-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CW4XFKG0P40e9Bs562zmscA/wIZ1zuVsYG2RQW5w3v2OFj51A8dZ+WH0SvHtNUmk 6P7EiXBqSk1bS0UStSPaAw== 0000891618-02-000722.txt : 20020414 0000891618-02-000722.hdr.sgml : 20020414 ACCESSION NUMBER: 0000891618-02-000722 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRIDENT MICROSYSTEMS INC CENTRAL INDEX KEY: 0000859475 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770156584 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20784 FILM NUMBER: 02545094 BUSINESS ADDRESS: STREET 1: 2450 WALSH AVENUE CITY: SANTA CLARA STATE: CA ZIP: 95051-1303 BUSINESS PHONE: 4084961085 MAIL ADDRESS: STREET 1: 2450 WALSH AVENUE CITY: SANTAL CLARA STATE: CA ZIP: 95051 10-Q 1 f79054e10-q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________________ to __________________ Commission file number: 0-20784 TRIDENT MICROSYSTEMS, INC. -------------------------- (Exact name of registrant as specified in its charter) DELAWARE 77-0156584 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer identification No.) incorporation or organization) 1090 E. Arques Avenue, Sunnyvale, California 94085 -------------------------------------------------- (Address of principal executive offices) (Zip code) (408) 991-8800 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares of the registrant's $0.001 par value Common Stock outstanding at December 31, 2001 was 13,405,481. TRIDENT MICROSYSTEMS, INC. INDEX
Page ---- PART I: FINANCIAL INFORMATION Item 1: Unaudited Financial Information Condensed Consolidated Balance Sheet - December 31, 2001 and June 30, 2001 3 Condensed Consolidated Statement of Operations for the three months and six months ended December 31, 2001 and 2000 4 Condensed Consolidated Statement of Cash Flows for the six months ended December 31, 2001 and 2000 5 Notes to the Condensed Consolidated Financial Statements 6 Item 2: Management's Discussion and Analysis of Financial Condition 11 and Results of Operations Item 3: Quantitative and Qualitative Disclosures About Market Risk 23 PART II: OTHER INFORMATION Item 1: Legal Proceedings 25 Item 2: Changes in Securities and Use of Proceeds Not Applicable Item 3: Defaults upon Senior Securities Not Applicable Item 4: Submission of Matters to a Vote of Security Holders 27 Item 5: Other Information Not Applicable Item 6: Exhibits and Reports on Form 8-K 28 Signatures 29
TRIDENT MICROSYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEET (IN THOUSANDS, UNAUDITED) ASSETS
December 31, June 30, 2001 2001 ------------ --------- Current assets: Cash and cash equivalents $ 25,327 $ 26,677 Short-term investments - UMC 70,165 52,708 Short-term investments - other 710 791 Accounts receivable, net 7,859 9,247 Inventories 8,877 10,669 Deferred income tax assets 1,656 1,656 Prepaid expenses and other assets 3,491 3,481 --------- --------- Total current assets 118,085 105,229 Property and equipment, net 3,932 3,559 Long-term investments - UMC 12,578 26,005 Long-term investments - other 9,956 11,996 Other assets 391 630 --------- --------- Total assets $ 144,942 $ 147,419 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 13,611 $ 11,829 Accrued expenses and other liabilities 12,743 13,169 Deferred income taxes 7,085 -- Income taxes payable 201 1,040 --------- --------- Total current liabilities 33,640 26,038 Deferred income taxes, non-current 9,576 14,947 Minority interest in subsidiary 894 1,068 --------- --------- Total liabilities 44,110 42,053 --------- --------- Stockholders' equity: Common stock and additional paid-in capital 55,556 55,106 Treasury stock, at cost (17,952) (17,952) Retained earnings 43,453 74,996 Accumulated other comprehensive gain (loss) 19,775 (6,784) --------- --------- Total stockholders' equity 100,832 105,366 --------- --------- Total liabilities and stockholders' equity $ 144,942 $ 147,419 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. - 3 - TRIDENT MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Months Ended Six Months Ended December 31, December 31, ----------------------- ----------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Net sales $ 30,178 $ 25,785 $ 55,918 $ 61,842 Royalty and license revenue -- 9,267 -- 9,267 -------- -------- -------- -------- Total revenue 30,178 35,052 55,918 71,109 Cost of sales 24,523 19,941 44,325 46,608 -------- -------- -------- -------- Gross profit 5,655 15,111 11,593 24,501 Research and development expenses 5,765 5,997 11,292 11,543 Sales, general and administrative expenses 3,570 4,132 6,948 7,815 -------- -------- -------- -------- Income (loss) from operations (3,680) 4,982 (6,647) 5,143 Gain (loss) on investments 150 -- (41,915) -- Interest and other income (expense), net (41) 302 188 846 -------- -------- -------- -------- Income (loss) before income taxes (3,571) 5,284 (48,374) 5,989 Provision (benefit) for income taxes (237) 1,179 (16,831) 1,350 -------- -------- -------- -------- Net income (loss) $ (3,334) $ 4,105 $(31,543) $ 4,639 ======== ======== ======== ======== Basic earnings (loss) per share $ (0.25) $ 0.32 $ (2.36) $ 0.36 ======== ======== ======== ======== Shares used in computing basic per share amounts 13,380 12,984 13,339 13,044 ======== ======== ======== ======== Diluted earnings (loss) per share $ (0.25) $ 0.29 $ (2.36) $ 0.33 ======== ======== ======== ======== Shares used in computing diluted per share amounts 13,380 13,935 13,339 14,263 ======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. - 4 - TRIDENT MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS, UNAUDITED)
