr. Jen served in finance and operations positions for
various corporations, including Bristol-Myers (Taiwan), Pacific Glass
Corporation, a subsidiary of Corning Glass Works, and Philips Telecommunicatie
Industrie, B.V. Mr. Jen holds an M.B.A. in Marketing from Central Missouri State
University and a B.S. in Accounting from National Taiwan University.
14
15
Dr. Liu was appointed to his present position in January 1998. With
seventeen years of experiences in microelectronics related and software
industries, he joined Trident in January 1996 through its acquisition of Omega
Micro, Inc. Prior to joining Trident, Dr. Liu served eight years as founder and
president of venture-backed Knights Technology and later its affiliate Omega
Micro concurrently, a notebook IC design company acquired by Trident in January
1996. He continued to serve as a board member of Knights Technology until its
acquisition by Electroglas (NASDAQ: EGLS). Prior to founding Knights Technology,
he had been with Fairchild Semiconductor. He also was President of the Chinese
Institute of Engineers, San Francisco Bay Chapter and a founding board member of
the Chinese Software Professional Association. He is currently senior advisor to
a venture capital fund and business advisor to several companies in the
telecommunication and Internet industries. He holds a Ph.D. in Computer Science
from the University of California, Berkeley, and a M.S.E.E. from the University
of Illinois, Chicago, and an B.S.E.E. from National Taiwan University.
Mr. Rowe joined the Company in June 1995. He was appointed as acting
Chief Financial Officer in March of 1998. From 1994 to 1995 Mr. Rowe served in a
multi-functional role including administration and human resources at OPTi, Inc.
From 1992 to 1994 he was the Corporate Director of Administration and Human
Resources for Olivetti North America, a division of Ing. C. Olivetti & C. Spa.,
Ivrea, Italy. Prior to Olivetti Mr. Rowe spent two years in private consulting
to various high technology companies including Harris Microwave and General
Electric. He is a past board member for the Society of Human Resources
Management. Mr. Rowe holds a B.A. in Public Law and an M.A. in
Speech/Communications from California State University, Chico, and a Juris
Doctorate from Lincoln Law.
15
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's stock has been traded on the NASDAQ National Market since
the Company's initial public offering on December 16, 1992 under the NASDAQ
symbol TRID. The following table sets forth, for the periods indicated, the high
and low closing sales prices for the Company's common stock as reported by
NASDAQ:
Year Ended June 30, High Low
------------------- ------- -------
1998
----
First Quarter $19.375 $10.875
Second Quarter 16.875 7.688
Third Quarter 10.250 7.630
Fourth Quarter 7.875 5.000
1999
----
First Quarter $ 5.313 $ 2.625
Second Quarter 5.313 3.031
Third Quarter 7.688 4.188
Fourth Quarter 9.563 5.375
As of June 30, 1999, there were approximately 190 registered holders of
record of the Company's common stock.
The Company has never paid cash dividends on its common stock. The
Company currently intends to retain earnings, if any, for use in its business
and does not anticipate paying any cash dividends in the foreseeable future.
16
17
ITEM 6. SELECTED AND SUPPLEMENTARY FINANCIAL DATA
TRIDENT MICROSYSTEMS, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
Year ended June 30,
------------------------------------------------------------
(in thousands, except per share data) 1999 1998 1997 1996 1995
--------- --------- -------- -------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net Sales $ 89,255 $ 113,002 $177,934 $168,089 $106,766
Income (loss) from operations (14,251) (9,520) 20,553 22,742 9,776
Net Income (loss) (12,195) (5,106) 15,340 16,860 8,011
Basic earnings (loss) per share (0.94) (0.39) 1.20 1.38 0.69
Diluted earnings (loss) per share (0.94) (0.39) 1.09 1.26 0.61
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents, and short-term and investments $ 32,469 $ 36,886 $ 59,945 $ 41,228 $ 60,636
Working capital 37,498 47,881 64,952 58,618 61,610
Total assets 110,910 118,427 139,516 127,510 88,665
Long-term debt, less current portion 82 350 707 -- --
Total stockholders' equity 93,381 104,891 109,557 90,184 66,141
SUPPLEMENTARY QUARTERLY CONSOLIDATED FINANCIAL DATA
FISCAL 1999 QUARTER ENDED
-------------------------------------------------------
(in thousands, except per share data) JUNE 30 MARCH 31 DECEMBER 31 SEPTEMBER 30
--------- --------- ----------- ------------
Net sales $ 21,473 $ 23,253 $ 20,652 $ 23,876
Gross margin 6,528 7,127 8,056 6,958
Income (loss) from operations (4,447) (4,259) (2,322) (3,195)
Net income (loss) (4,022) (3,787) (1,757) (2,709)
Basic earnings (loss) per share (0.30) (0.29) (0.14) (0.21)
Diluted earnings (loss) per share (0.30) (0.29) (0.14) (0.21)
FISCAL 1998 QUARTER ENDED
-------------------------------------------------------
(in thousands, except per share data) JUNE 30 MARCH 31 DECEMBER 31 SEPTEMBER 30
--------- --------- ----------- ------------
Net sales $ 19,274 $ 28,249 $ 26,939 $ 38,539
Gross margin 4,088 9,731 8,234 15,546
Income from operations (7,577) (1,858) (3,529) 3,443
Net income (5,307) (923) (1,949) 3,073
Basic earnings per share (0.41) (0.07) (0.15) 0.24
Diluted earnings per share (0.41) (0.07) (0.15) 0.21
17
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
When used in this discussion, the words "expects," "anticipates,"
"estimates" and similar expressions are intended to identify forward-looking
statements. Such statements, which include statements concerning the timing of
availability and functionality of products under development, product mix,
trends in average selling prices, the percentage of export sales and sales to
strategic customers and the availability and cost of products from the Company's
suppliers, are subject to risks and uncertainties, including those set forth
below under "Factors That May Affect Our Results," that could cause actual
results to differ materially from those projected. These forward-looking
statements speak only as of the date hereof. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any statement is based.
ANNUAL RESULTS OF OPERATIONS
The following table sets forth the percentages that consolidated
statement of operations items are to net sales for the years ended June 30,
1999, 1998 and 1997:
Year ended June 30,
----------------------------
1999 1998 1997
---- ---- ----
Net sales 100% 100% 100%
Cost of sales 68 67 64
--- --- ---
Gross margin 32 33 36
Research and development 29 25 12
Selling, general and administrative 19 17 12
--- --- ---
Income (loss) from operations (16) (9) 12
Interest income, net 2 2 1
--- --- ---
Income (loss) before provision for income taxes (14) (7) 13
Provision (benefit) for income taxes -- (2) 4
--- --- ---
Net income (loss) (14) (5) 9
=== === ===
Net Sales
Net sales in fiscal 1999 decreased to $89.3 million, or 21%, from $113.0
million reported in fiscal 1998. The decrease in net sales was primarily due to
decreases in unit volume shipments of approximately 30% of graphical user
interface (GUI) accelerators and graphics controllers and a decline in average
selling prices (ASPs) in the desktop area in fiscal 1999 as compared to fiscal
1998. Sales of portable products of $51.4 million were approximately 58% of the
Company's net sales in fiscal 1999 as compared to $44.9 million or 40% of net
sales in fiscal 1998. Sales of GUI accelerator desktop products were
approximately $33.8 million or 38% of the Company's net sales in fiscal 1999 as
compared to approximately $64.0 million or 57% in fiscal 1998.
Net sales in fiscal 1998 decreased to $113.0 million, or 36%, from
$177.9 million reported in fiscal 1997. The decrease in net sales was primarily
due to a 26% decline in unit volume shipments and decreases in ASPs for GUI
accelerators and graphics controllers in fiscal 1998 as compared to fiscal 1997.
