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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, 1996
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.)
189 North Bernardo Avenue
Mountain View, California 94043-5203
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (415) 691-9211
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
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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, 1996, as reported on Nasdaq National Market was approximately $144,849,676.
Shares of Common Stock held by each 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, 1996, was 12,595,624.
Part III incorporates by reference from the definitive proxy statement
for the registrant's 1996 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.
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TABLE OF CONTENTS
Page
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PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Securities Holders. . . . . . . . . . . . . . . . . . . . . . 13
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters . . . . . . . . . . . . 14
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . 17
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . 23
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . 24
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . 24
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 24
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . 25
POWER OF ATTORNEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
INDEX TO EXHIBITS FILED TOGETHER WITH THIS ANNUAL REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
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PART I
ITEM 1. BUSINESS
Trident Microsystems, Inc. ("Trident" or the "Company") designs,
develops and markets very large scale integrated circuit ("IC") graphics and
multimedia products for IBM-compatible personal computers ("PCs"), including
Graphical User Interface ("GUI") accelerators, graphics controllers and video
processing products. The Company's graphics and video 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 flat-panel LCD controllers for notebooks, acceleration of
CD-ROM 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 by purchasing IC graphics
and multimedia solutions that integrate functions formerly performed by several
separate components. Moreover, as CD-ROM 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 PC.
The Company's overall strategy is to capture these market
opportunities by using its design expertise to develop and volume manufacture
graphics 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 which
it believes will appeal to leading PC systems manufacturers.
MARKETS AND PRODUCTS
Trident has targeted the PC desktop, notebook, 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,
increasingly, design graphic controllers onto their motherboards.
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. As a result of the Company's efforts, the Company started
selling to several leading PC systems manufacturers such as IBM, NEC and
Olivetti during fiscal 1995, and continued to expand its customer base in
fiscal 1996 to include Acer, Fujitsu, Hewlett-Packard, Matsushita,
Seiko-Epson, Sharp and others. Sales to leading PC systems manufacturers
represented approximately 6% of net sales for fiscal 1995, and approximately
37% of net sales for fiscal 1996. The Company expects sales to leading PC
systems manufacturers to continue to increase and expects that Asian customers
will continue to provide for a substantial portion of the Company's sales for
the next year.
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The Company competes in the following markets:
SVGA Graphics Controllers.
The Company's initial and most popular products to date have been its
SVGA graphics controllers. This reflects Trident's traditional focus on the
largest segment of the desktop graphics market -- low to mid-range PCs and
adapter cards. However, as the SVGA controller market matured, Trident has
refocused its development efforts on higher performance markets such as higher
performance GUI accelerators and video processors. Nevertheless, the Company
will remain engaged in the SVGA controller market so long as it is profitable
for the Company to do so. The Company believes that demand for SVGA
controllers will continue in the niche markets where the relative price of
components is the determinative factor.
Home Computing.
Major North American, European and Asian systems manufacturers, such
as IBM, NEC and Compaq have continued to introduce multimedia PCs with
increasing levels of audio, graphics, video and 3D graphics capabilities to
appeal to consumers. Economical 64-bit GUI accelerators like the Company's
ProVidia9680 with full-motion video support have become the defacto standard in
Pentium based PCs because of their highly integrated mixed-signal design and
match to the Pentium's performance. TV-Output capability is seen as an enabler
for moving the PC out of the study and into the living room where it can
connect to the TV. The Company's 64-bit ProVidia9685 has been designed to
address and help propel this trend. 3D polygon rendering capability has been
added to graphics accelerators by other volume graphics suppliers enabling
presentation of higher quality 3D images, albeit at low speeds. The Company
expects that during 1997 more demanding requirements for 3D technology will
emerge. The Company has announced and demonstrated 3D technology which it
intends to use in developing new products to meet these requirements.
Office Computing.
Office PCs continue to account for a large percentage of the total PC
market. Characteristically, they are 2D MS-Windows machines with good
networking capability but few of the multimedia features of the home PC.
Recently, affordable video-graphics chips, formerly sold in the home PC
segment have been adopted into this market segment. New, faster SGRAM memory
will increase the 2D performance of increasingly complex Windows based tasks.
The Company believes that during 1997 the office computing segment will begin
to see the adaption of some 3D features. The Company has introduced a number
of products for this segment including the ProVidia9680 and ProVidia9682.
Mobile Computing.
Notebook computers continue to grow as a percentage of total PC
shipments. The last year has seen a continued reduction of color TFT LCD
display-panel costs. At the same time, for greater appeal, innovative designs
are striving to give notebooks the same performance as desktops, although at
higher costs. Pentium notebooks with 64-bit graphics controllers first
appeared in mid 1996 closing the performance gap between desktop and notebook
PCs substantially. At the same time TV-Output support has been added in
highend systems for presentation purposes. To address these trends, the
Company introduced two 64-bit controllers for the mobile market. Its Cyber9382
and Cyber9385 products both include 64-bit video and graphics capability while
the Cyber9385 also includes TV-Output for the presentation segment of the
market.
Current Products
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
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cost and more compact system designs. This product supports up to 1024x768
resolution with 16 colors non-interlaced at 70Hz refresh rates.
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.
TKD8001. This is the Company's first integrated 24-bit DAC and dual
(memory and video) clock synthesizer. The TKD8001 is designed for use with the
Company's standard TVGA8900D/DR controller. Combining the true color DAC and
dual clock into one package saves cost and board space as compared with
discrete solutions.
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") DAC for high
resolution video-in-a-window.
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.
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.
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.
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.
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 applications 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.
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
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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.
OMEGA82C094 AND OMEGA82C28. This is the Company's first PCI-to-PCMCIA
host controller chip set supporting two PC Card slots. This product is
optimized for use in high-performance notebook computers where multimedia
applications require high bandwidth. Omega82C094 supports the Zoomed Video
standard delivering full-screen broadcast-quality video free of the system
bandwidth constraints. Omega82C094 is register-set compatible with Intel
i82092AA, the industry's first PCI-to-PCMCIA host controller. The companion
Omega82C28 interfaces to power switches and enables serialized interrupt
requests for ISA legacy support.
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.
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.
OMEGA82C194 AND OMEGA82C128. This is the Company's first 32-bit
PCI-to-CardBus host controller chip set for next-generation multimedia notebook
computers. The CardBus controller Omega82C194 features pin-compatible
upgradability from the Omega82C094. It enables true PCI-bus performance to and
from the inserted CardBus cards. The companion Scalable Zoomed Video controller
Omega82C128 can be combined to support multiple CardBus slots and interface to
various audio/video multimedia functions on the motherboard.
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, notebook and multimedia product lines in
an attempt to maintain product competitiveness. 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
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.
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SALES, MARKETING AND DISTRIBUTION
The Company sells its products primarily through direct sales efforts.
The Company has sales offices in Taiwan, Hong Kong and Mountain View,
California. The Company's offices are staffed 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 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. Also graphics and video
processing subsystems have been increasingly integrated onto the motherboard of
the PC system and this trend has decreased adapter card manufacturers' market
share. 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. During fiscal 1996 sales to
major systems manufacturers accounted for 37% of net sales.
Trident's future success depends in large part on the success of its
sales to leading systems manufacturers. The Company has added and expects to
continue to add sales and marketing personnel in the U.S. with the goal of
increasing sales to the leading PC systems manufacturers and OEM channel.
Competitive factors of particular importance in such markets include
performance and the integration of functions on a single IC chip. During
fiscal 1996, the Company announced design wins with several major PC
manufacturers. There can be no assurance that such marketing efforts in these
or other markets will continue to be successful.
During fiscal 1996, the Company generated 78% of its revenues from
Asia and 22% from North America and rest of 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. IBM, NEC,
and Jaton Corp. comprised 16%, 12%, and 11% of net sales, respectively, for
fiscal 1996. 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 8 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 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.
