Back to GetFilings.com
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 1997 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: (650) 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 [ ]
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
29, 1997 ($17.875 per share), as reported on Nasdaq National Market was
approximately $204,035,993. Shares of Common Stock held by executive officers
and directors and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliate.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The number of shares of the registrant's $0.001 par value Common Stock
outstanding on August 31, 1997, was 13,075,194.
Part III incorporates by reference from the definitive proxy statement
for the registrant's 1997 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.
2
TABLE OF CONTENTS Page
----
PART I..................... .................................................. 3
Item 1. Business.................................................... 3
Item 2. Properties..................................................11
Item 3. Legal Proceedings...........................................11
Item 4. Submission of Matters to a Vote of Securities Holders.......11
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...................................16
Item 8. Financial Statements and Supplementary Data.................21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................21
PART III .....................................................................22
Item 10. Directors and Executive Officers of the Registrant..........22
Item 11. Executive Compensation......................................22
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................ .................22
Item 13. Certain Relationships and Related Transactions..............22
PART IV .................................................................... 23
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.............................. .....................23
POWER OF ATTORNEY.............................................................42
SIGNATURES....................................................................42
INDEX TO EXHIBITS FILED TOGETHER WITH THIS ANNUAL REPORT......................43
2
3
PART I
ITEM 1. BUSINESS
Trident Microsystems, Inc. ("Trident" or the "Company") designs,
develops and markets very large scale integrated circuit ("IC") videographics
and multimedia products for the desktop and portable personal computer (PC)
market. 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 Digital Versatile Disk
("DVD") based live-video playback, and three-dimensional ("3D") display for game
and entertainment applications.
The overall PC marketplace is characterized by extreme price
competition and rapid technological change as leading PC systems manufacturers
compete among themselves and other PC clone makers for market share. As a
result, PC systems manufacturers require low-cost, feature-rich, advanced
graphics and multimedia solutions. The Company believes that the systems
manufacturers are moving towards reducing system cost by purchasing IC graphics
and multimedia solutions that integrate functions formerly performed by several
separate components. Moreover, as DVD and video processing capabilities become
more popular, an increasing percentage of computer users require a
high-performance, low-cost graphics system that can display photo-realistic
images or display full-motion video on a PC.
The Company's overall strategy is to capture these market opportunities
by using its design expertise to develop and manufacture videographics and
multimedia products that offer a superior combination of price, performance and
features. The Company is employing this strategy in the fast-growing graphics
and multimedia markets with significant volume potential and is focusing on
providing high performance and feature rich products which it believes will
appeal to leading PC systems manufacturers.
MARKETS AND PRODUCTS
Trident has targeted the PC desktop, portable, and multimedia markets.
The desktop market is the largest segment of the PC industry for the Company's
graphics and multimedia products and is characterized by intense price
competition and rapid technological advances. The desktop market includes
adapter card manufacturers, who build graphics controllers onto adapter cards
that serve as graphics subsystems, and PC systems manufacturers and motherboard
suppliers, who may either include adapter cards in their systems or design
graphic controllers onto their motherboards. The Company has been working
closely with top tier OEMs and has had encouraging success with its new 3D
architecture implemented in its 3DImage product family. The first two products
of the family are the 3DImage975 and 3DImage985, both products incorporate an
on-chip triangle set-up engine. Overall, with the rapid desktop transition to 3D
in 1997, the Company believes its 3DImage family is well positioned to
capitalize on the new market requirements.
Trident entered the portable market in 1995, surpassed the competition,
and now has captured the number two position in the market. The Company's
portable strategy is to leverage its superior product positioning and continue
to deliver the broadest product offering in the industry. The Company's product
line includes two 2D 64-bit controllers, the Cyber9382 and Cyber9385 (with
TV-Output), and today's fastest 3D portable graphics controller, the Cyber9397.
The Company's development direction is a three-way technology drive with 3D,
DVD, and embedded SDRAM solutions. Trident's portable vision is to be "The only
other chip on the notebook(SM)" by integrating 3D, DVD, TV-out embedded memory,
and audio in the future into one product. The Cyber9397 together with two
products currently being demonstrated, the Cyber9388 and the DVD functionality
in 3DImage975, are the tangible core of this vision.
The Company has made a major effort to design products to fill the
needs of leading PC systems
3
4
manufacturers as well as the needs of adapter card manufacturers. Sales to
leading PC systems manufacturers represented approximately 6% of net sales for
fiscal 1995, approximately 37% of net sales for fiscal 1996 and approximately
41% of net sales for fiscal 1997. The Company expects sales to leading PC
systems manufacturers to continue to increase and expects that Asia Pacific and
Japan customers will continue to provide for a substantial portion of the
Company's sales for the next year.
Current Products
TVGA9000i. This is the Company's first generation mixed-signal SVGA
controller, integrating an 8-bit pseudo color digital analog converter ("DAC")
and dual clock synthesizer reducing component count, permitting lower cost and
more compact system designs. This product supports up to 1024x768 resolution
with 16 colors non-interlaced at 70Hz refresh rates.
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.
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.
3DIMAGE975. This is the Company's first 3D graphics accelerator for the
desktop market. It features a high performance 3D rendering engine, set-up
engine, TrueVideo(R) processor, motion video capture port, and Clear TV(TM) for
flicker-free TV-out support.
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.
4
5
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.
CYBER9397. This is the Company's first 3D color LCD flat panel graphics
accelerator for the mobile computer market. It features a hardware 3D rendering
engine with triangle set-up engine, TrueVideo(R) processor, motion video capture
port, dual video windows for videoconferencing, dual displays support of
different resolution/color-depth/refresh-rate and ClearTVTM for flicker-free
TV-Output support.
OMEGA82C365G. The Omega82C365 is the Company's first Intel 82365SL
pin-compatible ISA-to-PCMCIA host controller supporting two PC Card slots mainly
used for new desktop PC presentation applications 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 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.
3DIMAGE985. The 3DImage985 is the Company's second product offering to
the 3D desktop market with 2x full AGP 3D performance.
CYBER9388. The Cyber9388 is the Company's first 64-bit color LCD flat
panel graphics accelerator with 2MB embedded SDRAM. It features a single-cycle
high performance 2D engine, TrueVideo(R) processor, motion video capture port,
dual video windows for video conferencing, dual display support of different
resolution/color-depth/refresh-rate for presentation, and ClearTV(TM) for
flicker-free TV-output support.
Products Under Development
The Company continues to invest in product development programs which
it considers crucial to its success. In particular, the Company is investing in
extensions to its current desktop, portable and multimedia product lines in an
attempt to maintain product competitiveness particularly in the important area
of 3D graphics and multimedia including video and audio.
5
6
New product development also continues in technologies where further integration
is likely to be needed and may be applied throughout the Company's product line.
There can be no assurance that the Company will be able to successfully
complete the development of these products or to commence shipments of these
products in a timely manner, or that product specifications required by the
market will not change during the development period. In addition, even if
successfully developed and shipped, there can be no assurance that new products
will be successful in the marketplace.
SALES, MARKETING AND DISTRIBUTION
The Company sells its products primarily through direct sales efforts.