Six Months Ended December 31, ----------------------- 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(31,543) $ 4,639 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization 821 1,217 Provision for doubtful accounts and sales returns 542 -- Loss on investments 41,915 -- Deferred income taxes, net (15,991) -- Changes in assets and liabilities: Accounts receivable 846 (4,821) Inventories 1,792 (7,069) Prepaid expenses and other current assets (10) 972 Other assets 239 129 Accounts payable 1,782 5,882 Accrued expenses and other liabilities (609) (1,062) Income taxes payable (839) 1,333 -------- -------- Net cash (used in) provided by operating activities (1,055) 1,220 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Sales (purchases) of investments 450 (4,742) Purchase of property and equipment (1,195) (886) -------- -------- Net cash used in investing activities (745) (5,628) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 450 2,016 Purchase of treasury stock -- (7,671) -------- -------- Net cash provided by (used in) financing activities 450 (5,655) -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (1,350) (10,063) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 26,677 39,041 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,327 $ 28,978 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. - 5 - TRIDENT MICROSYSTEMS, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION In the opinion of Trident Microsystems, Inc. (the "Company"), the condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the financial position, operating results and cash flows for those periods presented. The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and are not audited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2001 included in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for any other period or for the entire fiscal year which ends June 30, 2002. NOTE 2. REVENUE RECOGNITION Revenue from product sales is recognized upon shipment. Provision is made for expected sales returns and allowances when revenue is recognized. The Company provides reserves for returns and allowances for distributor inventories. These reserves are based on the Company's estimates of inventories held by its distributors and the expected sell through of its products by its distributors. The Company has no obligation to provide any modification or customization upgrades, enhancements or other post-sale customer support. The Company recognizes license revenue in accordance with the revenue recognition criteria set forth in SOP 97-2 "Software Revenue Recognition." The Company's license revenue does not require significant production, modification or customization of software. The Company's license revenues are recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the vendor's fee is fixed or determined, (4) collectibility is probable. Royalty revenue is recognized when the Company is informed that the related products have been sold provided that collectibility is assured. In December 1999, The Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 provides interpretive guidance on the recognition, presentation and disclosure of revenue in financial statements under certain circumstances. The Company adopted the provisions of SAB 101 in these financial statements for all periods presented. The adoption of SAB 101 did not have a material impact on the Company's financial statements. NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133 "Accounting for Derivatives Instruments and Hedging Activities." This statement establishes accounting - 6 - and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the balance sheet and measurement of those instruments at fair value. The adoption of this standard did not have a material impact on the Company's financial statements. NOTE 4. INVENTORIES Inventories consisted of the following (in thousands):
December 31, 2001 June 30, 2001 ----------------- ------------- Work in process $ 2,520 $ 5,867 Finished goods 6,357 4,802 ---------- ---------- $ 8,877 $ 10,669 ========== ==========
NOTE 5. EARNINGS PER SHARE Basic Earnings Per Share (EPS) is computed by dividing net income (loss) available to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period and excludes the dilutive effect of stock options. Diluted Earnings Per Share (EPS) gives effect to all dilutive potential common shares outstanding during a period. In computing Diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from exercise of stock options. Following is a reconciliation of the numerators and denominators of the Basic and Diluted EPS computations for the periods presented below.