Sales of portable products of $44.9 million were approximately 40% of the
Company's net sales in fiscal 1998 as compared to $65.8 million or 37% of net
sales in fiscal 1997. Sales of GUI accelerator desktop products were
approximately $64.0 million or 57% of the Company's net sales in fiscal 1998 as
compared to approximately $92.5 million or 52% in fiscal 1997.
18
19
The Company has made a major effort to design products to fill the
needs of leading PC systems manufacturers as well as the needs of adapter card
manufacturers. Sales to leading PC systems manufacturers represented
approximately 26% of net sales for fiscal 1999, an increase from 25% in fiscal
1998, and a decrease from 41% in fiscal 1997. Sales to Asian customers,
primarily in Hong Kong, Taiwan, Korea and Japan, accounted for 73%, 84% and 74%
of net sales in fiscal 1999, 1998, and 1997, respectively. Sales to two
customers, Fujitsu and Innoquest, accounted for approximately 13% and 12% of net
sales for fiscal 1999, respectively. Sales to two customers, Union Computer and
Fujitsu, accounted for approximately 15% and 11% of net sales for fiscal 1998,
respectively, and sales to three customers, IBM, Union Computer, and Jaton
Corporation accounted for approximately 21%, 12%, and 11% of net sales for
fiscal 1997, respectively. Substantially all of the sales transactions were
denominated in U.S. dollars during all periods. The Company derives a
significant portion of its revenues from sales to distributors. Sales to
distributors represented 12% and 17% of net sales during the twelve months ended
June 30, 1999 and 1998, respectively. 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.
The Company plans to develop new and higher-performance GUI
accelerators, graphics controllers and multimedia products to sell to existing
customers as well as new customers in Asia, North America and Europe. The
Company's future success depends upon its successful introduction of these and
other new products on a regular and timely basis and upon those products meeting
customer requirements. There can be no assurance that the Company will be able
to complete the development of new products or to commence shipments of new
products in a timely manner, or that product specifications will not change
during the development period. In addition, even if such new products are
successfully developed and shipped, there can be no assurance that they will be
successful in the marketplace.
Gross Margin
Trident's gross margin decreased to 32% in fiscal 1999 from 33% in
fiscal 1998. Gross margins were generally lower in fiscal 1999 because of
decreasing prices in desktop computers, and an increase in the cost of embedded
DRAM for portable computers. Trident's gross margin decreased to 33% in fiscal
1998 from 36% in fiscal 1997 due to decreasing prices in the personal computer
industry and a product mix which was more heavily weighted from desktop
computers which have lower margins than portable computer products.
The Company believes that the prices of high-technology products decline
over time, as competition increases and new, advanced products are introduced.
The Company expects ASPs of existing products to continue to decline, although
the ASPs of the Company's entire product line may remain constant or increase as
a result of introductions of new higher-performance products often with
additional functionality which are planned to be sold at higher prices. The
Company's strategy is to maintain and improve gross margins by (1) developing
new products that have higher margins through its custom design methodology and
migration to new process technology, and (2) reducing manufacturing costs by
large-volume production. There is no assurance that the Company will be able to
develop and introduce new products on a timely basis or that it can reduce
manufacturing costs.
Research and Development
Research and development expenditures decreased to $26.3 million in
fiscal 1999 from $28.2 million in fiscal 1998, and increased from $22.1 million
in fiscal 1997. Research and development expenditures as a percentage of net
sales were 29%, 25% and 12% in fiscal 1999, 1998 and 1997, respectively. The
decrease in expenditures in fiscal 1999 compared to fiscal 1998 was primarily
due to the Company's cost reduction efforts in fiscal 1999. The increase in
expenditures in fiscal 1998 compared to fiscal 1997 was primarily due to an
increase in spending in multimedia engineering, graphics engineering, the Taiwan
Research and Development Center and the start-up of the Shanghai Research and
Development Center.
19
20
Selling, General and Administrative
Selling, general and administrative expenditures decreased to $16.6
million in fiscal 1999 from $19.0 million in fiscal 1998 and were $21.9 million
in fiscal 1997. Selling, general and administrative expenditures as a percentage
of net sales were 19%, 17% and 12% in fiscal 1999, 1998 and 1997, respectively.
Selling expenditures were $10.9 million in fiscal 1999 as compared to $13.5
million and $14.7 million in fiscal 1998 and 1997, respectively. General and
administrative expenditures were $5.7 million in fiscal 1999 as compared to $5.5
million and $7.2 million in fiscal 1998 and 1997, respectively. Selling costs
have declined in fiscal years 1999 and 1998 due to the slow-down in personal
computer sales and reductions in marketing personnel. General and administrative
expenditures were higher in fiscal 1999 than in fiscal 1998 primarily due to an
increase in legal services. General and administrative expenditures were lower
in fiscal 1998 than in fiscal 1997 primarily due to reductions in bonus
expenses, personnel, and consulting services. As a result of the Company's cost
reduction efforts, the Company expects selling, general and administrative
expenditures to remain at or below the levels for fiscal 1999 during fiscal
2000.
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 the
prevailing interest rates. Net interest income decreased to $2.0 million in
fiscal 1999 from $2.4 million in fiscal 1998 due to lower cash balances in
higher yielding short-term investments. Net interest income increased to $2.4
million in fiscal 1998 from $2.0 million in fiscal 1997 due to cash investments
being held in higher yielding certificates of deposit.
Provision for Income Taxes
No provision for income tax was taken in fiscal year 1999 due to the
Company's loss situation. As a percentage of income before income taxes, the
provision (benefit) for income tax was (28)% for fiscal year 1998, and 32% for
fiscal years 1997. Based on a number of factors, as of June 30, 1999 the Company
has provided a full valuation allowance. These factors include primarily the
inability to carryback tax attributes to prior federal tax returns as well as
state returns, recent operating losses incurred by the Company, and the fact
that the market in which the Company competes is intensely competitive and
characterized by rapidly changing technology.
Factors That May Affect Our Results
TRIDENT HAS A HISTORY OF LOSSES, EXPECTS FUTURE LOSSES AND CANNOT ASSURE YOU
THAT IT WILL ACHIEVE PROFITABILITY
We have experienced operating loses in the years ended June 30, 1998 and
1999 and expect to report operating losses for the next several quarters. We
cannot accurately predict when we will achieve profitability. Future performance
will substantially depend upon numerous factors, such as:
- timely introducing 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; and
- funding increased levels of research and development.
We anticipate that we will incur significant sales and marketing,
product development and general and administrative expenses and, as a result, we
will need to generate significantly higher revenue to achieve and sustain
profitability. Trident's management is diligently trying to control operating
expenses to enable Trident to achieve profitability. However, there is no
guarantee that management's efforts will be successful.
20
21
A NUMBER OF FACTORS COULD CONTINUE TO CAUSE TRIDENT'S QUARTERLY FINANCIAL
RESULTS TO SIGNIFICANTLY FLUCTUATE
We plan to tightly control our operating expenses to expand our sales
and marketing activities, broaden our customer support capabilities, develop new
distribution channels and fund increased levels of research and development.
Our quarterly revenue and operating results have varied significantly in
the past and may fluctuate significantly in the future due to a number of
factors including:
- 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 manage product transitions;
- announcements and new product introductions by our competitors;
- our ability to achieve required cost reductions;
- our ability to attain and maintain production volumes and quality
levels for our products;
- delayed new product introductions;
- unfavorable responses to new products;
- adverse economic conditions, particularly in Asia;
- the mix of products sold and the mix of distribution channels through
which they are sold; and
- availability of foundry and assembly capacities.