The Company has sales offices in Taipei, Taiwan, Hong Kong, People's Republic of
China, Houston, Texas, Raleigh, North Carolina, 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. 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 1997 sales to major systems manufacturers accounted for 41% 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 1997, 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 1997, the Company generated 74% of its revenues from Asia
(including Japan) and 26% from North America and the rest of the world. Major
systems manufacturers often take delivery of their products in Asia for
production purposes, and such sales by the Company are reflected in the
Company's revenues in Asia. Sales to three customers accounted for approximately
21%, 12%, and 11% of net sales, respectively, for fiscal 1997. 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 generally been able to avoid the significant
capital investment required for wafer fabrication facilities and to focus its
resources on product design, quality assurance, marketing and customer support.
The Company has, however, made a substantial investment in a manufacturing joint
venture. Trident's wholly-owned subsidiary, Trident Microsystems (Far East) Ltd.
("Trident Far East"), manages the manufacturing
6
7
operations of the Company.
In order to obtain an adequate supply of wafers, especially wafers
manufactured using advanced process technologies, the Company entered into a
joint venture agreement in August 1995 with 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 U.S.$55 million for a
10% equity interest in a joint venture with UMC and other venture partners. The
Company will be guaranteed 12 .5% of total wafer supply from the wafer
fabrication facility of the new venture which commenced production in August
1997. The first payment of U.S.$13.7 million was made in January 1996. The
Company made an additional payment of U.S.$25.9 million in January 1997. The
final payment under the joint venture agreement, estimated to be U.S.$15
milllion, is currently anticipated in November 1997. The UMC agreement is
expected to provide the Company with substantial additional capacity; however,
it will also expose the Company to certain financial risk if the Company does
not obtain enough purchase orders from its customers to consume the capacity or
if the joint venture is not successful in its operations.
In fiscal 1997, the Company's primary foundries were United
Microelectronic Corporation ("UMC") and Taiwan Semiconductor Manufacturing
Company ("TSMC"). The Company also received additional capacity from Samsung
Semiconductor, Inc. and Winbond Corporation. In January 1997, the Company
renegotiated its June 1995 wafer purchase agreement with TSMC. This agreement
committed the Company to purchase and the supplier is to provide a certain
number of wafers each year through December 31, 1999. TSMC reimbursed U.S.$14.4
million to Trident in conclusion of this formal agreement, but continue to
maintain their semiconductor foundry relationship. The Company will continue to
explore arrangements for additional capacity commitments, although there is no
assurance that any additional agreements will be executed, or that additional
capacity is required.
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. The Company has experienced
few customer returns based on the quality of its products. However, Trident's
future return experience may vary because its newer, more complex products are
more difficult to manufacture and test. In addition, some of its customers,
including major PC systems manufactures may subject those products to more rigid
testing standards than in the past.
The Company's reliance on third party foundries and assembly and
testing houses involves several risks including the absence of adequate
capacity, the unavailability of or interruptions in access to certain process
technologies, and reduced control over delivery schedules, manufacturing yields,
quality assurance and costs. The Company conducts business with certain
foundries by delivering written purchase orders specifying the particular
product ordered, quantity, price, delivery date and shipping terms and,
therefore, except as set forth in the above-mentioned contracts or agreements,
such foundries are not obligated to supply products to the Company for any
specific period, in any specific quantity or at any specified price, except as
may be provided in a particular purchase order.
While the Company has obtained and continues to seek additional
capacity, the qualification process and the production ramp-up for additional
foundries has in the past taken and could in the future take longer than
anticipated. There can be no assurance that such additional capacity from
current foundries and new foundry sources will be available and will satisfy the
Company's requirements on a timely basis or at acceptable quality or per unit
prices. Constraints or delays in the supply of the Company's products, whether
because of capacity constraints, unexpected disruptions at the foundries or
assembly or testing houses, delays in additional production at
7
8
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 215 research and development personnel as of June 30, 1997. The Company
is focusing its development efforts primarily on the development of more
advanced graphics controllers, including 3D graphics controllers, flat panel
controller products for notebook PCs and multimedia products. In addition, the
Company intends to continue to devote significant resources to the development
of a broad range of high-performance, proprietary software drivers. In
anticipation of future market demand, the Company is investing in a variety of
new technologies through licensing and purchase arrangements. These technologies
may be incorporated in the Company's future products, providing additional
functionality and integration.
COMPETITION
The markets in which the Company competes are highly competitive and
the Company expects that competition will increase. The principal factors of
competition in the Company's markets include 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. (C&T),
Cirrus Logic, Inc., NeoMagic, Inc., and S3 Inc. and potential competitors
include certain large semiconductor manufacturers including Intel Corporation,
National Semiconductor Corporation, and emerging semiconductor manufacturers.
Also, in August 1997 Intel has made an offer to acquire Chips and Technologies
which has been accepted by C & T and is currently under review by the FTC.
Certain of the Company's current competitors and many potential competitors have
significantly greater technical, manufacturing, financial and marketing
resources than the Company.
Leading PC systems manufacturers have increased market share in 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 geographic markets, there can be no assurance
that the Company will continue to be able to compete successfully as to price or
any other factor or that the Company will continue to be successful in its
efforts to expand sales in these markets. The failure of the Company to meet the
technological and pricing challenges of its competition would have an adverse
effect on the Company's results of operations.
INTERNATIONAL OPERATIONS
The Company's wholly-owned subsidiary, Trident Far East, maintains
offices in Kowloon, Hong Kong, People's Republic of China and Taipei, Taiwan.
Trident Far East is responsible for the manufacturing of the Company's products
and is principally responsible for international sales activities and for
operation of the Hong Kong and Taiwan offices. The Hong Kong office provides
sales and technical support for customers in Hong Kong and logistical support
for customers in Hong Kong and Taiwan. The Taiwan office provides sales and
technical support for customers in that region. Each office hires its own
employees directly. The Company has established a research and development
facility in Hsinchu, Taiwan.
During fiscal 1997, 1996 and 1995, sales to OEM, ODM, and adapter card
customers in Asia Pacific and
8
9
Japan accounted for approximately 74%, 78% and 80% of the Company's net sales,
respectively, and the Company anticipates that sales to customers in Asia will
continue to account for a substantial percentage of sales. In addition, the
foundries that manufacture the Company's products are located in Asia. Due to
this concentration of international sales and manufacturing capacity in Asia,
the Company is subject to the risks of conducting business internationally,
including unexpected changes in regulatory requirements, fluctuations in the
U.S. dollar which could increase the sales price in local currencies of the
Company's products in foreign markets, tariffs and other barriers and
restrictions, and the burdens of complying with a wide variety of foreign laws.
In addition, the Company is subject to general geopolitical risks, such as
political and economic instability and changes in diplomatic and trade
relationships, in connection with its sales, support and third-party fabrication
efforts in Hong Kong 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
available to the Company on commercially reasonable terms, the Company would be
adversely affected. In addition, the laws of certain countries in which the
Company's products have been or may be developed, manufactured or sold,
including the People's Republic of China, Taiwan and Korea, may not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States.
Trident and TrueVideo are registered trademarks, and TVGA9000i,
TVGA8900D/DR, TKD8001, TGUI9440, TVG9470, ProVidia9680, ProVidia9682,
ProVidia9685, 3DImage975, Cyber9320, Cyber9382, Cyber9385, Cyber9387,
Omega82C365G, Omega82C722G, Omega82C722GX, Omega82C094, Omega82C28, 3DImage985,
Cyber9388 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,
9
10
the Company seeks to ship products within a few weeks of receipt of orders. As a
result, the Company operates without significant backlog, and relies on bookings
each quarter to comprise a predominant portion of its sales for that quarter.