Trident's wholly-owned subsidiary, Trident Microsystems (Far East) Ltd.
("Trident Far East"), manages the manufacturing operations of the Company.
Prior to 1996, the Company had been particularly dependent upon one
foundry, Taiwan Semiconductor Manufacturing Company ("TSMC") to meet its
foundry requirements. While TSMC manufactured a substantial amount of the
Company's graphics IC products throughout fiscal 1996, the
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Company complemented TSMC production with additional capacity at Samsung
Semiconductor, Inc., United Microelectronic Corporation ("UMC") and Winbond
Corporation.
In order to obtain an adequate supply of wafers, especially wafers
manufactured using advanced process technologies, the Company entered into an
agreement in June 1995 with TSMC, one of the Company's current foundries, under
which the Company is committed to purchase and TSMC is committed to provide a
certain number of wafers each year through December 31, 1999. In addition, the
Company has the option to purchase an additional amount of wafers each year
during that period. Under this agreement, the Company paid $16.8 million in
August 1995. The payment can be applied in portions in each of the next four
calendar years ending in 1999 to offset the cost of the wafers purchased under
the agreement after certain specified quantities are purchased in each of such
years. However, the payment is not refundable except in certain circumstances.
In August 1995, the Company also entered into a joint venture agreement with
United Microelectronics Corporation ("UMC"), one of the Company's current
foundries, under which the Company is committed to invest a certain amount of
New Taiwan dollars, currently equivalent to approximately US$59 million over
the next three years for a 10% equity interest in a joint venture with UMC and
other venture partners. The Company will be guaranteed a certain percentage of
total wafer supply from the wafer fabrication facility of the new venture which
will be located in Taiwan and is expected to be operational mid-1997. In the
interim, UMC has been providing capacity to Trident from existing foundries.
The first payment of US$13.7 million was made in January 1996. The remaining
committed equity contributions during calendar years 1996 and 1997 are
currently equal to approximately US$30 million and US$15 million. The Company
is continuing 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 TSMC and UMC agreements are expected to provide the Company with
substantial additional capacity; however, they 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. In addition, the agreements with TSMC and UMC
will utilize a significant amount of the Company's available funds.
Historically, the Company has subcontracted to foundries the product
packaging, product testing and other activities for certain products. As a
result, the Company has paid only for fully-tested products meeting
Company-determined standards, and costs associated with abnormally low yields
were generally borne by the foundry. During 1994, the Company began purchasing
product in wafer form from the foundries and managing 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. 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. To date, the
Company has experienced few customer returns 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 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,
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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.
The Company has been actively working to obtain additional capacity
from its foundries and to qualify additional foundries and is continuously
evaluating potential new sources of supply. 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 all of its product development in-house and had
a staff of 182 research and development personnel as of June 30, 1996. 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 video processing
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 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 include ATI Technologies, Inc., Chips and Technologies,
Inc., Cirrus Logic, Inc., S3 Inc. and Tseng Labs Inc. and potential competitors
include certain large semiconductor manufacturers including Intel Corporation
and emerging semiconductor manufacturers. Certain of the Company's current
competitors and many potential competitors have significantly greater
technical, manufacturing, financial and marketing resources than the Company.
Leading systems manufacturers have increased market share 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 a share in these 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.
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INTERNATIONAL OPERATIONS
The Company's wholly-owned subsidiary, Trident Far East, maintains
offices in Kowloon, Hong Kong 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 that region. Each office hires its own employees directly.
During fiscal 1996, 1995 and 1994, sales to customers in Asia
accounted for approximately 78%, 80% and 86% of the Company's 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 and Taiwan. Political instability or
significant changes in economic policy could disrupt the Company's operations
in foreign countries or result in the curtailment or termination of such
operations. While the Company has not experienced any material adverse effects
on its operations as a result of such 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.
LICENSES, PATENTS AND TRADEMARKS
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. In certain cases, the Company has applied for
patents on its technology. Although the Company intends to protect its rights
vigorously, there can be no assurance that these measures will be successful.
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. In the
future, however, there can be no assurance that third parties will not assert
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. In the event of litigation to determine the validity
of any third-party claims, such litigation 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 which 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 were not made
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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 Hong Kong, 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.
Trident and TrueVideo are registered trademarks, and TVGA9000i,
TVGA8900DR, ProVidia, ProVidia9682, ProVidia9683, ProVidia9685, PC View+,
TGUI9440, TVG9470, TGUI9680, Cyber9320, Cyber9382, Cyber9385, Omega82C365,
Omega82C7226, Omega82C094, Omega82C28, Omega82C194 and Omega82C128 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.
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 one industry segment as described above.
EMPLOYEES
As of June 30, 1996, the Company had 308 full time employees,
including 182 in research and development, product testing, quality assurance
and related functions, 67 in marketing and sales and 59 in finance and
administration. The Company plans to continue to increase its employee base
during fiscal 1997. 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.
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EXECUTIVE OFFICERS OF THE REGISTRANT
As of June 30, 1996, 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 51 President, Chief Executive Officer and 1987
Chairman of the Board
James T. Lindstrom 50 Vice President, Finance, Chief 1992
Financial Officer and Secretary
Peter Jen 49 Vice President of Worldwide Sales and 1988
Asian Operations
Jung-Herg Chang, Ph.D. 40 Vice President, Engineering 1992
Richard I. Silverman 44 Vice President, Marketing 1992
Mr. Lin founded the Company and has served as President, Chief
Executive Officer and Chairman of the Board of the Company since July 1987.
From June 1984 to July 1987, he was Vice President of Engineering at Genoa
Systems, Inc., a graphics chipset design company that he co-founded. From
January 1982 to June 1984, he was a Department Manager/PC I/O Subsystem
Development and Integration with Olivetti Advanced Technical Center,
Incorporated, where he was responsible for developing peripheral equipment for
Olivetti's IBM-compatible personal computers.
Mr. Lindstrom joined the Company as Vice President, Finance, and Chief
Financial Officer in August 1992. Mr. Lindstrom also has served as Secretary
of the Company since October 1992. From February 1990 to July 1992, he was the
Chief Financial Officer of C-Cube Microsystems, Inc., a semiconductor design
company.
Mr. Jen joined the Company in August 1988, served as Vice President,
Finance from October 1990 through August 1992, served as Vice President,
Operations from September 1992 to March 1994, served as General Manager of Asia
Operations from April 1994 to April 1995 and was appointed to the position of
Vice President, Worldwide Sales and Asia Operations in April 1995. 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.
Dr. Chang joined the Company in July 1992, served as Chief Technical
Officer from July 1992 through June 1994 and was appointed Vice President,
Engineering in July 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 B.S. in Electrical Engineering
from the National Taiwan University and an M.S. in Electrical Engineering and
Computer Science and a Ph.D. in Computer Science from the University of
California at Berkeley.
Mr. Silverman joined the Company in August 1992, served as Director of
Product Marketing from August 1992, Senior Director of Marketing from April
1994, Vice President of Strategic Planning from January 1995 and was appointed
Vice President, Marketing in April 1995. From January 1992 to July 1992, he
served as Senior Strategic Marketing Specialist-Graphics at Samsung
Semiconductor, Inc. From December 1983 to June 1991, Mr. Silverman served in a
number of senior positions including Vice President of Marketing at Vermont
Microsystems, Inc., a high-performance graphics card designer and
manufacturer.
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ITEM 2. PROPERTIES
The Company leases two buildings, one of approximately 58,000 square
feet and a second one of approximately 26,000 square feet, on North Bernardo
Avenue in Mountain View, California, pursuant to leases which expire in June
1999 and February 2000, respectively. These buildings are used as the
Company's headquarters and include development, marketing and sales, and
administrative offices. The Company also leases office space in Taipei, Taiwan
for the Taiwan office, and in Kowloon, Hong Kong for the Hong Kong office and
Cayman subsidiary.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None.