Three Months Ended Six Months Ended December 31, December 31, ------------------------- ----------------------- (in thousands, except per share amounts) 2001 2000 2001 2000 ---------- -------- -------- -------- BASIC NET INCOME (LOSS) PER SHARE Net income (loss) available to Common Shareholders $ (3,334) $ 4,105 $(31,543) $ 4,639 ========== ======== ======== ======== Weighted average common shares 13,380 12,984 13,339 13,044 ========== ======== ======== ======== Basic net income (loss) per share $ (0.25) $ 0.32 $ (2.36) $ 0.36 ========== ======== ======== ======== DILUTED NET INCOME (LOSS) PER SHARE Net income (loss) available to Common Shareholders $ (3,334) $ 4,105 $(31,543) $ 4,639 ========== ======== ======== ======== Weighted average common shares 13,380 12,984 13,339 13,044 Dilutive common stock equivalents (1) -- 951 -- 1,219 ---------- -------- -------- -------- Weighted average common shares and equivalents 13,380 13,935 13,339 14,263 ========== ======== ======== ======== Diluted net income (loss) per share $ (0.25) $ 0.29 $ (2.36) $ 0.33 ========== ======== ======== ========
(1) Dilutive common stock equivalents not included in the EPS calculation for the period ended December 31, 2001 because the effect would be anti-dilutive. - 7 - NOTE 6. INVESTMENT IN UMC In August 1995, the Company made an investment of $49.3 million in United Integrated Circuits Corporation (UICC). On January 3, 2000, United Microelectronics Corporation (UMC) acquired UICC and, as a result of this merger, the Company received approximately 46.5 million shares of UMC. On April 7, 2000, UMC announced a 20% stock dividend payable to shareholders of record May 16, 2000, and a 15% stock dividend payable to shareholders of record July 21, 2001. The only change in the number of shares in UMC held by the Company from January 3, 2000 to December 31, 2001 was the increase resulting from the stock dividends. As of December 31, 2001, the Company owned approximately 64.2 million shares of UMC which represents about 0.5% of the outstanding stock of UMC. On January 3, 2000, the Company recognized a pre-tax gain of $117.0 million upon the receipt of UMC shares in exchange for the UICC shares. In the quarter ended March 31, 2001 based on the decline of the UMC's stock price, the decline in stock prices of publicly traded semiconductor companies and the unfavorable outlook regarding the demand and operating environment of the semiconductor industry, the Company concluded that the decline in the investment value in UMC had become other-than-temporary. Accordingly, the difference of $76.4 million between the carrying value on January 3, 2000 and the quoted fair value on March 31, 2001, was written off and included in earnings as impairment loss on investments in accordance with SFAS No. 115 and APB No. 18 for the short-term and long-term portions of investments, respectively. In the quarter ended September 30, 2001, the Company concluded that due to a substantial decline in the market value of UMC's stock price from June 30, 2001 to September 30, 2001, the continued decline in stock prices of publicly traded semiconductor companies and the continuing unfavorable outlook for the semiconductor industry, the decline in the investment value in UMC had become other-than-temporary. Accordingly, the difference of $40.0 million between the carrying value on March 31, 2001 and the quoted fair value on September 30, 2001, was written off and included in earnings as an impairment loss on investments in accordance with SFAS No. 115 and APB No. 18, for the short-term and long-term portions of investments, respectively. Due to an increase in the market value of UMC's stock price from October 1, 2001 to December 31, 2001, an unrealized gain of $19.6 million was recorded in equity as "accumulated other comprehensive gain" in accordance with SFAS No. 130, "Reporting Comprehensive Income." The $19.6 million is equal to a $32.6 million increase in market value of our short-term investment in UMC for the three months ended December 31, 2001, less deferred taxes relating to the unrealized gain of $13.0 million. In order to preserve the 12.5% wafer capacity guarantee of the UICC facility, which guarantees a maximum of approximately 3,000 wafers per month, there are certain limitations on the Company's ability to sell the UMC shares. If the Company's total shareholdings fall below one-half of the initial percentage of shares held in UMC, the Company's production capacity will be reduced by at least 50%, and depending on the interpretation of the foundry capacity agreement between the parties, the Company's production capacity could be reduced by substantially more than 50%. In addition, one-third of the shares are subject to a two-year lock-up period in accordance with an investment agreement entered into with UMC on January 3, 2000. After a two-year period, one-fifth of the shares will be available for sale from the lock-up portion every six months. As of December 31, 2001, approximately 16.1 million shares with a carrying value of $12.6 million are subject to this lock-up restriction. These - 8 - shares are accounted for as long-term investments using the cost method in accordance with APB No. 18. The $12.6 million reflects