Additionally, purchase orders may be cancelable without significant penalty or
subject to price renegotiations, changes in unit quantities or delivery
schedules to reflect changes in customers' requirements or manufacturing
availability. Consequently, the Company does not believe that backlog is a
reliable indicator of future sales.
SEGMENTS
Trident operates in the videographics and multimedia segments as
described above.
EMPLOYEES
As of June 30, 1997, the Company had 387 full time employees, including
215 in research and development, 36 in product testing, quality assurance and
operations functions, 100 in marketing and sales and 36 in finance, human
resources, and administration. The Company plans to continue to increase its
employee base during fiscal 1998. 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.
10
11
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 a 5,400 square foot research and development
facility in Chandler, Arizona. The Company leases office space for sales offices
in Raleigh, North Carolina and Houston, Texas. These two sales offices total
approximately 1,000 square feet. Other Company leases include a 10,000 sauare
foot office in Kowloon, Hong Kong, People's Republic of China, for the Hong Kong
branch office of the Cayman Islands subsidiary, an 8,000 square foot sales
office in Taipei, Taiwan, and a 6,000 square foot research and development
facility in Hsinchu, Taiwan.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None.
11
12
EXECUTIVE OFFICERS OF THE REGISTRANT
As of June 30, 1997, 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 52 President, Chief Executive Officer and 1987
Chairman of the Board
Jung-Herng Chang, Ph.D. 41 Vice President, Graphics Engineering 1992
Richard Hegberg 36 Vice President, Worldwide Sales 1996
Peter Jen 50 Vice President, Asia Operations 1988
Pete J. Mangan 37 Vice President, Finance, Chief 1996
Financial Officer
Amir Mashkoori 35 Vice President, Operations 1995
Mr. Lin founded Trident in July of 1987. He has served in his present
position since then. His career spans 25 years in the computer and
communications industries. Prior to Trident, he was vice president of
engineering and co-founder of Genoa Systems, Inc., a graphics and storage
product company. Before Genoa, Mr. Lin worked for GTE, ROLM, and was a senior
manager at Olivetti Advanced Technical Center in Cupertino, CA. He holds a
B.S.E.E. from National Chiao Tung University, Taiwan and an M.S.E.E. from the
University of Iowa. Mr. Lin is also a board member of Monte Jade Science and
Technology Association and United Integrated Circuit Corporation ("UICC"). UICC
is a joint venture among UMC, Trident and other fabless companies.
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 a M.S. in Electrical Engineering and Computer
Science and a Ph.D. in Computer Science from the University of California,
Berkeley.
Mr. Hegberg joined Trident in 1996 from VLSI Technology, Santa Clara,
CA, where he was vice president and general manager of the Advanced Systems
Computing Group from 1993 to 1996. Previously he was with Electronic Designs,
Inc., Hopkinton, MA, from 1988 to 1993, as director of sales and marketing. He
holds a B.S.E.E. from Marquette University.
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, 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. Mr. Jen holds a B.S. in Accounting from National Taiwan
University and an M.B.A. in Marketing from Central Missouri State University.
Mr. Mangan joined the Company in November 1996 as the corporate
controller, and was promoted to his current position in May 1997. Mr. Mangan has
thirteen years experience in the high technology industry with Advanced Micro
Devices (AMD) and Sun Microsystems. Mr. Mangan came to Trident from AMD where he
was most recently the group controller in their communication and components
group. He also held international positions, from
12
13
June 1992 to September 1995, with AMD as its Hong Kong General Manager and Asia
Pacific Sales Controller responsible for Finance and administration in the
region. Mr. Mangan has a B.A. in Business Economics from the University of
California, Santa Barbara.
Mr. Mashkoori joined Trident in 1995 after seventeen years with
Advanced Micro Devices where he last held the position of director of operations
for the nonvolatile memory division. Prior to his directorship he worked in a
variety of management positions at AMD International operations and memory test
groups. He holds a B.S. and M.B.A. in Finance from San Jose State University.
13
14
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
------------------- ---- ---
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
1997
First Quarter 16.750 8.625
Second Quarter 23.125 14.500
Third Quarter 24.500 12.625
Fourth Quarter 16.000 8.750
As of June 30, 1997, there were approximately 182 registered holders of
record of the Company's common stock.
The Company has never paid cash dividends on its common stock. The
Company currently intends to retain earnings, if any, for use in its business
and does not anticipate paying any cash dividends in the foreseeable future.
14
15
ITEM 6. SELECTED FINANCIAL DATA
TRIDENT MICROSYSTEMS, INC.
SELECTED FINANCIAL DATA
Year ended June 30,
------------------------------------------------------------------
(in thousands, except per share data) 1993 1994 1995 1996 1997
------- ------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net sales $77,726 $69,139 $106,766 $168,089 $177,934
Income from operations 14,801 973 9,776 22,742 20,553
Net income 10,137 1,480 8,011 16,860 15,340
Net income per share 0.86 0.12 0.61 1.26 1.09
BALANCE SHEET DATA:
Cash and investments $43,189 $50,492 $ 60,636 $ 41,228 $ 59,945
Working capital 51,149 50,713 61,610 58,618 64,952
Total assets 62,362 75,269 88,665 127,510 139,033
Stockholders' equity 53,650 56,116 66,141 90,184 109,557
15
16
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, 1997, 1996 and 1995:
Year ended June 30,
----------------------
1997 1996 1995
---- ---- ----
Net sales 100% 100% 100%
Cost of sales 64 66 66
--- --- ---
Gross margin 36 34 34
Research and development 12 11 13
Selling, general and administrative 12 10 11
Litigation charges - - 1
--- --- ---
Income from operations 12 13 9
Interest income, net 1 2 2
--- --- ---
Income before provision for income taxes 13 15 11
Provision for income taxes 4 5 4
--- --- ---
Net income 9 10 7
=== === ===
Net Sales
Net sales in fiscal 1997 increased to $177.9 million, or 6%, above the
$168.1 million reported in fiscal 1996. The increase in net sales was primarily
due to increases in the unit volume shipments of graphical user interface
("GUI") accelerators and graphics controllers of approximately 21% in fiscal
1997 as compared to fiscal 1996 but was partly offset by the decrease in average
selling prices ("ASPs") of approximately 12% from 1996 ASPs. Sales of portable
products increased to approximately 37% of the Company's net sales in fiscal
1997 from only 15% in fiscal 1996. Sales of GUI accelerator desktop products
declined to approximately 52% of the Company's net sales in fiscal 1997 from
approximately 66% in fiscal 1996.
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 GUI accelerators, graphics
controllers and video processing products of approximately 34% in fiscal 1996 as
compared to fiscal 1995. The increase in the ASPs of approximately 17% in fiscal
1996 as compared to fiscal 1995 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 66%
of net sales in fiscal 1996 from approximately 61% in fiscal 1995.
16
17
The Company has made a major effort to design products to fill the
needs of leading PC systems manufacturers as well as the needs of adapter card
manufacturers. Sales to leading PC systems manufacturers represented
approximately 41% of net sales for fiscal 1997, an increase from 37% in fiscal
1996, and 6% in fiscal 1995. Sales to Asian customers, primarily in Hong Kong,
Taiwan, Korea and Japan, accounted for 74%, 78% and 80% of net sales in fiscal
1997, 1996, and 1995, respectively. The Company expects that Asian customers
will continue to account for a significant portion of its sales for the next
year and expects sales to leading PC systems manufacturers to continue to
increase. Sales to three customers accounted for approximately 21%, 12% and 11%
of net sales for fiscal 1997; approximately 16%, 12% and 11% of net sales for
fiscal 1996; and approximately 16%, 13%, and 11% of net sales for fiscal 1995.