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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
------------------- ---- ---
1995
----
First Quarter $ 6.375 $ 5.000
Second Quarter 11.625 6.000
Third Quarter 17.500 9.500
Fourth Quarter 21.000 15.500
1996
----
First Quarter 25.750 20.250
Second Quarter 37.250 17.750
Third Quarter 23.875 13.250
Fourth Quarter 19.000 12.500
As of June 30, 1996, there were approximately 221 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.
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ITEM 6. SELECTED FINANCIAL DATA
TRIDENT MICROSYSTEMS, INC.
SELECTED FINANCIAL DATA
Year ended June 30,
-------------------
(in thousands, except per share data) 1992 1993 1994 1995 1996
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net sales $67,387 $77,726 $69,139 $106,766 $168,089
Income from operations 17,736 14,801 973 9,776 22,742
Net income 11,655 10,137 1,480 8,011 16,860
Net income per share 0.98 0.86 0.12 0.61 1.26
BALANCE SHEET DATA:
Cash and investments $22,921 $43,189 $50,492 $60,636 $41,228
Working capital 21,995 51,149 50,713 61,610 58,618
Total assets 35,672 62,362 75,269 88,665 127,510
Long term obligations and
redeemable preferred stock 7,518 -- -- -- --
Stockholders' equity 16,801 53,649 56, 116 66,141 90,184
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TRIDENT MICROSYSTEMS, INC.
QUARTERLY FINANCIAL DATA
Year ended June 30, 1995 Year ended June 30, 1996
------------------------ ------------------------
(unaudited, in thousands except First Second Third Fourth First Second Third Fourth
per share amounts) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- -------- ------- ------- ------- ------- -------
Net sales $19,053 $26,830 $29,801 $31,082 $36,566 $41,348 $46,007 $44,168
Gross margin 5,369 7,788 10,970 11,777 13,568 15,504 17,277 11,065
Income from operations 139 1,978 4,520 3,139 6,095 7,040 7,665 1,943
Net income 349 1,652 3,414 2,596 4,505 5,156 5,580 1,619
Net income per share 0.03 0.13 0.26 0.20 0.34 0.38 0.42 0.12
Year ended June 30, 1995 Year ended June 30, 1996
------------------------ ------------------------
First Second Third Fourth First Second Third Fourth
(as a percentage of net sales) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Net sales 100% 100% 100% 100% 100% 100% 100% 100%
Gross margin 28 29 37 38 37 37 38 25
Income from operations 1 7 15 10 17 17 17 4
Net income 2 6 12 8 12 12 12 4
In the fourth quarter of fiscal 1996, the Company recorded a $4.0
million lower of cost or market charge to inventory.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ANNUAL RESULTS OF OPERATIONS
The following table sets forth the percentages that income statement
items are to net sales for the years ended June 30, 1996, 1995 and 1994:
Year Ended June 30,
-------------------
1996 1995 1994
---- ---- ----
Net sales 100% 100% 100%
Cost of sales 66 66 72
--- --- ---
Gross margin 34 34 28
Research and development 11 13 14
Selling, general and administrative 10 11 12
Litigation charges -- 1 1
--- --- ---
Income from operations 13 9 1
Interest income, net 2 2 2
--- --- ---
Income before provision for income taxes 15 11 3
Provision for income taxes 5 4 1
--- --- ---
Net Income 10 7 2
=== === ===
Net Sales
Net sales in fiscal 1996 amounted to $168.1 million, or 57%, above the
$106.8 million reported in fiscal 1995. The increase in net sales was
primarily due to increases in the unit volume shipments of graphical user
interface ("GUI") accelerators, graphics controller, notebook and video
processing products of approximately 34% in fiscal 1996 as compared to fiscal
1995 and an increase in the average selling prices ("ASPs") of approximately
17%. The increases in unit volume and ASP were primarily attributable to sales
of the Company's higher priced GUI accelerator desktop and notebook products
which entered volume production in the second half of fiscal 1995 and to
significant growth of the overall PC market during fiscal 1996. Sales of GUI
accelerator desktop products rose to approximately 66% of the Company's net
sales in fiscal 1996 from approximately 61% in fiscal 1995. Sales of notebook
products increased to approximately 15% of the Company's net sales in fiscal
1996 from only 1% in fiscal 1995.
Net sales in fiscal 1995 amounted to $106.8 million, or 55%, above the
$69.1 million reported in fiscal 1994. The increase in net sales was
primarily due to increases in the unit volume shipments of GUI accelerators,
graphics controller and video processing products of approximately 30% in
fiscal 1995 as compared to fiscal 1994. The increase in the ASPs of
approximately 16% in fiscal 1995 as compared to fiscal 1994 was due to the
shift in product mix toward GUI accelerator products. The increase in unit
volume was primarily attributable to sales of the Company's higher performance
GUI accelerator products introduced during the year and significant growth of
the overall PC market during fiscal 1995. Sales of higher priced GUI
accelerator products rose to approximately 61% of the Company's net sales in
fiscal 1995 from approximately 20% in fiscal 1994.
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The Company's customers have been primarily Asian adapter card
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. As a result of the Company's efforts, during fiscal 1996,
the Company sold products to Acer, Fujitsu, Hewlett-Packard, IBM, Matsushita,
NEC, Olivetti, Seiko-Epson, and Sharp. Sales to leading PC systems
manufacturers represented approximately 37% of net sales for fiscal 1996, an
increase from 6% in 1995. Sales to Asian customers, primarily in Hong Kong,
Taiwan, Korea and Japan, accounted for 78%, 80% and 86% of net sales in fiscal
1996, 1995, and 1994, respectively. The Company expects that Asian customers
will continue to provide for a significant portion of the Company's sales for
the next year and expects sales to leading PC systems manufactures to continue
to increase. Sales to three customers accounted for approximately 16%, 12% and
11% of net sales for 1996. Sales to three customers accounted for
approximately 16%, 13% and 11% of net sales for fiscal 1995. Sales to four
customers accounted for approximately 24%, 18%, 12% and 10% of net sales for
fiscal 1994. Substantially all of the sales transactions were denominated in
U.S. dollars during all periods.
The Company plans to continuously introduce new and higher performance
GUI accelerators, graphics controller and multimedia products which it will
seek to sell to existing customers as well as new customers in Asia, North
America and Europe. The Company's future success depends upon the Company
successfully introducing 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 successfully 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 successfully developed and shipped,
there can be no assurance that new products described above will be successful
in the marketplace.
Gross Margin
Trident's gross margin remained constant at 34% in fiscal 1996 and
fiscal 1995. Gross margins were generally higher in 1996 because of the high
percentage of sales of GUI accelerators with higher gross margins and a
relative stable pricing environment for all products because of industry supply
constraints. However, the increase in gross margin for the fiscal year was
offset by a $4.0 million lower cost or market charge to inventory in the fourth
quarter of fiscal 1996 which reduced gross margins for that quarter to 25%.
Gross margin increased from 28% in fiscal 1994 to 34% in fiscal 1995.
The increase in gross margin during the year was primarily the result of volume
shipments of new GUI accelerator products with higher gross margins, reduction
in the manufacturing costs of certain SVGA products and lower per unit overhead
cost associated with higher unit volumes.
The Company believes that it is common for the prices of
high-technology products to decline over time, as availability and competition
increase and new, advanced products are introduced. The Company expects ASPs of
existing products to continue to decline, although average ASPs may remain
constant or increase as a result of introductions of new higher performance
products often with additional functionality. The Company's strategy is to
maintain gross margins through the introduction of new products which have
higher margins and the reduction in manufacturing costs accomplished through
the Company's custom design methodology and migration to new process
technology, and by taking advantage of the economies of scale of volume
production. As a result, the Company depends upon the success of new product
development and the timely introduction of new products, as well as upon the
success of its manufacturing cost reduction efforts. There can be no assurance
that the Company can successfully or timely develop and introduce new products
or that it can successfully reduce manufacturing costs.