the write-down to the market value as of December 31, 2001. Shares of the Company's UMC investment are listed on the Taiwan Stock Exchange. In accordance with SFAS No. 115, the 48.1 million unrestricted shares are treated as available-for-sale securities and are classified as short-term investments. These unrestricted shares had a market value of $70.2 million as of December 31, 2001. Unrestricted shares include shares that may need to be held by the Company to retain wafer capacity, as described in the prior paragraph. NOTE 7. INVESTMENTS IN OTHER COMPANIES During the six months ended December 31, 2001, the Company also recognized impairment losses on investments other than UMC totaling $1.9 million as follows: ADSL company $ 270,000 Communications company 66,000 Broadband communications company 750,000 Voice over DSL communications company 850,000 ---------- Total $1,936,000 ==========
In September 1999, the Company invested $909,000 in an ADSL company for 227,250 shares of preferred stock which were then converted into the same number of common stock shares upon the company's initial public offering in August 2000. On March 31, 2001 the fair value of these shares as quoted was $498,000. Because the company experienced declining earnings in relation to its competitors in the ADSL market and erosion of its market share, the decline in value was considered other-than-temporary. Accordingly, the difference between the carrying value and the quoted fair value on March 31, 2001 was written off against earnings in accordance with SFAS No. 115. On September 30, 2001 due to deteriorating industry outlook and decreasing value in the company's shares, the difference between the carrying value and the quoted fair value on September 30, 2001 of $270,000 was considered an other-than-temporary impairment and was written off against earnings in accordance with SFAS No. 115. Due to an increase in the market value of the ADSL company's stock price from October 1, 2001 to December 31, 2001, an unrealized gain of $103,000 was recorded in equity as "accumulated other comprehensive gain" in accordance with SFAS No. 130, "Reporting Comprehensive Income." The $103,000 is equal to a $170,000 increase in market value of the short-term investment for the three months ended December 31, 2001, less deferred taxes relating to the unrealized gain of $67,000. In June 2000, the Company invested $600,000 in a communications company which was subsequently acquired by a listed company. On March 31, 2001, the fair value of the shares of the listed company owned by the Company was $221,000. Because of the significant losses incurred by this company, the Company concluded that the decline in value was other-than-temporary. Accordingly, the difference between the carrying value and the quoted fair value on March 31, 2001 was written off against earnings in accordance with SFAS No. 115. On September 30, 2001 due to the deteriorating industry outlook and decreasing value in the company's shares, the difference between the carrying value and the quoted fair value on September 30, 2001 of $66,000 was considered an other-than-temporary impairment and was written off against earnings in accordance with SFAS No. 115. Due to an increase in the market value of the communications company's stock price from October 1, 2001 to December 31, 2001, an unrealized gain of $94,000 was recorded in equity as "accumulated other comprehensive gain" in accordance with SFAS No. 130, "Reporting Comprehensive Income." The $94,000 is equal to a - 9 - $157,000 increase in market value of the short-term investment for the three months ended December 31, 2001, less deferred taxes relating to the unrealized gain of $63,000. In April 2000, the Company invested $650,000 in a private company engaged in broadband communication technology. In June 2000, an additional $100,000 was invested in the company. In the quarter ended September 30, 2001, the Company determined that the prospects for recovery of the investment were unfavorable given the market position of the company and the company's operating losses. Therefore, the Company concluded that the impairment was other-than-temporary. Accordingly, the full investment of $750,000 was written off against earnings in accordance with APB No. 18. In September 2000, the Company invested $1,500,000 in a private company engaged in "voice over DSL" communication technology. In the quarter ended September 30, 2001, the Company determined that this communications company was in a product reengineering process. It was considered likely that the company would cease operations. The Company assessed the estimated cash recoverable from this investment and concluded that the estimated shortfall was an other-than-temporary impairment. Accordingly, $1,000,000 of the investment was written off against earnings in accordance with APB No. 18. In December 2001, this investment was sold for $650,000 and a gain of $150,000 was recognized as "Gain on investments" for the three months ended December 31, 2001. NOTE 8. OTHER CURRENT ASSETS Included in other current assets is a $500,000 loan to Mr. Frank Lin, the Company's President and Chief Executive Officer. In accordance with an agreement dated April 27, 