Substantially all of the sales transactions were denominated in U.S. dollars
during all periods.
The Company plans to develop new and higher-performance GUI
accelerators, graphics controllers and multimedia products to sell to existing
customers as well as new customers in Asia, North America and Europe. The
Company's future success depends upon its successful introduction of these and
other new products on a regular and timely basis and upon those products meeting
customer requirements. There can be no assurance that the Company will be able
to complete the development of new products or to commence shipments of new
products in a timely manner, or that product specifications will not change
during the development period. In addition, even if such new products are
successfully developed and shipped, there can be no assurance that they will be
successful in the marketplace.
Gross Margin
Trident's gross margin increased to 36% in fiscal 1997 from 34% in
fiscal 1996. Gross margins were generally higher in fiscal 1997 because of a
product mix which was more heavily weighted towards notebook GUI accelerators
with higher gross margins and continued reductions in manufacturing cost for all
products. Gross margin remained constant at 34% in both fiscal years 1996 and
1995.
The Company believes that the prices of high-technology products
decline over time, as competition increases and new, advanced products are
introduced. The Company expects ASPs of existing products to continue to
decline, although the ASPs of the Company's entire product line may remain
constant or increase as a result of introductions of new higher-performance
products often with additional functionality which are to be sold at higher
prices. The Company's strategy is to maintain gross margins by (1) developing
new products that have higher margins through its custom design methodology and
migration to new process technology, and (2) reducing manufacturing costs by
large-volume production. There is no assurance that the Company will be able to
develop and introduce new products on a timely basis or that it can reduce
manufacturing costs.
Research and Development
Research and development expenditures increased to $22.1 million in
fiscal 1997 from $17.9 million and $13.3 million in fiscal 1996 and 1995,
respectively. Research and development expenditures as a percentage of net sales
were 12%, 11% and 13% in fiscal 1997, 1996 and 1995, respectively. The increase
in expenditures in fiscal 1997 compared to fiscal 1996 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 resulting from the Company's increased research and
development efforts during the year. In fiscal 1997, a multimedia research and
development group was created to develop multimedia features and to integrate
them with the Company's core graphics technology or design them as a stand-alone
product. The increase in expenditures in fiscal 1996 compared to fiscal 1995
also was due to the increase in personnel-related costs associated with the
Company's increased research and development efforts during the year. The
Company intends to continue making substantial investments in research and
development, and it expects research and development costs to increase during
fiscal 1998 because of anticipated increases in costs associated with the
development of new products.
17
18
Selling, General and Administrative
Selling, general and administrative expenditures increased to $21.9
million in fiscal 1997 from $16.7 million and $11.2 million in fiscal 1996 and
1995, respectively. Selling, general and administrative expenditures as a
percentage of net sales were 12%, 10%, and 11% in fiscal 1997, 1996, and 1995,
respectively. Selling expenditures increased to $14.7 million in fiscal 1997
from $11.2 million and $6.9 million in fiscal 1996 and 1995, respectively.
General and administrative expenditures increased to $7.2 million in fiscal 1997
from $5.5 million and $4.3 million in fiscal 1996 and 1995, respectively.
Selling costs in fiscal 1997 were higher than in fiscal 1996 due to additional
staffing for an OEM sales team and increased marketing personnel. Selling costs
in fiscal 1996 were higher than in fiscal 1995 because of additional sales staff
in the U.S. and in Asia. General and administrative expenditures were higher in
fiscal 1997 than in fiscal 1996 primarily due to increases in additional human
resources and information systems personnel. Higher general and administrative
expenses in fiscal 1996 than in fiscal 1995 were also due to increases in
personnel-related expenses. The Company expects selling, general and
administrative expenditures to increase in absolute amounts during fiscal 1998
as it increases its sales and administrative activities.
Litigation Charges
On August 24, 1993, a class action lawsuit alleging violations of
federal securities laws was filed in the U.S. District Court for the Northern
District of California against the Company and certain other parties. The
Company settled 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.
Interest Income, Net
The amount of interest income earned by the Company varies directly
with the amount of its cash, cash equivalents, short-term and long-term
investments and the prevailing interest rates. Interest income decreased
slightly to $2.0 million in fiscal 1997 from $2.1 million in fiscal 1996 as a
result of declining interest rates in fiscal 1997. Interest income increased to
$2.1 million from $2.0 million in fiscal 1996 from fiscal 1995, primarily
because of a shift in the Company's investment portfolio to taxable instruments
with higher interest rates. A significant amount of the interest earned by the
Company during fiscal 1996 and 1995 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%, for fiscal year 1997, 1996 and 1995. The effective income tax rate
was below the statutory rate primarily because of operations in foreign
countries with lower income tax rates. In addition, a significant portion of
earned interest was not subject to federal income tax in fiscal 1996 and 1995.
Future Results; Forward-Looking Statements
This report contains, in addition to historical information,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding expected increases in sales to systems 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. Such forward-looking statements represent management's current
expectations, are not guarantees and involve risks and uncertainties. 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
18
19
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 and
changes in the Company's customer mix. The Company's prior performance should
not be presumed to be an accurate indicator of future performance. Future
results will depend substantially upon the Company's ability to bring new
products and technologies to market on a timely basis, and upon the acceptance
of those products. Also, future results will depend upon the market's acceptance
of the Company's customers' products which incorporate the Company's products,
and the amount and timing of expenditures for research and development, and for
selling, general and administrative functions. Operating results would be
adversely affected by a downturn in the market for desktop or portable PCs, the
Company's ability to predict product demand and manage its inventory, and order
cancellations or rescheduling. Because the Company is continuing to increase its
operating expenses for personnel and new product development, it would be
adversely affected if its sales did not increase correspondingly.
The Company's future operating results also may be affected by various
factors that are beyond its 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 marketplace, such as the shift in market share
from Asian clone makers to leading North American PC systems manufacturers, have
affected and will continue to affect 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.
The Company's products are extremely complex devices. The Company
establishes and implements test specifications and imposes quality standards
upon its suppliers and also performs separate application-based compatibility
and system testing for its products. However, its customers may discover defects
in the Company's products related to their particular application. To the extent
that the Company is unable to remedy defects or provide products able to meet
its customers' requirements, the Company may experience lower revenues and
excess inventories which could have an adverse effect on the Company's results
of operations.
The Company currently relies on several independent foundries to
manufacture its products either in finished form or wafer form. If a foundry
terminates its relationship with the Company or the Company's supply from a
foundry is interrupted or terminated for any other reason, such as a natural
disaster, the Company may not have sufficient 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 it 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 have in the past taken, and
in the future could take, longer than anticipated. There can be no assurance
that capacity from current foundries and new foundry sources will be available
to satisfy the Company's requirements on a timely basis or at acceptable quality
or per unit prices.