IF A KEY DISTRIBUTOR OR OTHER SIGNIFICANT CUSTOMER CANCELS OR DELAYS A LARGE
PURCHASE, TRIDENT'S REVENUES MAY DECLINE AND THE PRICE OF ITS STOCK MAY FALL
To date, a limited number of distributors and customers have accounted
for a significant portion of our revenue. If any of our large distributors or
customers stop or delay 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, particularly in light of the high sales price per unit of
our products and the length of our sales cycles.
While our financial performance depends on large orders from a few key
distributors and other significant customers, we do not have binding commitments
from any of them. For example:
- our customers can stop purchasing and our distributors can stop
marketing our products at any time;
- our distributor agreements generally are not exclusive with no
obligation of the distributor to renew the agreements; and
- our distributor agreements generally do not require minimum purchases.
We have established a reserve program which, under specified conditions,
enables distributors to return products to us. The amount of potential product
returns is estimated and provided for in the period of the sale. Actual returns
could differ from our estimates.
TRIDENT DEPENDS UPON INTERNATIONAL SALES FOR MUCH OF ITS REVENUE AND TRIDENT'S
ABILITY TO SUSTAIN AND INCREASE ITS INTERNATIONAL SALES DEPENDS ON SUCCESSFULLY
EXPANDING ITS INTERNATIONAL OPERATIONS
Because our distributors sell our products worldwide, changes in the
global graphics marketplace, such as the shift in market share from Asian clone
makers to leading North American PC systems manufacturers, have affected and
will continue to affect our operating results. Our revenues have been and are
expected to be generated primarily from Asian customers, particularly those of
Taiwan and Hong Kong. Additionally, our ability to grow
21
22
will depend in part on the expansion of international sales and operations which
have and are expected to constitute a significant portion of our sales. The
failure of our distributors to sell our products internationally would limit our
ability to sustain and grow our revenue. In addition, there are a number of
risks arising from our international business, including:
- longer accounts receivable collection cycles;
- difficulties in managing operations across disparate geographic areas;
- difficulties associated with enforcing agreements through foreign
legal systems;
- 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.
TRIDENT EXPECTS THE AVERAGE SELLING PRICES OF ITS PRODUCTS TO DECREASE RAPIDLY
WHICH MAY REDUCE GROSS MARGINS OR REVENUE
The graphics controller industry has experienced rapid erosion of average
selling prices due to a number of factors, including competitive pricing
pressures and rapid technological change. We may experience substantial
period-to-period fluctuations in future operating results due to the erosion of
our average selling prices. We anticipate that the average selling prices of
desktop computers will decrease in the future, while the cost of embedded DRAM
for portable computers may increase, in response to competitive pricing
pressures, increased sales discounts, new product introductions by us or our
competitors or other factors. Therefore, to maintain our gross margins, we must
develop and introduce on a timely basis new products and product enhancements
and continually reduce our product costs. Our failure to do so would cause our
revenue and gross margins to decline, which could materially adversely affect
our operating results and cause the price of our common stock to decline.
INTENSE COMPETITION IN THE MARKET FOR GRAPHICS CONTROLLERS COULD CAUSE TRIDENT
TO EXPERIENCE ADDITIONAL ADVERSE FLUCTUATIONS IN ITS OPERATING RESULTS
The market for graphics controllers is intensely competitive. Many of
our current and potential competitors in both graphics and audio have longer
operating histories and substantially greater financial, technical, sales,
marketing and other resources, as well as greater name recognition and market
share than we do. These competitors may have developed or could in the future
develop new technologies that compete with our products or even render our
products obsolete.
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 and our revenue and future
profitability could be materially adversely affected.
IF TRIDENT'S PRODUCTS CONTAIN UNDETECTED DEFECTS, TRIDENT COULD INCUR
SIGNIFICANT UNEXPECTED EXPENSES AND LOST SALES
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.
We have experienced such errors in the past and we expect that such errors will
be found from time to time in new or enhanced products after commencement of
commercial shipments. These problems may materially adversely affect our
business by causing us to incur significant warranty and repair costs, diverting
the attention of our engineering personnel from our product development efforts
and causing significant customer relations problems.
22
23
TRIDENT NEEDS TO EXPAND ITS NETWORK OF MANUFACTURING OPERATIONS AND DEPENDS ON
INDEPENDENT FOUNDRIES FOR SUBSTANTIALLY ALL OF ITS MANUFACTURING REQUIREMENTS
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 for a fixed period or a
specific quantity at a predetermined price. If a foundry terminates its
relationship with us or we encounter shortages and delays in obtaining
components, our ability to meet customer orders could be materially adversely
affected.
We have experienced a delay in product shipments from a contract
manufacturer in the past, which in turn delayed product shipments to our
customers. Such delays often force us to purchase at a higher per unit product
cost from other foundries or to pay 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 we will
effectively manage our foundry relationships or 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.
THE UNSTABLE PUBLIC MARKET COULD CAUSE TRIDENT'S STOCK PRICE TO FALL
The market price of our common stock has been, and may continue to be,
extremely volatile. Factors such as new product announcements by Trident 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 of high-technology companies, could cause
the price of Trident's stock to fluctuate substantially over short periods.
TRIDENT'S EXCHANGE OF UICC SHARES FOR UMC SHARES MAY POSE SOME ECONOMIC RISKS
We expect to receive approximately 46.5 million shares of UMC stock in
exchange for our shares of UICC by the end of 1999. This exchange may provide us
with an improved balance sheet and additional capital but may be subject to
resale restrictions and have a fair market value which fluctuates dramatically.
We have not received the UMC shares nor have we determined whether or when we
will sell the UMC shares or the sales price if the sale occurs.
IF TRIDENT OR ITS KEY DISTRIBUTORS AND CUSTOMERS FAIL TO BE YEAR 2000 COMPLIANT,
TRIDENT'S BUSINESS MAY BE SEVERELY DISRUPTED AND ITS REVENUES MAY DECLINE
The year 2000 computer issue creates a risk for us. If systems do not
correctly recognize date information when the year changes to 2000, there could
be an adverse impact on our operations. The risk exists in four areas:
- potential warranty or other claims from our customers;
- systems we use to run our business;
- systems used by our distributors; and
- the potential reduced spending by other companies on networking
solutions as a result of significant
23
24
information systems spending on year 2000 remediation.
We are currently evaluating our exposure in all of these areas.
We are in the process of conducting an inventory and evaluation of the
information systems used to run our business. Systems which are identified as
non-compliant will be upgraded or replaced. For the year 2000 non-compliance
issues identified to date, the cost of remediation is not expected to be
material to our operating results. However, if implementation of replacement
systems is delayed, or if significant new non-compliance issues are identified,
our operating results or financial condition could be materially adversely
affected.
We intend to contact our critical distributors to determine that the
distributors' operations and the products and services they provide are year
2000 compliant. Where practicable, we will attempt to mitigate our risks with
respect to the failure of suppliers to be year 2000 ready. However, failures
remain a possibility and could have an adverse impact on our operating results
or financial condition.
Since all customer situations cannot be anticipated, we may see an
increase in warranty and other claims as a result of the year 2000 transition.
In addition, litigation regarding year 2000 compliance issues is expected to
escalate. For these reasons, the impact of customer claims could have a material
adverse impact on our operating results or financial condition.