2000, this loan was provided to Mr. Lin for his personal use. It is payable in full on the earlier of cessation of employment or April 27, 2002. The interest rate is 6.46% compounded annually and the accrued interest is payable at maturity. Mr. Lin used shares of the Company's stock he acquired several years ago as collateral for the loan. This loan was not provided in relation to any purchase of the Company's stock or the exercise of the Company's stock options. NOTE 9. ACCUMULATED COMPREHENSIVE GAIN (LOSS) ON SHORT-TERM INVESTMENTS Under SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") any unrealized gains or losses on the short-term investments which are classified as available-for-sale equity securities are to be reported as a separate adjustment to equity. Between September 30, 2001 and December 31, 2001, the market value of the Company's short-term investment in United Microelectronics Corporation ("UMC") increased by $32.6 million. The unrealized gain of $19.6 million was equal to the $32.6 million increase in market value less deferred taxes of $13.0 million, and was included in equity as accumulated other comprehensive gain. Also, between September 30, 2001 and December 31, 2001, the market value of the Company's other short-term investments increased by $327,000. The unrealized gain of $197,000, which was equal to the $327,000 increase in market value less deferred taxes of $130,000, was included in equity as accumulated other comprehensive gain. - 10 - ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED) When used in this report the words "expects," "anticipates," "estimates" and similar expressions are intended to identify forward-looking statements. Such statements, which include statements concerning: - - the timing of availability and functionality of products under development, - - trends in average selling prices, - - the percentage of export sales, - - outcome of pending litigation, - - demand for our products, - - devotion of resources and control of expenses related to new products, markets and internal business strategies, are subject to risks and uncertainties, including those set forth below under "Factors That May Affect Our Results" and elsewhere in this report, that could cause actual results to differ materially from those projected. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based. RESULTS OF OPERATIONS The following table sets forth the results of operations expressed as percentages of total revenues for the three and six months ended December 31, 2001 and 2000:
Three Months Ended Six Months Ended December 31, December 31, -------------------- -------------------- 2001 2000 2001 2000 ------ ------ ------ ------ Net sales 100% 74% 100% 87% Royalty and license revenue -- 26 -- 13 ------ ------ ------ ------ Total revenues 100 100 100 100 Cost of sales 81 57 79 66 ------ ------ ------ ------ Gross margin 19 43 21 34 Research and development expenses 19 17 20 16 Selling, general and administrative expenses 12 12 12 11 ------ ------ ------ ------ Income (loss) from operations (12) 14 (11) 7 Loss on investments -- -- (75) -- Interest and other income, net -- 1 -- 1 ------ ------ ------ ------ Income (loss) before income taxes (12) 15 (86) 8 Provision (benefit) for income taxes (1) 3 (30) 2 ------ ------ ------ ------ Net income (loss) (11)% 12% (56)% 6% ------ ------ ------ ------
- 11 - Revenue Net sales for the three months ended December 31, 2001 increased 17% to $30.2 million from the $25.8 million reported in the three months ended December 31, 2000. Net sales for the six months ended December 31, 2001 decreased 10% to $55.9 million from the $61.8 million reported in the six months ended December 31, 2000. The increase in net sales in the three months ended December 31, 2001 over the three months ended December 31, 2000 is primarily attributed to an increase in sales of integrated notebook products. Net sales decreased during the six months ended December 31, 2001 compared to the six months ended December 31, 2000 due to an overall decrease in the sales of notebook and desktop products. The Company recognized $10.2 million in royalty revenue during the quarter ended December 31, 2000, offset by costs of $903,000, related to the lawsuit settlement with VIA Technologies Inc. As we reported in our press release of January 24, 2002 we expect sales for the coming quarter to be flat given the current business environment. Notebook, desktop and digital process television products accounted for 94%, 3% and 3% of net sales, respectively, for both the three and six months ended December 31, 2001. Notebook, desktop and digital process television products accounted for 83%, 9% and 5% of net sales, respectively, in the three months ended December 31, 2000, and 86%, 9% and 2% of net sales for the six months ended December 31, 2000. Sales to Asian customers, primarily in Taiwan and Japan, accounted for almost all of our revenues in both the three months ended December 31, 2001 and the three months ended December 31, 2000. Sales to North American and European customers represented 0.5% of net sales in the three months ended December 31, 2001 and the three months ended December 31, 2000. Sales to Asian customers, primarily in Taiwan and