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Research and Development
Research and development expenditures increased to $17.9 million from
$13.3 million and $9.6 million in fiscal 1996, 1995 and 1994, respectively.
Research and development expenditures as a percentage of net sales were 11%,
13% and 14% in fiscal 1996, 1995 and 1994, respectively, due to net sales
increasing at a faster rate than expenditures. The increase in expenditures in
fiscal 1996 compared to fiscal 1995 was primarily due to the increase in
headcount and associated personnel-related costs, increased depreciation, and
increased non-recurring engineering expenses and outside engineering services
because the Company increased its research and development efforts during the
year. The increase in expenditures in fiscal 1995 compared to fiscal 1994 was
due to the increase in headcount and associated personnel-related costs and
increased non-recurring engineering expenses as a result of increased research
and development efforts during fiscal 1995. The Company intends to continue
making substantial investments in research and development and expects research
and development costs to increase during fiscal 1997 because of anticipated
increases in headcount, acquisition of technologies and costs associated with
the development of new products.
Selling, General and Administrative
Selling, general and administrative expenditures increased to $16.7
million from $11.2 million and $7.7 million in fiscal 1996, 1995 and 1994,
respectively. Selling expenditures increased to $11.2 million from $6.9
million and $5.0 million in fiscal 1996, 1995 and 1994, respectively, and
general and administrative expenditures increased to $5.5 million from $4.3
million and $2.7 million in fiscal 1996, 1995 and 1994, respectively.
Increases in selling costs in fiscal 1996 compared to fiscal 1995 were
primarily due to the addition of sales staff in the U.S. and Asia as well as
additional commissions due to foreign distributors and sales representatives
due to higher sales through such channels. The increases in selling costs in
fiscal 1995 compared to fiscal 1994 were primarily due to increased
personnel-related costs, increased promotional activities and additional
commissions due to distributors and sales representatives as a result of higher
sales through such channels and increased net sales during fiscal 1995.
General and administrative expenditures increased in fiscal 1996 from fiscal
1995 primarily due to the increases in personnel related expenses as a result
of the increase of headcount, facility expenses, insurance expenses and banking
expenses. General and administrative expenditures increased in fiscal 1995
from fiscal 1994 primarily due to the increases in personnel related expenses
as a result of the increase of headcount, facility expenses, insurance expenses
and banking expenses. Selling, general and administrative expenditures as a
percentage of net sales were 10%, 11% and 12% in fiscal 1996, 1995, and 1994,
respectively, due to net sales increasing at a slightly higher rate than
expenditures. The Company expects selling, general and administrative
expenditures to increase in absolute amounts during fiscal 1997 as the Company
expects to increase its level of sales and administrative activities.
Litigation Charges
On August 24, 1993, a class action lawsuit was filed in the U.S.
District Court for the Northern District of California against the Company and
certain other parties alleging violations of federal securities laws. The
Company determined to settle the lawsuit in June 1995 for $3.2 million.
Pursuant to the settlement, the Company took a pretax charge of $1.6 million in
the year ended June 30, 1995 for the amounts expected to be paid in settlement
and in legal expenses. The Company took a pretax charge of $0.9 million in
the year ended June 30, 1994 for the amounts for the anticipated legal expenses
related to the above mentioned lawsuit.
Interest Income, Net
The amount of interest income earned by the Company varies directly
with the amount of its cash, cash equivalents, short-term investments and
long-term investments and the prevailing interest rates. Interest income
increased to $2.1 million from $2.0 million in fiscal 1996 from 1995, primarily
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20
due to a shift in the Company's investment portfolio to taxable instruments with
higher interest rates. Cash, cash equivalents and short term investments
declined during fiscal 1996 as the Company made advance payments to a foundry
and invested in a foundry venture. Interest income increased to $2.0 million
from $1.4 million in fiscal 1995 from 1994 primarily due to an increased amount
of cash, cash equivalents, short-term investments and long-term investments from
profitable operations and increased prevailing interest rates during fiscal
1995. A significant amount of the interest earned by the Company during fiscal
1996, 1995 and 1994 was not subject to income taxes.
Provision for Income Taxes
As a percentage of income before income taxes, the provision for
income tax was 32%, 32% and 37% for fiscal 1996, 1995 and 1994, respectively.
The effective income tax rate was below the statutory rate primarily because of
operations in foreign countries with lower income tax rates, and a significant
portion of earned interest was not subject to federal income tax.
Future Results; Forward Looking Statements
This report contains forward looking statements regarding expected
increases in sales to system manufacturers, expected increases in sales and
marketing personnel, expected increases in research and development and general
and administrative expenses, trends in the graphics marketplace and the
introduction of new technologies in the Company's products. Actual results
could vary significantly from those expected by the Company. The factors that
could affect actual results include those specified below, as well as those
specifically identified elsewhere in this report.
The Company has experienced fluctuations in its operating results in
the past and anticipates such fluctuations in the future. These fluctuations
have been caused by a variety of factors, including seasonal customer demand
(particularly during the summer when sales of PCs have traditionally been
slower), the timing of new product introductions, the acceptance of new
products, competitive pressures on average selling prices, the availability of
foundry and assembly capacities and changes in the mix of products sold. The
Company's prior performance should not be presumed to be an accurate indicator
of future performance. Future results will depend substantially on whether the
Company can timely bring new products to market, and upon the acceptance of
those products. Operating results would be adversely affected by a downturn in
the market for desktop or notebook PCs, order cancellations or order
rescheduling. Because the Company is continuing to increase its operating
expenses for personnel and new product development, the Company would be
adversely affected if its sales did not correspondingly increase.
The Company's future operating results also may be affected by various
factors which are beyond the Company's control. These include adverse changes
in general economic conditions, political instability, governmental regulation
or intervention affecting the personal computer industry, government regulation
resulting from U.S. foreign and trade policy, and fluctuations in foreign
exchange rates (particularly in relation to the U.S. dollar and Asian
currencies).
Because the Company's customers distribute their products worldwide,
changes in the global graphics market place, such as the shift in market share
from Asian clone makers to leading North American systems manufacturers, have
affected and will continue to affect the Company's operating results.
Furthermore, the Company's operating results will fluctuate with changes in the
Asian economies, particularly those of Taiwan and Hong Kong, since the
Company's revenues have been and are expected to be generated primarily from
customers in Asia. The market for graphics controllers has become increasingly
competitive, and the Company's results could be adversely affected by the
actions of existing or future competitors, including the development of new
technologies, the incorporation of graphics functionality into other components
and claims by third parties of infringement of patent or similar intellectual
property rights.
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The Company currently relies on several independent foundries to
manufacture its products either in finished form or wafer form. To the extent
a foundry terminates its relationship with the Company or should the Company's
supply from a foundry be interrupted or terminated for any other reason, such
as a natural disaster, the Company may not have a sufficient amount of time to
replace the supply of products manufactured by that foundry. While the Company
has made significant investments to secure foundry capacity, there can be no
assurance that the Company will obtain sufficient foundry capacity to meet
customer demand in the future, particularly if that demand should increase.
The Company is continuously evaluating potential new sources of supply.
However, 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 capacity from current foundries
and new foundry sources will be available and will satisfy the Company's
requirements on a timely basis or at acceptable quality or per unit prices.
The Company's products are assembled and tested by several independent
subcontractors. The Company's reliance on independent assembly and testing
houses to provide these services involves a number of risks, including the
absence of guaranteed capacity and reduced control over delivery schedules,
quality assurance and costs.
Constraints or delays in the supply of the Company's products, whether
because of capacity constraints, unexpected disruptions at the foundries or
assembly or testing houses, delays in obtaining additional production at
existing foundries or in obtaining production from 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
a timely manner.
The market price of the Company's Common Stock has been, and may
continue to be, extremely volatile. Factors such as new product announcements
by the Company or its competitors, quarterly fluctuations in the Company's
operating results and general conditions in the graphics controller market may
have a significant impact on the market price of the Company's Common Stock.