In addition, the Company's products are assembled and tested by several
independent subcontractors. The Company's reliance on independent manufacturing,
assembly and testing houses involves a number of risks, including the lack of
guaranteed capacity and reduced control over delivery schedules, manufacturing
yields, quality assurance and costs. Constraints or delays in the supply of the
Company's products, because of capacity constraints, unexpected disruptions at
the foundries or assembly or testing houses, delays in obtaining additional
19
20
production at existing foundries or 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, particularly if the
Company is 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 that 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's ability to manage any further growth will require
significant expansion of its research and development and marketing and sales
capabilities. In particular, sales to large system manufacturers in diverse
markets and their requirements 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 will depend upon its ability
to manage and expand its foundry relationships. Should Trident's management fail
to expand these functions to keep pace with growth should it occur, the
Company's business and results of operations could be adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company's principal sources of liquidity
included cash and cash equivalents of $29.7 million and short-term investments
of $30.2 million. Cash provided by operating activities was $29.7 million, $7.9
million and $10.2 million in fiscal 1997, 1996 and 1995, respectively. Cash
provided by operating activities in fiscal 1997 was mainly due to profitable
operations, decreases in inventory and other assets, and adjustment of non-cash
expenses, and primarily offset by increases in accounts receivable and decreases
in accounts payable. 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 current assets. Capital expenditures in fiscal 1997, 1996 and 1995 were
$3.5 million, $4.8 million and $1.9 million, respectively.
During fiscal 1997, the Company issued 392,000 shares of common stock
which generated $2.9 million of cash. During fiscal 1996, the Company issued
717,000 shares of common stock which generated $3.7 million of cash. During
fiscal 1995, the Company issued 279,000 shares of common stock which generated
$1.1 million of cash.
Inventory decreased during fiscal 1997 to a level of $7.3 million at
year-end from $26.9 million at the end of fiscal 1996. The decline in inventory
is the result of lower inventory levels of 2D parts, and to shorter
manufacturing cycle times.
In May 1996, the Company obtained a $15.0 million unsecured revolving
bank credit line, which expires on December 31, 1997, of which no amounts are
currently outstanding. The availability of the credit facility depends upon the
Company's meeting certain financial ratios and operating results.
The Company has renegotiated its June 1995 wafer purchase agreement
with Taiwan Semiconductor Manufacturing Company (TSMC). This agreement committed
the Company to purchase and the supplier to provide a certain number of wafers
each year through December 31, 1999. In January 1997 TSMC reimbursed U.S.$14.4
million to Trident in conclusion of the formal agreement. The Company and TSMC
continue to maintain their semiconductor foundry relationship.
In August 1995, the Company entered into a joint venture agreement with
United Microelectronics Corporation (UMC), under which the Company committed to
invest an amount of New Taiwan dollars currently equivalent to approximately
U.S. $55 million for a 10% equity ownership in a joint venture with UMC and
other venture partners to establish a new foundry, United Integrated Circuits
Corporation (UICC). Under the agreement,
20
21
the new foundry guarantees to Trident 12 .5% of the foundry's total wafer
supply. The Company made the first payment, amounting to U.S. $13.7 million, in
January 1996. The Company made an additional payment of U.S. $25.9 million in
January 1997. The final payment under the joint venture agreement, estimated to
be U.S. $15 million, is currently anticipated in November 1997.
The Company's investment in the UICC joint venture is intended to
secure capacity so that it can meet expected increased demand, should it occur.
However, there are certain risks associated with the transaction including the
Company's ability, together with its partners, to fully utilize the capacity of
UICC. The Company will continue to consider transactions to secure additional
foundry capacity as circumstances warrant.
The agreement with UMC has utilized a significant amount of Trident's
available funds; however the Company believes its current resources are
sufficient to meet its needs for at least the next twelve months. The Company
regularly considers transactions to finance its activities, including debt and
equity offerings and new credit facilities or other financing transactions.
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.
21
22
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
1997 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."
22
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Form:
1. Financial Statements:
Page Number
-----------
Report of Independent Accountants 24
Consolidated Statement of Operations - 25
For the Three Years Ended June 30, 1997
Consolidated Balance Sheet - 26
As of June 30, 1997 and 1996
Consolidated Statement of Changes in Stockholders' Equity 27
For the Three Years Ended June 30, 1997
Consolidated Statement of Cash Flows 28
For the Three Years Ended June 30, 1997
Notes to Consolidated Financial Statements 29
2. Financial Statement Schedules:
For years ended June 30, 1997, 1996 and 1995:
Report of Independent Accountants on Financial Statement
Schedules 40
Schedule Page Number
-----------
II. Valuation and Qualifying Accounts and Reserves 41
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 43. 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.
23
24
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, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 1997, 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 17, 1997
24
25
TRIDENT MICROSYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
(in thousands, except per share data) 1997 1996 1995
-------- -------- --------
Net sales:
Sales $163,129 $158,471 $ 97,852
Sales to related parties 14,805 9,618 8,914
-------- -------- --------
177,934 168,089 106,766
Cost of sales 113,404 110,675 70,862
-------- -------- --------
Gross margin 64,530 57,414 35,904
Research and development expenses 22,082 17,931 13,334
Selling, general and administrative expenses 21,895 16,741 11,221
Litigation charges - - 1,573
-------- -------- --------
Income from operations 20,553 22,742 9,776
Interest income, net 2,008 2,052 2,005
-------- -------- --------
Income before provision for income taxes 22,561 24,794 11,781
Provision for income taxes 7,221 7,934 3,770
-------- -------- --------
Net income $ 15,340 $ 16,860 $ 8,011
======== ======== ========
Net income per share $ 1.09 $ 1.26 $ 0.61
======== ======== ========
Common and common equivalent shares used in
computing per share amounts 14,067 13,423 13,163
======== ======== ========
See accompanying notes to consolidated financial statements.
25
26
TRIDENT MICROSYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
JUNE 30,
------------------------
(in thousands, except per share data) 1997 1996
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 29,745 $ 16,894
Short-term investments 30,200 24,334
Accounts receivable 20,160 16,872
Inventories 7,296 26,866
Deferred income taxes 2,926 3,838
Prepaid expenses and other current assets 1,171 7,140
--------- ---------
Total current assets 91,498 95,944
Property and equipment, net 7,463 5,628
Investment in joint venture 39,631 13,716
Other assets 441 12,222
--------- ---------
Total assets $ 139,033 $ 127,510
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 14,274 $ 24,084
Accrued expenses 10,220 7,632
Current portion of obligation under capital lease 286 -
Income taxes payable 1,766 5,610
--------- ---------
Total current liabilities 26,546 37,326
--------- ---------
Deferred income taxes 2,223 -
Obligations under capital lease 707 -
--------- ---------
Total liabilities 29,476 37,326
--------- ---------
Commitments
Stockholders' Equity:
Common stock, 0.001 par value; 30,000 shares authorized;
12,970 and 12,578 shares issued and outstanding 13 12
Additional paid-in capital 42,799 38,267
Notes receivable form stockholders - (585)
Retained earnings 67,830 52,490
Treasury stock, at cost, 100 shares (1,085) -
--------- ---------
Total stockholders' equity 109,557 90,184
--------- ---------
Total liabilities and stockholders' equity $ 139,033 $ 127,510
========= =========
See accompanying notes to consolidated financial statements.