Businesses that face year 2000 compliance issues may require significant
hardware and software upgrades or modifications to their computer systems and
applications. These companies may plan to devote a substantial portion of their
information systems' spending to fund such upgrades and modifications and divert
spending away from IC videographics or audio products for the PC market. This
change in customers' spending patterns could materially adversely impact our
business, operating results or financial condition.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company's principal sources of liquidity
included cash and cash equivalents of $32.5 million. Cash used in operating
activities was $1.7 million in fiscal year 1999. Cash used in operating
activities in fiscal year 1998 was $7.7 million. Cash used in operating
activities in 1999 was mainly due to unprofitable operations, increases in
accounts receivable and prepaid expenses, primarily offset by decreases in
inventories and deferred taxes, and increases in accounts payable and accrued
expenses. Cash used in operating activities in fiscal 1998 was mainly due to
unprofitable operations, an increase in inventory, decreases in accounts payable
and accrued expenses, primarily offset by a decrease in accounts receivable.
Capital expenditures in fiscal 1999, 1998 and 1997 were $2.6 million, $3.8
million and $3.5 million, respectively.
During fiscal years 1999, 1998, and 1997 the Company issued 277,000,
319,000 and 392,000 shares of common stock under its employee stock option and
purchase plans, respectively. These issuances generated cash of $1.0 million,
$2.5 million, and $2.9 million in fiscal 1999, 1998, and 1997, respectively.
In fiscal year 1998, the Company invested $2.0 million in cash in a
privately-held semiconductor design company for an equity interest of less than
10%. The investment is presented as a long-term investment in the financial
statements.
In August 1995, the Company entered into a joint venture agreement with
UMC and other venture partners to establish a foundry, UICC. Under the
agreement, the Company invested $49.3 million in the joint venture and the
foundry guarantees to Trident a certain percentage of the foundry's total wafer
supply. On October 3, 1997, a fire at UICC's fabrication plant in Hsin Chu,
Taiwan, completely destroyed its fabrication equipment. The fabrication plant,
and the destroyed equipment, was insured. In June 1999 the Company announced
that it has received confirmation from UMC that, subject to the approval of the
UMC shareholders and the Taiwan government, the UICC joint venture will be
consolidated with UMC by the end of 1999. Trident expects to receive
approximately 46.5 million shares of UMC stock in the consolidation. These
shares represent about 0.5% of the outstanding stock of UMC. As the
consolidation is subject to UMC shareholder approval, no assurance can be
24
25
given as to whether such shares will be received. The Company has not determined
whether or when it will sell such shares and the shares may be subject to
trading or other restrictions. Following the consolidation, Trident will
continue to have a guaranteed wafer supply from UMC approximately the same in
quantity as it had with UICC. At June 30, 1999, the Company held a 7.25% equity
ownership in UICC.
The Company's investment in the UICC joint venture is intended to secure
capacity so that it can meet expected increased demand, should it occur.
However, there are certain risks associated with the transaction including the
Company's ability, together with its partners, to fully utilize the capacity of
UICC. The Company will continue to consider transactions to secure additional
foundry capacity as circumstances warrant.
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, 1998, the Company's Board of Directors approved a $20 million
stock repurchase program over the next twelve months. During fiscal year 1999,
161,000 shares of common stock were repurchased for $0.9 million under this
Plan. During fiscal year 1998, 274,500 shares of common stock were repurchased
for $2.1 million under this Plan. During fiscal year 1997, the Company
repurchased 100,000 shares of common stock for $1.1 million. The Company's cash
reserves may decline as a result of its future use, if any, of the repurchase
program.
YEAR 2000
Some computers, software, and other equipment include computer code in
which calendar year data is abbreviated to only two digits. As a result of this
design decision, some of these systems could fail to operate or fail to produce
correct results if "00" is interpreted to mean 1900, rather than 2000. These
problems are widely expected to increase in frequency and severity as the year
2000 approaches, and are referred to in this report as "Year 2000 issues."
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 is in its final
implementation and testing phase of its information systems for Year 2000
compliance. This phase is expected to be completed by the end of September 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. Office equipment and other items used in
the operations and facilities of the Company are currently in the final
implementation and testing phase for Year 2000 compliance. This phase is
expected to be completed by the end of September 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.
25
26
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. The Company is in the final stages of
implementation for all its information systems, 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.
Most likely consequences of Year 2000 issues. We expect to identify and
resolve all Year 2000 issues that could materially adversely affect our business
operations. However, we believe that it is not possible to determine with
complete certainty that all Year 2000 issues affecting us have been identified
or corrected. The number of devices that could be affected and the interactions
among these devices are simply to numerous. In addition, no one can accurately
predict how many Year 2000 issues related failures will occur or the severity,
duration, or financial consequences of these perhaps inevitable failures. As a
result, we believe that the following consequences are possible:
- a significant number of operational inconveniences and inefficiencies
for us, our contract manufacturers and our customers that will divert
management's time and attention and financial and human resources from
ordinary business activities;
- several business disputes and claims for pricing adjustments or
penalties due to Year 2000 issues by our customers, which we believe
will be resolved in the ordinary course of business; and
- a few serious business disputes alleging that we failed to comply with
the terms of contracts or industry standards of performance, some of
which could result in litigation or contract termination.
Disclaimer. The discussion of our efforts and expectations relating to Year 2000
compliance are forward-looking statements. Our ability to achieve Year 2000
compliance and the level of incremental costs associated therewith, could be
adversely affected by, among other things, the availability and cost of
programming and testing resources, third party suppliers' ability to modify
proprietary software, and unanticipated problems identified in the ongoing
compliance review.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and supplemental data of the Company required
by this item are set forth at the pages indicated at Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding Directors required by this Item is
incorporated by reference from the definitive proxy statement for the Company's
1999 annual meeting of stockholders to be filed with the Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Form (the "Proxy Statement"). Information relating to the executive
officers of the Company is set forth in Part I of this report under the caption
"Executive Officers of the Registrant."
Information required by this item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference from the Proxy Statement under the caption "EXECUTIVE COMPENSATION AND
OTHER MATTERS--Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from
the Proxy Statement under the caption "EXECUTIVE COMPENSATION AND OTHER
MATTERS."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from
the Proxy Statement under the captions "INFORMATION ABOUT TRIDENT
MICROSYSTEMS--Stock Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from
the Proxy Statement under the caption "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
27
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Form:
1. Financial Statements:
Page Number
-----------
Report of Independent Accountants 29
Consolidated Balance Sheet - 30
As of June 30, 1999 and 1998
Consolidated Statement of Operations - 31
For the Three Years Ended June 30, 1999
Consolidated Statement of Changes in Stockholders' 32
Equity For the Three Years Ended June 30, 1999
Consolidated Statement of Cash Flows 33
For the Three Years Ended June 30, 1999
Notes to Consolidated Financial Statements 34
2. Financial Statement Schedules:
All financial statement schedules are omitted because they
are not applicable or the required information is shown in
the consolidated financial statements or notes thereto.
3. Exhibits: See Index to Exhibits on page 46. The Exhibits listed
in the accompanying Index to Exhibits are filed or incorporated
by reference as part of this report.
(b) Reports on Form 8-K:
Report under item 5 filed on August 21, 1998 regarding the
adoption of the Rights Agreement dated July 24, 1998.