These conditions, as well as factors which generally affect the market for
stocks of high technology companies, could cause the price of the Company's
stock to fluctuate substantially over short periods.
The Company has recently experienced a period of significant growth,
which has placed, and could continue to place, a significant strain on
Trident's limited personnel and other resources. The Company's ability to
manage any further growth, should it occur, would require significant expansion
of its research and development and marketing and sales capabilities. In
particular, the sale and distribution of products to numerous large system
manufacturers in diverse markets and the requirements of such manufacturers for
design support would place substantial demands on Trident's research and
development and sales functions. In addition, the Company's ability to manage
any further growth, should it occur, would depend upon its ability to manage
and expand its foundry relationships. The failure of Trident's management to
effectively expand these functions consistent with any growth which may occur
could have a material adverse effect on the Company's business and results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, the Company's principal sources of liquidity
included cash and cash equivalents of $16.9 million and short-term investments
of $24.3 million. Cash provided by operating activities was $7.9 million,
$10.2 million and $9.4 million in fiscal 1996, 1995 and 1994, respectively.
Cash provided by operating activities in fiscal 1996 was mainly due to
profitable operations, adjustment of non-cash expenses and expansion of vendor
credit, offset by increased requirements for working capital due to increases
in accounts receivable, inventory and prepaid expenses and other
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current assets. Cash provided by operating activities in fiscal 1995 was
mainly due to profitable operations, adjustment of non-cash expenses, increase
in the income taxes payable in foreign operations, and the increase of accrued
liabilities, offset by increased requirements for working capital due to the
increase in accounts receivable and a decrease in accounts payable. Cash
provided by operating activities in fiscal 1994 was mainly due to profitable
operations, adjustment of non-cash expenses, expanding vendor credit and refund
of income taxes, increase in the income taxes payable in foreign operations,
and the increase of accrued liabilities including the accrual for legal fees,
offset by increased requirements for working capital due to increases in
accounts receivable and inventory. Capital expenditures in fiscal 1996, 1995
and 1994 were $4.8 million, $1.9 million and $2.7 million, respectively. The
Company expects to spend approximately $4.5 million on additions to property
and equipment during fiscal 1997.
During fiscal 1996 the Company issued 717,000 shares of common stock
and generated $3.7 million of cash. During fiscal 1995 the Company issued
279,000 shares of common stock and generated $1.1 million of cash.
In order to obtain a supply of wafers sufficient to meet anticipated
increased demand, and especially to obtain wafers manufactured using advanced
process technologies, the Company entered into an agreement in June 1995 with
Taiwan Semiconductor Manufacturing Company ("TSMC"), one of the Company's
current foundries, under which the Company is committed to purchase and TSMC is
committed to provide a certain number of wafers each year through December 31,
1999. In addition, the Company has the option to purchase an additional amount
of wafers each year during the period. The Company made a prepayment to TSMC
of $16.8 million in August 1995. In August 1995 the Company also entered into
a joint venture agreement with United Microelectronics Corporation ("UMC"),
under which the Company is committed to invest a certain amount of New Taiwan
dollars currently equivalent to approximately US$59 million over the next three
years for certain equity ownership in a joint ventures with UMC and other
venture partners to establish a new foundry. Under the agreement, the new
foundry guaranties to Trident a certain percentage of its total wafer supply.
The Company made the first payment amounting to US$13.7 million in January
1996. The remaining committed equity contributions during calendar years 1996
and 1997 are currently equal to approximately US$30 million and US$15 million.
These investments with TSMC and UMC are intended to secure capacity so
that the Company can meet expected increased demand, should it occur, and are
an investment in the future of Trident. However, there are certain risks
associated with these methods including the ability of the Company to utilize
the capacity for which it has made substantial investments and the inability of
UMC together with its partners to successfully build the new foundry. These
agreements and the risks associated with these and other foundry relationships
are described under the caption "Business-Manufacturing." The Company will
continue to consider possible transactions to secure additional foundry
capacity when circumstances warrant.
The aforementioned agreements with TSMC and UMC have utilized a
significant amount of the Company's available funds; however the Company
believes its current resources are sufficient to meet its needs for at least
the next twelve months. The Company regularly considers transactions to
finance its activities, including debt and equity offerings and new credit
facilities or other financing transaction.
Inventory increased during fiscal 1996 to a level of $26.9 million at
year end compared to $11.6 million at the end of fiscal 1995 reflecting the
increased deliveries from foundries during the third fiscal quarter of fiscal
1995 in part to support the Company's increased sales level, and in part due to
higher than expected yields. The increased inventory was primarily work in
process of products which are currently shipping in high volume. The Company
took a $4.0 million lower cost or market charge to inventory during the fourth
fiscal quarter of fiscal 1996. While the Company believes that this charge
sufficiently protects the Company from the risk that this inventory will not be
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23
sold at normal gross margins, there is no assurance that prices might not fall
more than anticipated, requiring further charges or that similar charges might
not be required as to other Company products in the future.
In May 1996, the Company entered into a $15.0 million unsecured
revolving credit line with a bank which expires on December 31, 1997 of which
no amounts are outstanding. The availability of the credit facility depends
upon the Company meeting certain financial ratios and operating results.
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.
23
24
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
1996 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".
24
25
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:
Page Number
-----------
1. Financial Statements:
Report of Independent Accountants 26
Consolidated Balance Sheet - 27
As of June 30, 1996 and 1995
Consolidated Statement of Operations - 28
For the Three Years Ended June 30, 1996
Consolidated Statement of Changes in Stockholders' Equity 29
For the Three Years Ended June 30, 1996
Consolidated Statement of Cash Flows 30
For the Three Years Ended June 30, 1996
Notes to Consolidated Financial Statements 31
2. Financial Statement Schedules:
For years ended June 30, 1996, 1995 and 1994:
Report of Independent Accountants on Financial Statement Schedules 41
Schedule Page Number
-------- -----------
II. Valuation and Qualifying Accounts and Reserves 42
All other 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 44. 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:
None.
25
26
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, changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
Trident Microsystems, Inc. and its subsidiaries at June 30, 1996 and 1995, and
the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1996, 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.
Price Waterhouse LLP
San Jose, California
July 24, 1996
26
27
TRIDENT MICROSYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
________________________________________________________________________________
JUNE 30,
(in thousands, except per share data) 1996 1995
ASSETS
Current Assets:
Cash and cash equivalents $ 16,894 $ 30,609
Short-term investments 24,334 30,027
Accounts receivable 16,872 8,767
Inventories 26,866 11,636
Deferred income taxes 3,838 1,867
Prepaid expenses and other current assets 7,140 1,228
------------ ------------
Total current assets 95,944 84,134
Property and equipment, net 5,628 3,679
Investments in joint venture 13,716 -
Other assets 12,222 852
------------ ------------
Total assets $ 127,510 $ 88,665
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 24,084 $ 11,527
Accrued expenses 7,632 7,030
Income taxes payable 5,610 3,967
------------ ------------
Total current liabilities 37,326 22,524
------------ ------------
Commitments (Notes 3 and 9)
Stockholders' Equity:
Common stock, $0.001 par value; 30,000
shares authorized; 12,578 and 11,861 shares issued
and outstanding 12 11
Additional paid-in capital 38,267 31,387
Deferred compensation related to restricted stock
and stock options - (253)
Notes receivable from stockholders (585) (634)
Retained earnings 52,490 35,630
------------ ------------
Total stockholders' equity 90,184 66,141
------------ ------------
Total liabilities and stockholders' equity $ 127,510 $ 88,665
============ ============
See accompanying notes to consolidated financial statements.