26
27
TRIDENT MICROSYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
DEFERRED
COMPENSATION
RELATED TO NOTES
COMMON ADDITIONAL RESTRICTED RECEIVABLE
STOCK PAID-IN STOCK AND FROM TREASURY RETAINED
(in thousands) SHARES AMOUNT CAPITAL STOCK OPTIONS STOCKHOLDERS STOCK EARNINGS
------ ------ ---------- ------------- ------------ -------- --------
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
Issuance of common stock 392 1 2,891 - - - -
Payment of stockholder
notes receivable - - - - 585 - -
Income tax benefit on
disqualifying disposition
of common stock options - - 1,641 - - - -
Purchase of treasury shares - - - - - (1,085)
Net income - - - - - - 15,340
-------------------------------------------------------------------------------------------
Balance at June 30, 1997 12,970 $13 $42,799 - - $(1,085) $67,830
===========================================================================================
See accompanying notes to consolidated financial statements.
27
28
TRIDENT MICROSYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
- --------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
----------------------------------
(in thousands) 1997 1996 1995
-------- -------- --------
Cash Flows from Operating Activities:
Net income $ 15,340 $ 16,860 $ 8,011
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 2,677 1,910 1,502
Provision for doubtful accounts and sales returns 76 12 271
Amortization of deferred compensation - 253 268
Gain on disposal of property and equipment - (112) -
Changes in assets and liabilities:
Accounts receivable (3,364) (8,117) (3,158)
Inventories 19,571 (15,230) 1,705
Prepaid expenses and other current assets 3,569 (1,112) (431)
Other assets (219) 630 (548)
Deferred income taxes, net 3,135 (1,971) (764)
Accounts payable (9,810) 12,557 (1,568)
Accrued expenses 2,588 602 2,715
Income taxes payable (3,844) 1,643 2,224
-------- -------- --------
Net cash provided by operating activities 29,719 7,925 10,227
-------- -------- --------
Cash Flows from Investing Activities:
Sales (purchases) of short-term investments, net (5,866) 5,693 (6,476)
Sales of long-term investments, net - - 1,747
Proceeds from disposal of fixed assets - 1,009 -
Purchases of property and equipment (3,519) (4,755) (1,878)
Advance payment from(to) vendor under wafer
capacity agreement 14,400 (16,800) -
Investment in joint venture (25,915) (13,716) -
-------- -------- --------
Net cash provided by (used in)
investing activities (20,900) (28,569) (6,607)
-------- -------- --------
Cash Flows from Financing Activities:
Issuance of common stock 2,891 3,684 1,128
Income tax benefit on disqualifying disposition
of common stock options 1,641 3,196 667
Principal repayments by stockholders of notes receivable 585 49 -
Purchase of treasury stock (1,085) - -
-------- -------- --------
Net cash provided by financing activities 4,032 6,929 1,795
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 12,851 (13,715) 5,415
Cash and cash equivalents at beginning of year 16,894 30,609 25,194
-------- -------- --------
Cash and cash Equivalents at end of year $ 29,745 $ 16,894 $ 30,609
======== ======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for income taxes $ 6,470 $ 4,083 $ 2,303
See accompanying notes to consolidated financial statements.
28
29
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Trident Microsystems, Inc. (the "Company") designs, develops and markets
videographics and multimedia integrated circuits for both the desktop and
portable PC market.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements include the
accounts of the Company and its subsidiaries after elimination of all
significant intercompany accounts and transactions. The preparation of
financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts; actual results could differ from those
estimates.
Cash Equivalents and Short-Term Investments. Cash equivalents consist of
highly liquid investments purchased with an original maturity of less than
90 days from the date of purchase. Short-term investments are comprised of
certificates of deposits, and municipal and other debt obligations of U.S.
financial institutions with contractual maturities of less than one year
and have been classified "available-for-sale." At June 30, 1997, the fair
value of the Company's investments approximated cost.
Inventories. Inventories are stated principally at standard cost adjusted
to approximate the lower of cost (first-in, first-out method) or market
(net realizable value).
Property and Equipment. Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives which range from three to seven years. Amortization of
leasehold improvements is computed using the straight-line method over the
shorter of the estimated life of the assets or the extended lease term.
Investments. Equity investment of less than 20% wherein the Company does
not have the ability to exert significant influence are accounted for using
the cost method.
Revenue Recognition. Revenue from product sales is recognized upon
shipment. Provision is made for expected sales returns and allowances when
revenue is recognized.
Software Development Costs. To date, the period between achieving
technological feasibility and the general availability of such software has
been short and software development costs qualifying for capitalization
have been insignificant. Accordingly, the Company has not capitalized any
software development costs.
Income Taxes. The Company accounts for income taxes using the asset and
liability method, under which the expected future tax consequences of
temporary differences between the book and tax bases of assets and
liabilities are recognized as deferred tax assets and liabilities. The
Company does not record a deferred taxes provision on unremitted earnings
of foreign subsidiaries to the extent that such earnings are considered
permanently invested.
29
30
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
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. The Company accounts for stock-based employee
compensation arrangements in accordance with provisions of APB No. 25,
"Accounting for Stock Issued to Employees" and complies with the disclosure
provisions of FAS No. 123, "Accounting for Stock-Based Compensation. "
Under APB No. 25, compensation cost is generally recognized based on the
difference, if any, between the quoted market price of the Company's stock
on the date of grant and the amount an employee must pay to acquire the
stock.
New Accounting Pronouncements. In February, 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128
(FAS No. 128),"Earnings per Share. " FAS No. 128 establishes financial
accounting and reporting standards for calculation of basic earnings per
share, and diluted earnings per share. FAS No. 128 supercedes APB No. 15,
and is effective for the periods ending after December 15, 1997, including
interim periods. On a pro forma basis, basic earnings per share under FAS
No. 128 for the years ended June 30, 1997 and 1996 would have been $1.18
and $1.34, respectively; diluted earnings per share would have been the
same as the reported amounts under APB No. 15.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (FAS No. 130), "Reporting
Comprehensive Income" and No. 131 (FAS No. 131), "Disclosures About
Segments of an Enterprise and Related Information." FAS No. 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. FAS No.
130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. FAS No. 131 supercedes FAS No. 14 and
requires segment information be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments in quarterly and annual reports. FAS No. 131 is
effective for annual reports for fiscal years beginning after December 15,
1997 and applicable to interim financial statements beginning in the second
year of application, along with comparative information for interim periods
in the initial year of applications.
30
31
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
2. BALANCE SHEET COMPONENTS
JUNE 30,
(in thousands) 1997 1996
Cash equivalents:
Certificates of deposit $ 8,080 $ -
Money market accounts 478 575
-------- --------
$ 8,558 $ 575
======== ========
Short-term investments:
Certificates of deposit $ 30,200 $ -
Municipal obligations - 24,334
-------- --------
$ 30,200 $ 24,334
======== ========
Accounts receivable:
Trade accounts receivable $ 21,224 $ 17,860
Less: allowance for doubtful accounts and sales allowances (1,064) (988)
-------- --------
$ 20,160 $ 16,872
======== ========
Inventories:
Work in process $ 3,154 $ 15,150
Finished goods 4,142 11,716
-------- --------
$ 7,296 $ 26,866
======== ========
Prepaid expenses and other current assets:
Advance payment under wafer capacity agreement $ - $ 4,800
Wafer foundry credits - 1,318
Interest receivable 22 250
Other 1,149 772
-------- --------
$ 1,171 $ 7,140
======== ========
Property and Equipment:
Machinery and equipment $ 12,574 $ 9,137
Furniture and fixtures 1,527 1,344
Leasehold improvements 2,007 1,393
-------- --------
16,108 11,874
Less: accumulated depreciation and amortization (8,645) (6,246)
-------- --------
$ 7,463 $ 5,628
======== ========
Other assets:
Advance payments under wafer capacity agreement $ - $ 12,000
Other 441 222
-------- --------
$ 441 $ 12,222
======== ========
Accrued expenses:
Compensation accruals $ 2,771 $ 2,358
Sales allowances 2,470 1,306
Nonrecurring engineering charges 897 602
Other 4,082 3,366
-------- --------
$ 10,220 $ 7,632
======== ========
31
32
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
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 committed to purchase and the supplier committed to provide
a certain number of wafers each year through December 31, 1999. The
Company paid $16,800,000 under the agreement in August 1995. During
fiscal 1997, the Company applied $2,400,000 of the payment against
wafer purchases and renegotiated the agreement. In January 1997, the
Company received reimbursement of $14,400,000 from the supplier in
conclusion of the agreement. The Company and its supplier continue to
maintain their semiconductor wafer supplier relationship.