28
29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Trident Microsystems, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Trident Microsystems, Inc. and its subsidiaries at June 30, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
July 23, 1999
29
30
TRIDENT MICROSYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30,
-----------------------
(in thousands, except per share data) 1999 1998
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 32,469 $ 22,916
Short-term investments -- 13,970
Accounts receivable 11,029 8,183
Inventories 4,681 10,146
Deferred income taxes -- 2,266
Prepaid expenses and other current assets 4,416 1,236
-------- --------
Total current assets 52,595 58,717
Property and equipment, net 6,113 7,766
Investment in joint venture 49,289 49,289
Other assets 2,913 2,655
-------- --------
Total assets $110,910 $118,427
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,267 $ 3,359
Accrued expenses 7,153 5,805
Current portion of obligation under capital lease 384 380
Income taxes payable 1,293 1,292
-------- --------
Total current liabilities 15,097 10,836
Deferred income taxes 2,350 2,350
Obligations under capital lease, less current portion 82 350
-------- --------
Total liabilities 17,529 13,536
======== ========
Commitments (Note 10)
Stockholders' Equity:
Common stock, $ 0.001 par value; 30,000 shares authorized;
13,566 and 13,289 shares issued and outstanding 14 13
Additional paid-in capital 46,963 45,339
Retained earnings 50,529 62,724
Treasury stock, at cost, 536 and 374 shares (4,125) (3,185)
-------- --------
Total stockholders' equity 93,381 104,891
-------- --------
Total liabilities and stockholders' equity $110,910 $118,427
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
30
31
TRIDENT MICROSYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30,
--------------------------------------
(in thousands, except per share data) 1999 1998 1997
-------- -------- --------
Net sales:
Sales $ 89,255 $113,002 $163,129
Sales to related parties -- -- 14,805
-------- -------- --------
89,255 113,002 177,934
Cost of sales 60,585 75,402 113,404
-------- -------- --------
Gross margin 28,670 37,600 64,530
Research and development expenses 26,345 28,156 22,082
Selling, general and administrative expenses 16,576 18,964 21,895
-------- -------- --------
Income (loss) from operations (14,251) (9,520) 20,553
Interest income, net 1,976 2,428 2,008
-------- -------- --------
Income (loss) before provision for income taxes (12,275) (7,092) 22,561
Provision (benefit) for income taxes (80) (1,986) 7,221
-------- -------- --------
Net income (loss) $(12,195) $ (5,106) $ 15,340
======== ======== ========
Basic earnings (loss) per share $ (0.94) $ (0.39) $ 1.20
======== ======== ========
Shares used in computing basic per share amounts 12,978 13,007 12,746
======== ======== ========
Diluted earnings (loss) per share $ (0.94) $ (0.39) $ 1.09
======== ======== ========
Shares used in computing basic per share amounts 12,978 13,007 14,067
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
31
32
TRIDENT MICROSYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NOTES
COMMON ADDITIONAL RECEIVABLE TOTAL
STOCK PAID-IN FROM TREASURY RETAINED STOCKHOLDERS'
(in thousands) SHARES AMOUNT CAPITAL STOCKHOLDERS STOCK EARNINGS EQUITY
------ ------ ---------- ------------ -------- -------- -------------
Balance at June 30, 1996 12,578 $12 $38,267 $(585) $ -- $ 52,490 $ 90,184
Issuance of common stock 392 1 2,891 -- -- -- 2,892
Payment of stockholder
notes receivable -- -- -- 585 -- -- 585
Income tax benefit on
disqualifying disposition
of common stock options -- -- 1,641 -- -- -- 1,641
Purchase of treasury shares -- -- -- -- (1,085) -- (1,085)
Net income -- -- -- -- -- 15,340 15,340
------ --- ------- ----- ------- -------- ---------
Balance at June 30, 1997 12,970 13 42,799 -- (1,085) 67,830 109,557
Issuance of common stock 319 -- 2,540 -- -- -- 2,540
Purchase of treasury shares -- -- -- -- (2,100) -- (2,100)
Net loss -- -- -- -- -- (5,106) (5,106)
------ --- ------- ----- ------- -------- ---------
Balance at June 30, 1998 13,289 13 45,339 -- (3,185) 62,724 104,891
Issuance of common stock 277 1 1,034 -- -- -- 1,035
Income tax benefit on
disqualifying disposition
of common stock options -- -- 590 -- -- -- 590
Purchase of treasury shares -- -- -- -- (940) -- (940)
Net loss -- -- -- -- -- (12,195) (12,195)
------ --- ------- ----- ------- -------- ---------
Balance at June 30, 1999 13,566 $14 $46,963 $ -- $(4,125) $ 50,529 $ 93,381
------ --- ------- ----- ------- -------- ---------
The accompanying notes are an integral part of these consolidated
financial statements.
32
33
TRIDENT MICROSYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEAR ENDED JUNE 30,
--------------------------------------
(in thousands) 1999 1998 1997
--------- --------- ---------
Cash Flows from Operating Activities:
Net income (loss) $(12,195) $ (5,106) $ 15,340
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 4,241 3,532 2,677
Provision for doubtful accounts and sales returns 488 49 76
Income tax benefit on disqualifying disposition
of common stock options 590 -- 1,641
Changes in assets and liabilities:
Accounts receivable (3,334) 12,411 (3,364)
Inventories 5,465 (2,850) 19,571
Prepaid expenses and other current assets (3,180) (65) 3,569
Other assets (258) (214) (219)
Deferred income taxes, net 2,266 787 3,135
Accounts payable 2,908 (10,916) (9,810)
Accrued expenses 1,348 (4,898) 2,588
Income taxes payable 1 (474) (3,844)
-------- -------- --------
Net cash provided by (used in) operating activities (1,660) (7,744) 31,360
-------- -------- --------
Cash Flows from Investing Activities:
Sales (purchases) of short-term investments, net 13,970 16,230 (5,866)
Purchases of property and equipment (2,588) (3,834) (3,519)
Advance payment from(to) vendor under wafer
capacity agreement -- -- 14,400
Investment in joint venture -- (9,658) (25,915)
Long-term investment -- (2,000) --
-------- -------- --------
Net cash provided by (used in) investing activities 11,382 738 (20,900)
-------- -------- --------
Cash Flows from Financing Activities:
Issuance of common stock 1,035 2,540 2,891
Repayment of capital leases (264) (263) --
Principal repayments by stockholders of notes receivable -- -- 585
Purchase of treasury stock (940) (2,100) (1,085)
-------- -------- --------
Net cash provided by (used in) financing activities (169) 177 2,391
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 9,553 (6,829) 12,851
Cash and cash equivalents at beginning of year 22,916 29,745 16,894
-------- -------- --------
Cash and cash equivalents at end of year $ 32,469 $ 22,916 $ 29,745
-------- -------- --------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for income taxes $ -- $ 544 $ 6,470
The accompanying notes are an integral part of these consolidated
financial statements.
33
34
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Trident Microsystems, Inc. (the "Company") designs, develops and markets
videographics and multimedia integrated circuits for the desktop and
portable PC market.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements include the
accounts of the Company and its subsidiaries after elimination of all
significant intercompany accounts and transactions. The preparation of
financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts; actual results could differ from those
estimates.
Cash Equivalents and Short-Term Investments. Cash equivalents consist of
highly liquid investments in money market accounts and certificates of
deposits purchased with an original maturity of 90 days or less from the
date of purchase. Short-term investments were comprised of certificates
of deposits with contractual maturities of less than one year and have
been classified "available-for-sale."
Inventories. Inventories are stated principally at standard cost
adjusted to approximate the lower of cost (first-in, first-out method)
or market (net realizable value).
Property and Equipment. Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the
estimated useful lives which range from three to seven years.
Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the estimated life of the
assets or the extended lease term.
Investments. Equity investment of less than 20% wherein the Company does
not have the ability to exert significant influence are accounted for
using the cost method.
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.
Software Development Costs. To date, the period between achieving
technological feasibility and the general availability of such software
has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs.
Income Taxes. The Company accounts for income taxes using the asset and
liability method, under which the expected future tax consequences of
temporary differences between the book and tax bases of assets and
liabilities are recognized as deferred tax assets and liabilities. The
Company does not record a deferred tax provision on unremitted earnings
of foreign subsidiaries to the extent that such earnings are considered
permanently invested.
34
35
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Net Income (loss) per Share. Basic net income (loss) per share is
computed by dividing net income (loss) available to common shareholders
by the weighted average number of common shares outstanding during the
period. Diluted net income per share is calculated using the weighted
average number of outstanding shares of common stock plus dilutive
potential common stock shares. Potential common stock shares consist of
common stock options, computed using the treasury stock method based on
the average stock price for the period.