27
28
TRIDENT MICROSYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
________________________________________________________________________________
YEAR ENDED JUNE 30,
(in thousands, except per share data) 1996 1995 1994
Net sales:
Sales $ 158,471 $ 97,852 $ 62,568
Sales to related parties 9,618 8,914 6,571
------------- ------------ -----------
168,089 106,766 69,139
Cost of sales 110,675 70,862 50,032
------------- ------------ -----------
Gross margin 57,414 35,904 19,107
Research and development expenses 17,931 13,334 9,557
Selling, general and administrative expenses 16,741 11,221 7,697
Litigation charges - 1,573 880
------------- ------------ -----------
Income from operations 22,742 9,776 973
Interest income, net 2,052 2,005 1,375
------------- ------------ -----------
Income before provision for income taxes 24,794 11,781 2,348
Provision for income taxes 7,934 3,770 868
------------- ------------ -----------
Net income $ 16,860 $ 8,011 $ 1,480
============= ============ ===========
Net income per share $ 1.26 $ 0.61 $ 0.12
============= ============ ===========
Common and common equivalent shares used in
computing per share amounts 13,423 13,163 11,955
------------- ------------ -----------
See accompanying notes to consolidated financial statements.
28
29
TRIDENT MICROSYSTEMS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
________________________________________________________________________________
DEFERRED
COMPENSATION
RELATED TO NOTES
ADDITIONAL RESTRICTED RECEIVABLE
COMMON STOCK PAID-IN STOCK AND FROM RETAINED
(in thousands) SHARES AMOUNT CAPITAL STOCK OPTIONS STOCKHOLDERS EARNINGS
Balance at June 30, 1993 11,341 $ 11 $29,256 $ (921) $ (836) $26,139
Issuance of common stock 241 - 372 - - -
Deferred compensation related to stock option
cancellations - - (36) 36 - -
Amortization of deferred compensation 364
Repayment of stockholder notes - - - - 251 -
Net income - - - - - 1,480
------- ------- ------- ------- ------- -------
Balance at June 30, 1994 11,582 11 29,592 (521) (585) 27,619
Issuance of common stock 279 - 1,128 - - -
Amortization of deferred compensation - - - 268 - -
Accrued interest converted to stockholder
notes receivable - - - - (49) -
Income tax benefit on disqualifying
disposition of common stock options - - 667 - - -
Net income - - - - - 8,011
------- ------- ------- ------- ------- -------
Balance at June 30, 1995 11,861 11 31,387 (253) (634) 35,630
Issuance of common stock 717 1 3,684 - - -
Amortization of deferred compensation - - - 253 - -
Payment of stockholder notes receivable - - - - 49 -
Income tax benefit on disqualifying
disposition of common stock options - - 3,196 - - -
Net income - - - - - 16,860
------- ------- ------- ------- ------- -------
Balance at June 30, 1996 12,578 $ 12 $38,267 $ - $ (585) $ 52,490
======= ======= ======= ======= ======= ========
See accompanying notes to consolidated financial statements.
29
30
TRIDENT MICROSYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
________________________________________________________________________________
(in thousands) YEAR ENDED JUNE 30,
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,860 $ 8,011 $ 1,480
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 1,910 1,502 1,313
Provision for doubtful accounts and sales returns 12 271 439
Amortization of deferred compensation 253 268 364
Loss (gain) on disposal of property and equipment (112) - 193
Changes in assets and liabilities:
Accounts receivable (8,117) (3,158) (2,291)
Inventories (15,230) 1,705 (4,628)
Prepaid expenses and other current assets (1,112) (431) 2,015
Other assets 630 (548) 4
Deferred income taxes (1,971) (764) 17
Accounts payable 12,557 (1,568) 7,940
Accrued expenses 602 2,715 1,877
Income taxes payable 1,643 2,224 680
------- ------- -------
Net cash provided by operating activities 7,925 10,227 9,403
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales (purchases) of short-term investments, net 5,693 (6,476) 5,345
Sales (purchases) of long-term investments, net - 1,747 (1,747)
Proceeds from disposal of fixed assets 1,009 - -
Purchases of property and equipment (4,755) (1,878) (2,666)
Advance payment to vendor under wafer capacity agreement (16,800) - -
Investment in joint venture (13,716) - -
------- ------- -------
Net cash provided by (used in) investing activities (28,569) (6,607) 932
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 3,684 1,128 372
Income tax benefit on disqualifying disposition of common
stock options 3,196 667 -
Principal repayments by stockholders of notes receivable 49 - 251
Principal payments under capital lease obligations - - (57)
------- ------- -------
Net cash provided by financing activities 6,929 1,795 566
------- ------- -------
Net increase (decrease) in cash and cash equivalents (13,715) 5,415 10,901
Cash and cash equivalents at beginning of year 30,609 25,194 14,293
------- ------- -------
Cash and cash equivalents at end of year $ 16,894 $ 30,609 $ 25,194
======== ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 4,083 $ 2,303 $ 404
See accompanying notes to consolidated financial statements.
30
31
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
________________________________________________________________________________
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Trident Microsystems, Inc. (the "Company") designs, develops and markets
very large scale integrated circuit graphical user interface accelerators,
graphics controllers and multimedia video processors for IBM-compatible
personal computers.
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 consists of
highly liquid investments purchased with an original maturity of less than
90 days from the date of purchase. Short-term investments are comprised of
municipal and other debt obligations of U.S. financial institutions.
Because the Company has classified its short-term investments as
"available-for-sale", such investments are carried at fair market value.
Inventories. Inventories are stated at the lower of cost or market, with
cost being determined by the first-in, first-out method.
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. Investments in which the equity investment is less than 20%
and 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.
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.
Research and Development. Expenditures for research and development are
charged to income as incurred.
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 taxes provision on unremitted earnings
of foreign subsidiaries to the extent that such earnings are considered
permanently invested.
31
32
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
________________________________________________________________________________
Net Income per Share. Net income per share is computed using the weighted
average common and common equivalent shares which consist of dilutive
common stock equivalents related to stock options outstanding during the
period.
Foreign Currency Translation. The functional currency of the Company's
operations in all countries except for Taiwan is the U.S. dollar. The
functional currency of the Taiwan branch is the New Taiwan dollar.
Accordingly, all assets and liabilities in Taiwan are translated at the
current exchange rate at the end of the period and revenues and costs at
average exchange rates in effect during the period. The gains and losses
from translation of this operation's financial statements have not been
material.
Sales and purchase transactions are generally denominated in U.S. dollars.
Foreign currency transaction gains and losses were immaterial in each of
the periods presented.
STOCK-BASED COMPENSATION. In October 1995, the Financial Accounting
Standards Board issued Statement No. 123 (FAS 123), "Accounting for
Stock-Based Compensation" which defines a "fair value" based method of
accounting for an employee stock option or similar equity instrument and
encourages, but does not require, entities to adopt that method of
accounting for all of their employee stock compensation plans in the
Company's primary financial statements. For companies that do not adopt
fair value accounting in the primary financial statements, FAS 123 does
however require entities to include pro forma disclosures of the
differences, if any, between compensation cost in the net income and the
related cost measured by the fair value method. The Company does not
intend to adopt the accounting provision of the new standard in its primary
financial statements and will adopt the disclosure provisions during fiscal
1997.