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 is to invest a certain amount of New Taiwan
dollars (equivalent to approximately U.S. $55,000,000) in three
installments for a 10% equity interest in the joint venture. The
Company paid $25,900,000 in January 1997 and $13,716,000 in January
1996. The final payment under the joint venture agreement, estimated to
be $15 million, is currently anticipated in November 1997.
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 outstanding under the line of credit as of
June 30, 1997.
32
33
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
5. INCOME TAXES
The components of income before taxes are as follows:
YEAR ENDED JUNE 30,
(in thousands) 1997 1996 1995
Income subject to domestic income taxes only $ 6,958 $16,116 $ 7,948
Income subject to foreign income taxes, and in
certain cases, domestic income taxes 15,603 8,678 3,833
------- ------- -------
$22,561 $24,794 $11,781
======= ======= =======
YEAR ENDED JUNE 30,
(in thousands) 1997 1996 1995
Current:
Federal $ 2,833 $ 7,171 $ 3,391
State 578 1,786 544
Foreign 675 948 599
------- ------- -------
4,086 9,905 4,534
------- ------- -------
Deferred:
Federal 2,749 $(1,828) $ (638)
State 386 (143) (126)
------- ------- -------
3,135 (1,971) (764)
------- ------- -------
$ 7,221 $ 7,934 $ 3,770
======= ======= =======
JUNE 30,
(in thousands) 1997 1996
Deferred tax assets:
State income taxes $ 89 $ 473
Vacation, bonus and other accruals 1,341 635
Allowances, reserves and other 1,425 2,578
Other 71 152
------- ------
2,926 3,838
------- ------
Deferred tax liabilities:
Unremitted earnings of foreign subsidiary (2,223) -
------- ------
$ 703 $3,838
======= ======
33
34
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
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 is as follows:
(in thousands) 1997 1996 1995
Federal statutory rate 35.0% 35.0% 34.0%
State taxes, net of federal tax benefit 2.0 4.3 2.3
Tax exempt income - (1.6) (3.1)
Research and development credit (1.4) - (4.3)
Foreign earnings subject to lower tax rates (6.6) (5.9) -
Other 3.0 0.2 3.1
---- ---- ----
Effective income tax rate 32.0% 32.0% 32.0%
==== ==== ====
The Company has not provided for U.S. federal income and foreign
withholding taxes on approximately $24 million of a non-U.S.
subsidiary's undistributed earnings as of June 30, 1997, because such
earnings are intended to be reinvested indefinitely.
6. STOCK-BASED COMPENSATION
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. As of June 30, 1997,
deferred compensation expense was fully amortized.
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, 1997,
6,195,000 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.
34
35
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
The following table summarizes the option activities for the years ended
June 30, 1995, 1996 and 1997:
OPTIONS OPTIONS WEIGHTED AVERAGE OUTSTANDING
AVAILABLE FOR NUMBER OF EXERCISE PRICE PER
(in thousands, except per share data) GRANT OPTIONS PRICE OPTION
------------- ---------- ---------------- ---------------
Balance, June 30, 1994 150 1,864 $ 0.77-$ 7.00
Additional shares reserved 800 -
Options granted (1,008) 1,008 $ 9.59 $ 1.55-$20.06
Options exercised - (221) $ 3.51 $ 0.80-$ 6.00
Options expired or canceled 335 (335) $ 7.01 $ 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 $ 15.66 $12.63-$34.38
Options exercised - (673) $ 4.81 $ 0.77-$11.25
Options expired or canceled 493 (493) $ 13.62 $ 1.55-$23.25
------ ----- ------ -------------
Balance, June 30, 1996 1,723 2,292 $ 0.77-$34.38
Additional shares reserved 1,000 -
Options granted (3,523) 3,523 $ 10.69 $ 9.00-$21.50
Options exercised - (334) $ 6.22 $ 0.77-$ 9.38
Options expired or canceled 1,631 (1,631) $ 12.95 $ 4.63-$25.63
------ ----- ------ -------------
Balance, June 30, 1997 831 3,850 $ 1.05-$34.38
====== ===== =============
At June 30, 1997, 1996 and 1995, options for 703,000, 538,000 and
691,000 shares of common stock were vested but not exercised. In July
1996, the Company canceled 1,077,000 options outstanding under the
Option Plan with exercise prices greater than $9.375, and reissued the
options with an exercise price of $9.375.
35
36
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
The following table summarizes information about stock options
outstanding at June 30, 1997:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------ -----------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 6/30/97 Contractual Life Exercise Price at 6/30/97 Exercise Price
- ------------------------------------------------------------------------ -----------------------------
$ 1.05 - $ 7.70 798,942 6.3 $ 5.38 539,296 $ 5.05
$ 9.00 - $ 9.00 327,000 9.0 $ 9.00 15,000 $ 9.00
$ 9.13 - $ 9.38 833,250 9.1 $ 9.36 99,200 $ 9.38
$ 9.75 - $10.25 869,000 9.5 $ 10.03 1,000 $ 9.94
$10.31 - $34.38 1,022,301 9.5 $ 13.85 48,801 $ 23.71
-
- ------------------------------------------------------------------------ -----------------------------
$ 1.05 - $34.38 3,850,493 8.7 $ 9.85 703,297 $ 7.04
- ------------------------------------------------------------------------ -----------------------------
FAIR VALUE PRESENTATION.
Had compensation cost for the Company's stock-based compensation plan
been determined based on the fair value method consistent with the
method prescribed FAS No. 123, the Company's net income and earnings
per share would have been further reduced to the pro forma amounts
indicated below:
June 30,
Dollars in thousands, except per share data 1997 1996
-----------------------------------------------------------------------
Net income
As reported $ 15,340 $ 16,860
---------- ----------
Pro forma $ 10,389 $ 15,140
---------- ----------
Net income per share
As reported $ 1.09 $ 1.26
---------- ----------
Pro forma $ 0.73 $ 1.13
---------- ----------
Under FAS No. 123, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in fiscal 1997
and 1996. Dividend yield of 0 percent for both years; expected
volatility of 68% to 72% for fiscal 1997 and 61% to 69% for 1996; risk
free interest rates of 6.07% to 6.60% for fiscal 1997 and 5.51% to
6.69% for fiscal 1996; and expected lives of five years for both years.