Japan, accounted for almost all of our revenues in both the six months ended December 31, 2001 and the six months ended December 31, 2000. Sales to North American and European customers represented 0.5% of net sales in the six months ended December 31, 2001, an increase from approximately 0.3% in the six months ended December 31, 2000. We expect Asian customers will continue to account for a significant portion of our sales. In the three months ended December 31, 2001, sales to two customers Inno Micro (a supplier to Toshiba) and Acer accounted for 62%, and 19% of total revenues, respectively. In the three months ended December 31, 2000, sales to three customers Inno Micro (a supplier to Toshiba), Quanta and Arima (suppliers to Compaq) accounted for 17%, 13%, and 13% of total revenues, respectively. In the six months ended December 31, 2001 sales to three customers Inno Micro, Acer and Quanta accounted for 56%, 15% and 11% of total revenues, respectively, and in the six months ended December 31, 2000 sales to three customers Arima, Quanta and Inno Micro accounted for 21%, 17% and 11%, respectively. We anticipate that sales in future quarters will continue to depend primarily on sales to key customers. We plan from time to time to introduce new and higher performance graphics controllers, multimedia products, and non-PC graphics products which we will seek to sell to our existing customers as well as new customers in Asia, North America and Europe. We also plan to continue expanding our product focus into markets outside the PC area, including digital TV applications. Our future success depends upon the regular and timely introduction of these and other new products, upon those products meeting customer requirements, and in significant part, upon the results of our expansion into new product markets. There can be no assurance that we will be able to successfully complete the development of these products or to commence shipments of these products in a timely manner, or that product specifications will not be changed during the development period. In addition, even if our products are developed and shipped on a timely basis, there can be no assurance that the products will be well accepted in the market place, or that we will experience success in the new product markets. - 12 - Gross Profit Gross profit decreased to $5.7 million for the three months ended December 31, 2001, down from $15.1 million in the three months ended December 31, 2000. Excluding the December 31, 2000 royalty revenue gross profit would have been $5.8 million for the three months ended December 31, 2000, a decrease of $100,000 for the three months ended December 31, 2001. Gross profit decreased to $11.6 million for the six months ended December 31, 2001, down from $24.5 million in the six months ended December 31, 2000. Excluding the royalty revenue of $9.3 million booked in the three months ended December 31, 2000, gross profit for the six months ended December 31, 2000 would have been $15.2 million, resulting in a decrease of $3.6 million for the six months ended December 31, 2001. The gross margin as a percentage of net sales for the three months ended December 31, 2001, decreased to 19% of net sales as compared to 23% for the three months ended December 31, 2000 excluding royalty revenue. The gross margin as a percentage of net sales for the six months ended December 31, 2001, decreased to 21% of net sales as compared to 25% for the six months ended December 31, 2000 excluding royalty revenue. The decrease in gross margin as a percentage of net sales for the three months ended December 31, 2001 is primarily due to a transition from discrete graphics (with CyberBLADE XP(TM)) to integrated graphics and core logic with (CyberALADDiN-T(TM)), and increased expense from substantial yield loss due to the quick ramp up of CyberALADDiN-T(TM) initial production to meet our customer's requirements. Also, adversely affecting gross margin in both the three and six months ended December 31, 2001 was a decrease in the sales of embedded notebook chips which have higher margins. We believe that the prices of our products will decline over time as competition increases and new and more advanced products are introduced. We expect average selling prices of existing products to continue to decline, although the average selling prices of our entire product line may remain constant or increase as a result of introductions of new higher-performance products which often have additional functionality and which are planned to have higher margins. Our strategy is to maintain and improve gross margins by (1) developing new products that have higher margins, and (2) reducing manufacturing costs by improving production yield and utilizing newer process technology. There is no assurance that we will be able to develop and introduce new products on a timely basis or that we can reduce manufacturing costs. Research and Development Research and development expenses for the three months ended December 31, 2001 decreased to $5.8 million from $6.0 million for the December 31, 2000 three month period. As a percent of total revenues, research and development expenses increased to 19% for the three months ended December 31, 2001, from 