32
33
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
________________________________________________________________________________
2. BALANCE SHEET COMPONENTS
JUNE 30,
(in thousands) 1996 1995
Cash and cash equivalents:
Cash and money market accounts $ 16,894 $ 27,499
Certificates of deposit - 1,041
Municipal obligations - 1,069
Other debt obligations - 1,000
------------ ------------
$ 16,894 $ 30,609
============ ============
Short-term investments:
Municipal obligations $ 24,334 $ 29,034
Other debt obligations - 993
------------ ------------
$ 24,334 $ 30,027
============ ============
Accounts receivable:
Trade accounts receivable $ 17,860 $ 9,743
Less: allowance for doubtful accounts and sales returns (988) (976)
------------ ------------
$ 16,872 $ 8,767
============ ============
Inventories:
Work in process $ 15,150 $ 3,302
Finished goods 11,716 8,334
------------ ------------
$ 26,866 $ 11,636
============ ============
33
34
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
________________________________________________________________________________
2. BALANCE SHEET COMPONENTS (CONTINUED)
JUNE 30,
(in thousands) 1996 1995
Prepaid expenses and other current assets:
Advance payment under wafer capacity agreement $ 4,800 $ -
Wafer foundry credits 1,318 -
Interest receivable 250 707
Other 772 521
------------ ------------
$ 7,140 $ 1,228
============ ============
Property and Equipment:
Machinery and equipment $ 9,137 $ 7,403
Furniture and fixtures 1,344 725
Leasehold improvements 1,393 464
------------ ------------
11,874 8,592
Less: accumulated depreciation and amortization (6,246) (4,913)
------------ ------------
$ 5,628 $ 3,679
============ ============
Other assets:
Advance payments under wafer capacity agreement $ 12,000 $ -
Other 222 852
------------ ------------
$ 12,222 $ 852
============ ============
Accrued Expenses:
Compensation accruals $ 2,358 $ 1,516
Sales allowances 1,306 666
Nonrecurring engineering charges 602 775
Litigation charges - 1,503
Other 3,366 2,570
------------ ------------
$ 7,632 $ 7,030
============ ============
3. AGREEMENTS WITH WAFER FOUNDRIES
Wafer Capacity Agreement. In June 1995, the Company and one of its
suppliers of semiconductor wafers entered into an agreement under
which the Company is committed to purchase and the supplier is
committed to provide a certain number of wafers each year through
December 31, 1999. In addition, the Company has the option to
purchase an additional amount of wafers each year during that period.
The Company paid $16,800,000 under an option agreement in August 1995.
The payment can be applied to partially offset the cost of wafers
purchased under the option, provided the Company purchases a specified
number of wafers during each of the four years ending December 31,
1999, but is not refundable except in certain circumstances. Of the
$16,800,000 paid for the option, $4,800,000 is included in prepaid and
other current assets and $12,000,000 is included in other long-term
assets.
34
35
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
________________________________________________________________________________
Investment in Joint Venture. In August 1995, the Company, together
with other U.S. semiconductor companies, entered into a joint venture
agreement with a supplier of semiconductor wafers to build a
semiconductor manufacturing facility located in Taiwan. Under the
agreement, the Company will invest a certain amount of New Taiwan
dollars (equivalent to approximately U.S.$59,000,000) in three
installments for a 10% equity interest in the joint venture. Of the
three installment payments, the first of $13,716,000 was paid in
January 1996. The remaining two payments of approximately $30,000,000
and $15,000,000 are expected to be paid in the fiscal years ended 1997
and 1998, respectively. Under the agreement, the Company is entitled
to purchase a certain percentage of the wafers produced at the new
plant under construction by the joint venture.
Impairment of Long-Lived Assets. The Company periodically assesses
the realizable value of all long-term assets in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived assets to be
Disposed of."
4. CREDIT FACILITY
On May 6, 1996, the Company entered into an unsecured credit agreement
with a bank. Under the agreement, the Company may borrow up to
$15,000,000 in revolving credit loans and term loans at an adjusted
LIBOR rate plus 1.25% and at the prime rate plus 0.25%, respectively.
The credit agreement expires on December 31, 1997 and requires the
Company to maintain certain financial ratios and operating results.
There were no borrowings under the line of credit as of June 30, 1996.
35
36
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
________________________________________________________________________________
5. INCOME TAXES
The components of income before taxes are as follows:
YEARS ENDED JUNE 30,
(in thousands) 1996 1995 1994
Income subject to domestic income taxes only $ 16,116 $ 7,948 $ (1,335)
Income subject to foreign income taxes, and in
certain cases, domestic income taxes 8,678 3,833 3,683
------------- ------------ ------------
$ 24,794 $ 11,781 $ 2,348
============= ============ ============
The provision for income taxes is comprised of the following:
YEARS ENDED JUNE 30,
(in thousands) 1996 1995 1994
Current:
Federal $ 7,171 $ 3,391 $ 138
State 1,786 544 94
Foreign 948 599 619
------------- ------------ ------------
9,905 4,534 851
------------- ------------ ------------
Deferred:
Federal (1,828) (638) -
State (143) (126) -
Foreign - - 17
------------- ------------ ------------
(1,971) (764) 17
------------- ------------ ------------
$ 7,934 $ 3,770 $ 868
============= ============ ============
Deferred tax assets are comprised of the following:
JUNE 30,
(in thousands) 1996 1995
State income taxes $ 473 $ 71
Vacation, bonus and other accruals 635 422
Allowances, reserves and other 2,578 1,158
Other 152 216
------------ ------------
Deferred tax assets $ 3,838 $ 1,867
============ ============
36
37
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
________________________________________________________________________________
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:
YEARS ENDED JUNE 30,
1996 1995 1994
Federal statutory rate 35.0% 34.0% 34.0%
State taxes, net of federal tax benefit 4.3 2.3 2.6
Tax exempt income (1.6) (3.1) -
Research and development credit - (4.3) -
Foreign earnings subject to lower tax rates (5.9) - -
Other 0.2 3.1 0.4
---- ---- ----
Effective income tax rate 32.0% 32.0% 37.0%
==== ==== ====
6. STOCKHOLDERS' EQUITY
Deferred compensation. In connection with the issuance of common stock and
stock options in 1993 and 1992, the Company recorded $1,274,000 as deferred
compensation in fiscal year 1993 and recognized $253,000, $268,000 and
$364,000 as compensation expense in fiscal years 1996, 1995 and 1994,
respectively. Deferred compensation is presented as a reduction of
stockholders' equity on the balance sheet and was amortized over the
vesting period of these restricted stock and stock options.
Stock Purchase Plan. In October 1992, the Board of Directors of the
Company adopted the 1992 Employee Stock Purchase Plan (the "Purchase Plan")
under which 500,000 shares of the Company's Common Stock may be issued.
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.
Stock Options. The Company grants nonstatutory and incentive stock options
to key employees, directors and consultants. At June 30, 1996, 5,195,000
shares of Common Stock are reserved for issuance upon exercise of the stock
options. Stock options are granted at prices determined by the Board of
Directors. 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.
37
38
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
________________________________________________________________________________
The following table summarizes the option activities for the years ended
June 30, 1994, 1995 and 1996:
OPTIONS OPTIONS OUTSTANDING
AVAILABLE FOR NUMBER OF PRICE PER
(in thousands, except per share data) GRANT OPTIONS OPTION
Balance, June 30, 1993 955 1,256 $0.77-$17.00
Options granted (1,665) 1,665 $4.63-$ 7.00
Options exercised - (197) $0.77-$ 5.00
Options expired or canceled 860 (860) $1.05-$16.75
------- ------ -------------
Balance, June 30, 1994 150 1,864 $0.77-$ 7.00
Additional shares reserved 800 -
Options granted (1,008) 1,008 $1.55-$20.06
Options exercised - (221) $0.80-$ 6.00
Options expired or canceled 335 (335) $0.80-$15.75
------- ------ -------------
Balance, June 30, 1995 277 2,316 $0.77-$20.06
Additional shares reserved 2,095 -
Options granted (1,142) 1,142 $12.63-$34.38
Options exercised - (673) $0.77-$11.25
Options expired or canceled 493 (493) $1.55-$23.25
------- ------ -------------
Balance, June 30, 1996 1,723 2,292 $0.77-$34.38
======= ====== =============
At June 30, 1996, 1995 and 1994, options for 538,000, 691,000 and 519,000
shares of Common Stock were vested but not exercised. In July 1993, the
Company canceled 830,000 options outstanding under the Option Plan with
exercise prices greater than $5.00 and reissued the options with an
exercise price of $5.00. In July 1996, the Company canceled 1,077,100
options outstanding under the Option Plan with exercise prices greater than
$9.38 and reissued the options with an exercise price of $9.38.