Foreign Currency Transactions. The functional currency of the Company's
operations in all countries is the U.S. dollar. Sales and purchase
transactions are generally denominated in U.S. dollars. Foreign
transaction gains and losses were not material for each period
presented.
Stock-based Compensation. The Company accounts for stock-based employee
compensation arrangements in accordance with provisions of Accounting
Principles Board Opinions ("APB") No. 25, "Accounting for Stock Issued
to Employees" and complies with the disclosure provisions of Statements
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation. " Under APB No. 25, compensation cost is
generally recognized based on the difference, if any, between the quoted
market price of the Company's stock on the date of grant and the amount
an employee must pay to acquire the stock.
Comprehensive income. Effective July 1, 1998, the Company adopted the
provision of SFAS No. 130, "Reporting Comprehensive Income." This
statement requires companies to classify items of other comprehensive
income by their components in the financial statements and display the
accumulated balance of other comprehensive income separately from
retained earnings in the equity section of a statement of financial
position. Foreign currency translation and unrealized gains and losses
on short-term investments are comprehensive income items applicable to
the Company. To date, the Company has not had any material transactions
that are required to be reported in comprehensive income.
New Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes standards
for accounting and reporting on derivative. SFAS No. 133 requires that
all derivative instruments be recognized in the balance sheet as either
assets or liabilities and measured at fair value. Furthermore, SFAS No.
133 requires current recognition in earnings of changes in the fair
value of derivative instruments depending on the intended use of the
derivative and the resulting designation. The Company expects that its
adoption of SFAS No. 133, which will become effective in fiscal year
2001, will not have a material effect on the Company's financial
statements.
35
36
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
2. Balance Sheet Components
JUNE 30,
------------------------
(in thousands) 1999 1998
--------- ---------
Accounts receivable:
Trade accounts receivable $ 12,147 $ 8,813
Less: allowance for doubtful accounts (1,118) (630)
-------- --------
$ 11,029 $ 8,183
======== ========
Inventories:
Work in process $ 850 $ 2,615
Finished goods 3,831 7,531
-------- --------
$ 4,681 $ 10,146
======== ========
Property and Equipment:
Machinery and equipment $ 17,905 $ 15,799
Furniture and fixtures 2,042 1,952
Leasehold improvements 1,296 2,289
-------- --------
21,243 20,040
Less: accumulated depreciation and amortization (15,130) (12,274)
-------- --------
$ 6,113 $ 7,766
======== ========
Accrued expenses:
Compensation accruals $ 2,826 $ 1,883
Sales allowances 602 671
Nonrecurring engineering charges 714 625
Other 3,011 2,626
-------- --------
$ 7,153 $ 5,805
======== ========
36
37
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
3. NET INCOME (LOSS) PER SHARE
Reconciliations of the numerators and denominators of the basic and
diluted net income (loss) per share calculations are as follows:
Year Ended June 30,
-------------------------------------
(in thousands, except per share data) 1999 1998 1997
--------- -------- -------
BASIC NET INCOME (LOSS) PER SHARE
Net income (loss) available to Common
Shareholders $(12,195) $(5,106) $15,340
======== ======= =======
Weighted average common shares 12,978 13,007 12,746
======== ======= =======
Basic net income (loss) per share $ (0.94) $ (0.39) $ 1.20
======== ======= =======
DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) available to Common
Shareholders $(12,195) $(5,106) $15,340
======== ======= =======
Weighted average common shares 12,978 13,007 12,746
Dilutive potential common shares -- -- 1,321
-------- ------- -------
Weighted average common and potential
common shares 12,978 13,007 14,067
======== ======= =======
Diluted net income (loss) per share $ (0.94) $ (0.39) $ 1.09
======== ======= =======
During fiscal years 1999 and 1998, all options outstanding were
anti-dilutive due to the net loss incurred for the year and were
accordingly excluded from the net loss per share calculation. During
fiscal 1997, options to purchase 260,301 shares of common stock were
antidilutive and excluded from the dilutive net income per share
calculations because the options' exercise price was greater than the
average market price of the common shares.
4. AGREEMENTS WITH WAFER FOUNDRIES
Investment in Joint Venture. 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 guaranteed to Trident
a certain percentage of the foundry's total wafer supply. In October
1997, a fire at UICC's fabrication plant in Hsin Chu, Taiwan completely
destroyed its fabrication equipment. The fabrication plant and the
destroyed equipment were insured. In June 1999 the Company announced
that it has received confirmation from UMC that, subject to the approval
of UMC shareholders and the Taiwan government, the UICC joint venture
will be consolidated with UMC by the end of 1999. Trident expects to
receive approximately 46.5 million shares of UMC stock in the
consolidation. These shares represent about 0.5% of the outstanding
stock of UMC. As the consolidation is subject to UMC shareholder
approval, no assurance can be given as to whether such shares will be
received. The Company has not determined whether or when it will sell
such shares and the shares may be subject to trading or other
restrictions. Following the consolidation, Trident will continue to have
a
37
38
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
guaranteed wafer supply from UMC approximately the same in quantity as
it had with UICC. At June 30, 1999, the Company held a 7.25% equity
ownership in UICC.
5. Income Taxes
The components of income (loss) before taxes are as follows:
YEAR ENDED JUNE 30,
-------------------------------------
(in thousands) 1999 1998 1997
-------- ------- -------
Income (loss) subject to domestic income taxes only $ (1,523) $ 148 $ 6,958
Income (loss) subject to foreign income taxes, and in
certain cases, domestic income taxes (10,752) (7,240) 15,603
-------- ------- -------
$(12,275) $(7,092) $22,561
======== ======= =======
The provision (benefit) for income taxes is comprised of the following:
YEAR ENDED JUNE 30,
----------------------------------
(in thousands) 1999 1998 1997
-------- -------- ------
Current:
Federal $(2,374) $(2,411) $2,833
State -- (362) 578
Foreign 28 -- 675
------- ------- ------
(2,346) (2,773) 4,086
------- ------- ------
Deferred:
Federal 2,266 391 2,749
State -- 396 386
------- ------- ------
2,266 787 3,135
------- ------- ------
$ (80) $(1,986) $7,221
======= ======= ======
The deferred tax assets (liabilities) are comprised of the following:
JUNE 30,
----------------------
(in thousands) 1999 1998
-------- --------
Deferred tax assets:
Vacation, bonus and other accruals $ 1,066 $ 788
Allowances, reserves and other 433 1,375
Research and development credits 2,567 1,190
Net operating losses 550 221
Other 800 485
------- -------
5,416 4,059
Valuation allowance (5,416) (1,793)
------- -------
Deferred tax assets, net -- 2,266
Deferred tax liabilities:
Unremitted earnings of foreign subsidiary (2,350) (2,350)
------- -------
$(2,350) $ (84)
======= =======
38
39
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Based on a number of factors, as of June 30, 1999, the Company has
provided a full valuation allowance for deferred tax assets due to the
uncertainty regarding their realization. These factors include primarily
recent operating losses incurred by the Company, the fact that the
market in which the Company competes is intensely competitive and
characterized by rapidly changing technology, and the inability to
carryback tax attributes to prior year Federal and State returns.