Weighted average fair value of options granted during the year were
$5.34 and $9.24 for fiscal year 1997 and 1996 respectively.
Stock Repurchases. On April 22, 1997 the Company's Board of Directors
authorized the Company to repurchase up to 600,000 shares of its own
common stock under certain conditions at prevailing market prices
through October 1997. In April 1997, the Company repurchased 100,000
shares for $1,085,000 in cash. Shares repurchased will be held as
treasury stock until reissued to the Company's stock option and stock
purchase plans or other benefit plans the Company may adopt in the
future or for other corporate purposes.
36
37
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
7. RELATED PARTY TRANSACTIONS
During the years ended June 30, 1997, 1996 and 1995, the Company sold
products with revenues of $14,805,000, $9,618,000 and $8,914,000,
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, 1997, 1996
and 1995 the Company had accounts receivable from an affiliate of a
stockholder of the Company related to such sales totaling $4,802,000,
$1,961,000 and $299,000, respectively.
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 74%, 78% and 80% for fiscal 1997, 1996 and
1995, respectively. The following is a summary of the Company's
geographic operations:
ASIA AND INTERCOMPANY
(in thousands) UNITED STATES PACIFIC ELIMINATION CONSOLIDATED
Fiscal Year 1997:
Product sales $ 74,716 $ 158,845 $ 55,627 $ 177,934
Income from operations 5,053 15,500 - 20,553
Identifiable assets 87,637 52,915 1,519 139,033
Fiscal Year 1996:
Product sales $ 137,784 $ 131,568 $ 101,263 $ 168,089
Income from operations 14,782 7,960 - 22,742
Identifiable assets 79,414 52,269 4,173 127,510
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
The Company effected a reorganization in March 1996. The Company
established a wholly owned subsidiary in the Cayman Islands, British
West Indies. The Cayman Islands 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.
37
38
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
9. COMMITMENTS AND CONCENTRATION OF SALES AND CREDIT RISK
Capital Leases. In June 1997, the Company entered into a capital lease
agreement with an equipment maker for research equipment in the amount
of $1,018,000. At June 30, 1997, leased capital assets and related
accumulated depreciation included in property, plant and equipment were
$1,018,000 and $0, respectively, and the related capital lease
obligation is $993,000. Total future minimum lease payments under the
capital lease at June 30, 1997 were $384,000, $384,000 and $352,000 in
fiscal years 1998, 1999, and 2000, respectively. Of total payments of
$1,120,000, $127,000 represented interest.
Building Leases. The Company leases facilities under noncancelable
operating lease agreements, which expire at various dates through 2001.
Rental expense for the years ended June 30, 1997, 1996 and 1995 was
$1,656,000, $1,092,000 and $1,042,000, respectively. Total future
minimum lease payments under operating leases at June 30, 1997 were
$1,449,000, $1,214,000, $572,000 and $19,000 in fiscal years 1998,
1999, 2000 and 2001, respectively.
Concentration of Sales and Credit Risks. Three customers comprised 21%,
12% and 11%, respectively, of the Company's net sales for the year
ended June 30, 1997. Three customers comprised 16%, 12% and 11%, 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 year ended
June 30, 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.
38
39
TRIDENT MICROSYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL 1997 QUARTER ENDED
(IN THOUSANDS EXCEPT PER SHARE DATA) SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
----------------------------------------------------------------------------------------------------------
Net sales $44,838 $51,864 $46,511 $34,720
Gross margin 15,263 18,413 17,447 13,407
Income from operations 4,830 7,273 6,306 2,144
Net income 3,525 5,365 4,532 1,918
Net income per share $ 0.26 $ 0.38 $ 0.32 $ 0.14
(as a percentage of sales)
Net sales 100% 100% 100% 100%
Gross margin 34 36 38 39
Income from operations 11 14 14 6
Net income 8 10 10 6
----------------------------------------------------------------------------------------------------------
FISCAL 1996 QUARTER ENDED
(IN THOUSANDS EXCEPT PER SHARE DATA) SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
----------------------------------------------------------------------------------------------------------
Net sales $36,566 $41,348 $46,007 $44,168
Gross margin 13,568 15,504 17,277 11,065
Income from operations 6,095 7,040 7,665 1,943
Net income 4,505 5,156 5,580 1,619
Net income per share $ 0.34 $ 0.38 $ 0.42 $ 0.12
(as a percentage of sales)
Net sales 100% 100% 100% 100%
Gross margin 37 37 38 25
Income from operations 17 17 17 4
Net income 12 12 12 4
----------------------------------------------------------------------------------------------------------
FISCAL 1995 QUARTER ENDED
(IN THOUSANDS EXCEPT PER SHARE DATA) SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
----------------------------------------------------------------------------------------------------------
Net sales $19,053 $26,830 $29,801 $31,082
Gross margin 5,369 7,788 10,970 11,777
Income from operations 139 1,978 4,520 3,139
Net income 349 1,652 3,414 2,596
Net income per share $ 0.03 $ 0.13 $ 0.26 $ 0.20
(as a percentage of sales)
Net sales 100% 100% 100% 100%
Gross margin 28 29 37 38
Income from operations 1 7 15 10
Net income 2 6 11 8
----------------------------------------------------------------------------------------------------------
In the fourth quarter of fiscal 1996, the Company recorded a $4.0
million lower of cost or market charge to inventory.
39
40
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 17, 1997, appearing on page 24 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 17, 1997
40
41
SCHEDULE II
TRIDENT MICROSYSTEMS INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Beginning Charged to Costs Charged to Other Ending
Description Balance & Expense Accounts Deductions Balance
Allowance for
Doubtful Accounts:
1995 $ 312,000 $ 180,000 $ 492,000
1996 492,000 13,000 505,000
1997 505,000 76,000 581,000
Allowance for Sales Returns:
1995 $ 393,000 $ 91,000 $ 484,000
1996 484,000 (1,000) 483,000
1997 483,000 - 483,000
Allowance for Realizable
Inventory:
1995 $ 1,585,000 $ 233,000 $ 254,000 $ 1,564,000
1996 1,564,000 4,719,000 614,000 5,669,000
1997 5,669,000 2,547,000 1,127,000 7,089,000
41
42
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Pete J. Mangan as his attorney-in-fact, with the power
of substitution, for him in any and all capacities, to sign any amendments to
this Report on Form 10-K, and to file same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on September 24, 1997 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 Officer)
(Frank C. Lin)
/s/ Pete J. Mangan Vice President, Finance, Chief Financial Officer
- -------------------------- (Principal Accounting and Financial Officer)
(Pete J. Mangan)
/s/ Glen M. Antle Director
- --------------------------
(Glen M. Antle)
/s/ Shyur-Jen Paul Chien Director
- --------------------------
(Shyur-Jen Paul Chien)
/s/ Yasushi Chikagami Director
- --------------------------
(Yasushi Chikagami)
/s/ Charles A. Dickinson Director
- --------------------------
(Charles A. Dickinson)
/s/ Leonard Y. Liu Director
- --------------------------
(Leonard Y. Liu)
/s/ Millard Phelps Director
- --------------------------
(Millard Phelps)
42
43
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)
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)
10.16 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) 45
21.1 List of Subsidiaries.(6) 46
23.1 Consent of Independent Accountants.(6) 47
24.1 Power of Attorney (See page 42).(6)
27.1 Financial Data Schedule (EDGAR version
only)(6) 48
- --------
(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.
43