7. RELATED PARTY TRANSACTIONS
During the years ended June 30, 1996, 1995 and 1994, the Company sold
products with revenues of $9,618,000, $8,914,000 and $6,571,000,
respectively, 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. As of June 30, 1996, 1995 and 1994 the
Company had accounts receivable from affiliates of stockholders related to
such sales totaling $1,961,000, $299,000 and $607,000, respectively.
Notes receivable from stockholders primarily represent notes with interest
of approximately 4% that are secured by common stocks and due on January 5,
1997.
38
39
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
________________________________________________________________________________
8. GEOGRAPHIC SEGMENT INFORMATION
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 78%, 80% and 86% for fiscal 1996, 1995 and 1994,
respectively. The following is a summary of the Company's geographic
operations:
ASIA AND INTERCOMPANY
(in thousands) UNITED STATES PACIFIC ELIMINATION CONSOLIDATED
Fiscal Year 1996:
Product sales $ 137,784 $ 131,568 $ 101,263 $ 168,089
Income from operations 14,782 7,960 - 22,742
Identifiable assets 76,598 90,566 39,654 127,510
Fiscal Year 1995:
Product sales $ 72,002 $ 75,160 $ 40,396 $ 106,766
Income from operations 5,735 4,041 - 9,776
Identifiable assets 74,625 21,290 7,250 88,665
Fiscal Year 1994:
Product sales $ 54,378 $ 51,572 $ 36,811 $ 69,139
Income (loss) from operations (2,327) 3,300 - 973
Identifiable assets 64,965 18,962 8,658 75,269
The Company effected a reorganization in March 1996. The Company
established a wholly-owned subsidiary in the Cayman Islands. The Cayman
subsidiary and its two branch offices in Hong Kong and Taiwan are
responsible for the manufacturing of the Company's products and principally
responsible for the international sale of the Company's products.
Operations in the Company's subsidiary in Hong Kong and the Taiwan branch
office of the Hong Kong subsidiary were wound down during fiscal year 1996.
9. COMMITMENTS AND CONCENTRATION OF SALES AND CREDIT RISK
Building Leases. The Company leases facilities under noncancellable
operating lease agreements which expire at various dates through 1999.
Rental expense for the years ended June 30, 1996, 1995 and 1994 was
$1,092,000, $1,042,000 and $638,000, respectively. Total future minimum
lease payments under operating leases at June 30, 1996 were $1,338,000,
$1,248,000, $981,000 and $339,000 in fiscal years 1997, 1998, 1999 and
2000, respectively.
Concentration of Sales and Credit Risks. Three customers comprised 16%,
12% and 11%, respectively, of the Company's net sales for the year ended
June 30, 1996. Three customers comprised 16%, 13% and 11%, of the
Company's net sales for the year ended June 30, 1995.
39
40
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
________________________________________________________________________________
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash
equivalents, short-term investments and trade accounts receivable. The
Company places its cash and cash equivalents and short-term investments
primarily in market rate accounts and highly rated municipal and debt
obligations. 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.
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41
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Trident Microsystems, Inc.
Our audits of the consolidated financial statements referred to in our report
dated July 24, 1996, appearing on page 26 of this Form 10-K also included an
audit of the Financial Statement Schedule listed in Item 14(a) of this Form
10-K. In our opinion, this Financial Statement Schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
Price Waterhouse LLP
San Jose, California
July 24, 1996
41
42
SCHEDULE II
TRIDENT MICROSYSTEMS INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Additions
Beginning Charged to Costs & Charged to Other Ending
Description Balance Expense Accounts Deductions Balance
Allowance for Doubtful Accounts:
1994 $ 142,000 $ 180,000 $ 10,000 $ 312,000
1995 312,000 180,000 492,000
1996 492,000 13,000 505,000
Allowance for Sales Returns:
1994 $ 134,000 $ 259,000 $ 393,000
1995 393,000 91,000 484,000
1996 484,000 (1,000) 483,000
Allowance for Realizable
Inventory:
1994 $ 620,000 $ 993,000 $ 28,000 $1,585,000
1995 1,585,000 233,000 254,000 1,564,000
1996 1,564,000 4,719,000 614,000 5,669,000
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43
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints James T. Lindstrom 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 25, 1996 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 Executive
(Frank C. Lin) Officer)
/s/ James T. Lindstrom Vice President, Finance, Chief Financial
------------------------------------------ Officer and Secretary (Principal Accounting
(James T. Lindstrom) and Financial Officer)
/s/ Charles A. Dickinson Director
------------------------------------------
(Charles A. Dickinson)
/s/ Glen M. Antle Director
--------------------------------------------
(Glen M. Antle)
/s/ Yasushi Chikagami Director
------------------------------------------
(Yasushi Chikagami)
/s/ Shyur-Jen Paul Chien Director
------------------------------------------
(Shyur-Jen Paul Chien)
/s/ Leonard Y. Liu Director
--------------------------------------------
(Leonard Y. Liu)
/s/ Millard Phelps Director
--------------------------------------------
(Millard Phelps)
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44
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 Series A Preferred Stock Purchase Agreement dated April 28, 1988, between the
Company and certain investors.(2)
4.4 Series B Preferred Stock Purchase Agreement dated September 26, 1988, between
the Company and an investor.(2)
4.5 Series C Preferred Stock Purchase Agreement dated December 8, 1989, between the
Company and certain investors, together with a form of warrant to purchase
Series C Preferred Stock of the Company.(2)
4.6 Series D Preferred Stock Purchase Agreement dated September 21, 1990, between
the Company and a vendor of the Company.(2)
4.7 Series E Preferred Stock and Warrant Purchase Agreement dated December 26, 1991,
between the Company and certain investors, together with form of warrant to
purchase Series E Preferred Stock, and Shareholders Agreement between the
Company, certain employees of the Company and certain investors.(2)
4.8 Warrant Amendment Agreement dated as of October 26, 1992, between the Company
and each holder of Series E Preferred Stock.(2)
10.1 Lease Agreement dated May 29, 1991, between the Company and Metropolitan Life
Insurance Company for offices located at 205 Ravendale Drive, Mountain View,
California.(2)
10.2 Offer letter dated June 8, 1992, from the Company to Mr. Glen Antle.(2)
10.3 Loan Agreement and Revolving Credit Note dated December 17, 1991, between the
Company and First Interstate Bank of California, together with a Security
Agreement executed in connection therewith.(2)
10.4 Form of Loan and Option Agreement between the Company and certain of its
employees executed in connection with the Series E Preferred Stock Purchase
Agreement dated December 26, 1991, together with form of Promissory Note and
form of Non-Recourse Pledge Agreement, each executed by such employees in
connection with such Loan and Option Agreement.(2)
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.(3)
10.13(*) Form of 1992 Stock Option Plan amending and restating the 1990 Stock Option Plan
included as Exhibit 10.5.(2)
10.14 Lease Agreement dated March 23, 1994 between the Company and Chan-Paul
Partnership for the Company's principal offices located at 189 North Bernardo
Avenue, Mountain View, California.(4)
10.15 Option Agreement between the Company and Taiwan Semiconductor Manufacturing
Company dated June 25, 1995.(5)(7)
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45
10.16 Foundry Venture Agreement dated August 18, 1995 by and between the Company and
United Microelectronics Corporation.(5)(7)
11.1 Computation of Net Income Per Share.(6) 46
21.1 List of Subsidiaries.(6) 47
23.1 Consent of Independent Accountants.(6) 48
24.1 Power of Attorney (See page 42)(6).
27.1 Financial Data Schedule (EDGAR version only)(6) 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 of the same number to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996.
(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, 1994.
(5) Incorporated by reference from exhibit of the same number to the
Company's Annual Report on Form 10-K for the year ended June 30, 1995.
(6) Filed herewith.
(7) Confidential treatment has been requested for a portion of this
document.
(*) Management contracts or compensatory plans or arrangements covering
executive officer or directors of the Company.
45