The reconciliation of the income tax provisions computed at the United
States federal statutory rate to the effective tax rate for the recorded
provision for income taxes is as follows:
YEAR ENDED JUNE 30,
----------------------------
(in thousands) 1999 1998 1997
------- ------- -----
Federal statutory rate (35.0)% (35.0)% 35.0%
State taxes, net of federal tax benefit -- (3.2) 2.0
Research and development credit -- (17.8) (1.4)
Foreign earnings subject to lower tax rates -- 13.7 (6.6)
Valuation allowance 29.5 16.4 --
Other 4.8 (2.1) 3.0
---- ----- ----
Effective income tax rate (0.7)% (28.0) % 32.0%
==== ===== ====
The Company has not provided for U.S. federal income and foreign
withholding taxes on approximately $11 million of a non-U.S.
subsidiary's undistributed earnings as of June 30, 1999, because such
earnings are intended to be reinvested outside the U.S. indefinitely.
6. STOCK-BASED COMPENSATION
Stock Purchase Plans. In October 1998, the Board of Directors of the
Company (the "Board") adopted the 1998 Employee Stock Purchase Plan
under which 500,000 shares of the Company's common stock may be issued.
This plan replaced the 1992 Employee Stock Purchase Plan which was
terminated on October 30, 1998. Shares are to be purchased from payroll
deductions; employees of the Company who are based outside the United
States may participate by making direct contributions to the Company for
the purchase of stock. Such payroll deductions or direct contributions
may not exceed 10% of an employee's compensation. The purchase price per
share at which the shares of the Company's common stock are sold in an
offering generally will be equal to 85% of the lesser of the fair market
value of the common stock on the first or the last day of the offering.
During fiscal year 1999, 108,000 shares were issued under the 1998
Employee Stock Purchase Plan. During fiscal years 1999 and 1998, 144,000
and 137,000 shares were issued under the 1992 Employee Stock Purchase
Plan, respectively.
Stock Options. The Company grants nonstatutory and incentive stock
options to key employees, directors and consultants. At June 30, 1999,
shares of common stock reserved for issuance upon exercise of the stock
options aggregated 7,055,000. Stock options are granted at prices
determined by the Board. Nonstatutory and incentive stock options may be
granted at prices not less than 85% of the fair market value and at not
less than fair market value, respectively, at the date of grant. Options
generally become exercisable one year after date of grant and vest over
a maximum period of five years following the date of grant.
39
40
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The following table summarizes the option activities for the years ended June
30, 1997, 1998 and 1999:
WEIGHTED
OPTIONS OPTIONS AVERAGE OUTSTANDING
AVAILABLE FOR NUMBER OF EXERCISE PRICE PER
(in thousands, except per share data) GRANT OPTIONS PRICE OPTION
------- --------- -------- ------------
Balance, June 30, 1996 1,958 2,292 $0.77-$34.38
Additional shares reserved 1,000 --
Options granted (3,523) 3,523 $10.69 $9.00-$21.50
Options exercised -- (334) $ 6.22 $0.77-$ 9.38
Options canceled 1,631 (1,631) $12.95 $4.63-$25.63
------ ------ ------------
Balance, June 30, 1997 1,066 3,850 $1.05-$34.38
Options granted (3,478) 3,478 $ 9.39 $5.00-$18.00
Options exercised -- (192) $ 7.37 $1.55-$10.25
Options canceled 2,834 (2,834) $11.72 $1.55-$21.50
------ ------ ------------
Balance, June 30, 1998 422 4,302 $1.05-$34.38
Additional shares reserved 625 --
Options granted (5,127) 5,127 $ 3.58 $2.63-$ 6.38
Options exercised -- (26) $ 3.50 $3.50-$ 3.50
Plan shares expired (85) --
Options canceled 4,534 (4,534) $ 7.83 $1.55-$34.38
------ ------ ------------
Balance, June 30, 1999 369 4,869 $1.05-$34.38
------ ------
At June 30, 1999, 1998 and 1997, options for 1,637,000, 1,293,000, and
703,000 shares of common stock were vested but not exercised. In October
1998, the Company canceled 3,643,000 outstanding options with exercise
prices greater than $3.50 and reissued the options with an exercise
price of $3.50. In January 1998, the Company canceled 1,702,000
outstanding options granted after July 28, 1997 with exercise prices
greater than $8.63 and reissued the options with an exercise price of
$8.63. In July 1996, the Company cancelled 1,077,000 options outstanding
under the option plan with exercise prices greater than $9.38 and
reissued the options with an exercise price of $9.38.
40
41
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The following table summarizes information about stock options
outstanding at June 30, 1999:
Options Outstanding Options Exercisable
(in thousands except per share data) (in thousands except per share data)
----------------------------------------------- ------------------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices 6/30/99 Contractual Life Exercise Price at 6/30/99 Exercise Price
- --------------- ----------- ---------------- -------------- ----------- ----------------
$ 1.05-$ 3.38 567 8.4 $ 2.87 69 $ 1.71
$ 3.50-$ 3.50 3,270 9.3 $ 3.50 1,446 $ 3.50
$ 3.88-$10.38 991 9.3 $ 4.97 80 $ 7.35
$10.63-$34.38 42 7.0 $24.88 42 $24.88
------------- ----- --- ------ ----- ------
$ 1.05-$34.38 4,870 9.2 $ 3.91 1,637 $ 4.15
------------- ----- --- ------ ----- ------
FAIR VALUE PRESENTATION.
Had compensation cost for the Company's stock-based compensation awards
been determined based on the fair value method consistent with the
method prescribed SFAS No. 123, the Company's net income (loss) and
earnings (loss) per share would have been further adjusted to the pro
forma amounts as follows:
Year Ended June 30,
-------------------------------------
(in thousands except per share data) 1999 1998 1997
-------- -------- -------
Net income (loss):
As reported $(12,195) $ (5,106) $15,340
-------- -------- -------
Pro forma $(20,283) $(11,377) $10,389
-------- -------- -------
Net income (loss) per share:
As reported:
Basic $ (0.94) $ (0.39) $ 1.20
-------- -------- -------
Diluted $ (0.94) $ (0.39) $ 1.09
-------- -------- -------
Pro forma:
Basic $ (1.56) $ (0.87) $ 0.80
-------- -------- -------
Diluted $ (1.56) $ (0.87) $ 0.73
-------- -------- -------
Under SFAS 123, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in fiscal 1999,
1998 and 1997, respectively:
41
42
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Year Ended June 30,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
Stock Options Plans
Expected dividend yield -- -- --
Expected stock price volatility 79% 69% 68%
Risk-free interest rate 4.18%-5.52% 5.61%-5.99% 6.07%-6.60%
Expected life (years) 5 5 5
Stock Purchase Plan
Expected dividend yield -- -- --
Expected stock price volatility 71%-82% 62%-72% 64%-72%
Risk-free interest rate 3.95%-5.09% 5.30%-5.52% 5.20%-5.52%
Expected life (years) 0.5 0.5 0.5
Weighted average fair value of options granted were $2.40, $5.78 and
$5.34 for fiscal years 1999, 1998 and 1997, respectively.
Stock Repurchases. On April 22, 1998, the Board authorized the Company
to repurchase up to $20,000,000 of its own common stock at prevailing
prices over the next 12 months. During fiscal years 1999 and 1998,
161,000 and 274,500 shares have been repurchased for $940,000 and
$2,100,000 in cash, respectively. On April 22, 1997, the Board
authorized the Company to repurchase up to 600,000 shares of its own
common stock under certain conditions at prevailing market prices
through October 1997. In April 1997, the Company repurchased 100,000
shares for $1,085,000 in cash. Shares repurchased are being held as
treasury stock until reissued to the Company's stock option and stock
purchase plans or other benefit plans the Company may adopt in the
future or for other corporate purposes.
7. PREFERRED RIGHTS AGREEMENT
On July 24, 1998, the Board adopted a Preferred Shares Rights Agreement
("Agreement") and pursuant to the Agreement authorized and declared a
dividend of one preferred share purchase right ("Right") for each common
share outstanding of the Company on August 14, 1998. The Rights are
designed to protect and maximize the value of the outstanding equity
interests in the Company in the event of an unsolicited attempt by an
acquirer to take over the Company, in a manner or terms not approved by
the Board. Each Right becomes exercisable to purchase one-hundredth of a
share of Series A Preferred Stock of the Company at an exercise price of
$50.00 and expire on July 23, 2008. The Company may redeem the Rights at
a price of $0.001 per Right.
8. RELATED PARTY TRANSACTIONS
During the year ended June 30, 1997, the Company sold products with
revenues of $14,805,000 to a stockholder of the Company and affiliates
of that stockholder. The Company believes that the terms of the
transactions with those customers were no less favorable to the Company
than those offered to entities unrelated to the Company.
42
43
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. GEOGRAPHIC SEGMENT INFORMATION
Effective July 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This statement
requires enterprises to report information about operating segments in
annual financial statements and selected information about reportable
segments in interim financial reports. It also establishes standards for
related disclosures about products, geographic areas and major
customers. The Company has one reportable segment. The following is a
summary of the Company's geographic operations:
(in thousands) UNITED STATES TAIWAN JAPAN HONG KONG CHINA OTHERS CONSOLIDATED
------------- ------- ------- --------- ----- ------- ------------
Fiscal Year 1999:
Product sales $23,832 $23,892 $22,057 $14,719 $- $ 4,755 $ 89,255
Long-lived assets 4,388 842 -- 77 806 -- 6,113
Fiscal Year 1998:
Product sales $17,166 $36,455 $24,265 $27,658 $- $ 7,458 $113,002
Long-lived assets 6,116 906 -- 167 577 -- 7,766
Fiscal Year 1997:
Product sales $38,661 $45,189 $35,786 $44,881 $- $13,417 $177,934
Long-lived assets 7,106 254 -- 103 -- -- 7,463
Product sales are attributed to countries based on delivery locations.
Long-lived assets comprise property and equipment.
The Company sells principally to multinational original equipment
manufacturers, many of whom have manufacturing facilities in Asia, and
to adapter card manufacturers primarily located in Asia. Sales to
customers in Asia totaled 73%, 84% and 74% for fiscal years 1999, 1998
and 1997, respectively. Export sales to third party customers outside of
the United States totaled $193,000, $240,000, and $1,553,000,
respectively.
10. COMMITMENTS AND CONCENTRATION OF SALES AND CREDIT RISK
Capital Leases. In June 1997, the Company entered into a capital lease
agreement with an equipment maker for research equipment in the amount
of $1,102,000. In April of 1999, $109,000 of additional lease equipment
was acquired. At June 30, 1999, leased capital assets and related
accumulated depreciation included in property, plant and equipment were
$1,211,000 and $722,000 respectively, and total capital lease
obligations were $466,000. Total future minimum lease payments under the
capital lease at June 30, 1999 are $422,000, $41,000, and $30,000 in
fiscal years 2000, 2001 and 2002, respectively.
Building Leases. The Company leases facilities under noncancelable
operating lease agreements, which expire at various dates through 2002.
Rental expense for the years ended June 30, 1999, 1998 and 1997 was
$2,406,000, $2,127,000 and $1,656,000, respectively. Total future
minimum lease payments under operating leases at June 30, 1999 were
$2,342,000, $1,667,000 and $175,000 in fiscal years 2000, 2001 and 2002,
respectively.
43
44
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Concentration of Sales and Credit Risks. Two customers, Fujitsu and
Innoquest, comprised 13% and 12% of the Company's net sales for the year
ended June 30, 1999. Two customers, Union Computer and Fujitsu,
comprised 15% and 11% of the Company's net sales for the year ended June
30, 1998. Three customers, IBM, Union Computer, and Jaton Corporation
comprised 21%, 12% and 11%, of the Company's net sales for the year
ended June 30, 1997.
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash
and cash equivalents, and trade accounts receivable. The Company places
its cash and cash equivalents primarily in market rate accounts. The
Company offers credit terms on the sale of its products to certain
customers. The Company performs ongoing credit evaluations of its
customers' financial condition and, generally, requires no collateral
from its customers. The Company maintains an allowance for uncollectible
accounts receivable based upon the expected collectibility of all
accounts receivable.
11. LITIGATION
On December 14, 1998, NeoMagic Corporation ("NeoMagic"), filed a patent
infringement lawsuit against the Company. The Company believes it has
meritorious defenses against NeoMagic's action and it intends to defend
itself vigorously. On July 22, 1999, the Company filed a lawsuit against
VIA Technologies Inc. ("VIA") for breach of contract, fraud,
misappropriation of trade secrets, breach of fiduciary duty, specific
performance, breach of confidence, inducement of breach of contract,
intentional interference with economic relations, recission and unfair
competition, and patent infringement and copyright infringement. In
response to the Company's lawsuit, VIA filed a counter lawsuit against
the Company. The Company believes it has a valid basis for action
against VIA and defenses against counterclaim by VIA. However, given the
nature of litigation and inherent uncertainties associated with
litigation, management cannot predict with certainty the ultimate
outcome of these litigations.
44
45
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Peter Jen as his attorney-in-fact, with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on September 24, 1999 by the following persons on behalf
of the registrant and in the capacities indicated.
Signature Title
--------- -----
/s/ Frank C. Lin President, Chief Executive Officer and
- -------------------------------- Chairman of the Board (Principal
(Frank C. Lin) Executive Officer)
/s/ Peter Jen Senior Vice President, Asia Operations
- -------------------------------- and Chief Accounting Officer (Principal
(Peter Jen) Financial and Accounting Officer)
/s/ Glen M. Antle Director
- --------------------------------
(Glen M. Antle)
/s/ Yasushi Chikagami Director
- --------------------------------
(Yasushi Chikagami)
/s/ Charles A. Dickinson Director
- --------------------------------
(Charles A. Dickinson)
/s/ John Luke Director
- --------------------------------
(John Luke)
/s/ Millard Phelps Director
- --------------------------------
(Millard Phelps)
45
46
INDEX TO EXHIBITS FILED TOGETHER WITH THIS ANNUAL REPORT
Page
Exhibit Description Number
- ------- ----------- ------
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.(4)
10.16 Foundry Venture Agreement dated August 18, 1995 by and between the
Company and United Microelectronics Corporation.(5)(8)
10.17(*) Form of 1998 Stock Option Plan which replaces the 1992 Stock Option
Plan. (6)
21.1 List of Subsidiaries.(7) 47
23.1 Consent of Independent Accountants.(7) 48
24.1 Power of Attorney (See page 45).(7)
27.1 Financial Data Schedule (EDGAR version only)(7) 49
- ---------------------
(1) Incorporated by reference from exhibit of the same number to the Company's
Annual Report on Form 10-K for the year ended June 30, 1993.
(2) Incorporated by reference from exhibit of the same number to the Company's
Registration Statement on Form S-1 (File No. 33-53768), except that Exhibit
3.2 is incorporated from Exhibit 3.4.
(3) Incorporated by reference from exhibit 99.1 to the Company's Report on Form
8-K filed August 21, 1998.
(4) Incorporated by reference from exhibit of the same number to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
(5) Incorporated by reference from exhibit of the same number to the Company's
Annual Report on Form 10-K for the year ended June 30, 1995.
(6) Incorporated by reference to the Company's 1998 Employee Stock Purchase Plan
Individual Stock Option Agreements and 1996 Nonstatutory Stock Option Plan
on Form S-8 filed April 23, 1999 (File No. 333-76895).
(7) Filed herewith.
(8) Confidential treatment has been requested for a portion of this document.
(*) Management contracts or compensatory plans or arrangements covering
executive officer directors of the Company.
46