17% of total revenues for the three months ended December 31, 2000. Research and development expenses for the six months ended December 31, 2001 decreased to $11.3 million from $11.5 million for the December 31, 2000 six month period. As a percent of total revenues, research and development expenses increased to 20% for the six months ended December 31, 2001, from 16% of total revenues for the six months ended December 31, 2000. The decrease in research and development expenses in actual dollars for both the three and six months ended December 31, 2001 from December 31, 2000, can be attributed primarily to the restructuring of our research and development organization, and the concentration of our research and development efforts on only those products with the greatest revenue generating potential. - 13 - Selling, General and Administrative Selling, general and administrative expenses decreased to $3.6 million for the three months ended December 31, 2001 from $4.1 million for the three months ended December 31, 2000. As a percent of total revenues, selling, general and administrative expenditures remained at 12% for both the three months ended December 31, 2001 and the three months ended December 31, 2000. Selling, general and administrative expenses decreased to $6.9 million in the six months ended December 31, 2001 from $7.8 million for the six months ended December 31, 2000. As a percent of total revenues, selling, general and administrative expenditures increased to 12% for the six months ended December 31, 2001 from 11% for the six months ended December 31, 2000. The decrease in selling and administrative expenditures in actual dollars was attributed primarily to our cost reduction efforts. The Company intends to continue to monitor and control its selling, general and administrative expenses. Investment in UMC and Other Investments As of December 31, 2001, the Company owned approximately 64.2 million shares of United Microelectronics Corporation (UMC) which represents about 0.5% of the outstanding stock of UMC. In the quarter ended September 30, 2001, we concluded that due to a substantial decline in the market value of UMC's stock price from June 30, 2001 to September 30, 2001, the continued decline in stock prices of publicly traded semiconductor companies and the continuing unfavorable outlook for the semiconductor industry, that the decline in the investment value in UMC had become other-than-temporary. Accordingly, $40.0 million, which represents the difference between the carrying value on March 31, 2001 and the quoted fair value on September 30, 2001, was written off and included in earnings as an impairment loss on investments in accordance with SFAS No. 115 and APB No. 18, for the short-term and long-term portions of investments, respectively. See Part I, Item 1, Notes 6 and 9 above ("Investment in UMC" and "Accumulated comprehensive gain (loss) on short-term investments," respectively) for discussion of this investment and related losses. During the six months ended December 31, 2001, the Company also recognized impairment losses on investments other than UMC totaling $1.9 million as follows: ADSL company $ 270,000 Communications company 66,000 Broadband communications company 750,000 Voice over DSL communications company 850,000 ---------- Total $1,936,000 ==========
During the three months ended December 31, 2001, the Company recognized gains on investments of $150,000, resulting from the sale of our investment in the voice over DSL communications company. See Part I, Item 1, Notes 7 and 9 above (" Investments in other companies" and "Accumulated comprehensive gain (loss) on short-term investments," respectively) for discussion of these investments and related losses. While we cannot predict the future values of our investments, we do anticipate that our future financial performance will be affected by future fluctuations of such values. - 14 - Interest and Other Income (Expense), Net Interest and other expense net was equal to $41,000 in the three months ended December 31, 2001 representing interest income of $146,000 offset by $187,000 in net other expense. This compares to interest income of $302,000 in the three months ended December 31, 2000. In the six months ended December 31, 2001 interest and other income net equaled $188,000 representing primarily interest income of $339,000 offset by $151,000 in net other expense. This compares to interest income of $846,000 in the six months ended December 31, 2000. The decline in interest income for the six months ended December 31, 2001 can be primarily attributed to lower average cash balances, and lower interest rates, for the six months ended December 31, 2001 compared to the six months ended December 31, 2000. The amount of interest income earned by us varies directly with the amount of our cash and cash equivalents and the prevailing interest rates. Provision (Benefit) for Income Taxes A benefit from income taxes for the three months ended December 31, 2001 was recorded in the amount of $237,000 and for the six months ended December 31, 2001 a benefit was recorded in the amount of $16.8 million. The benefit for income taxes for the six months ended December 31, 2001 primarily related to our loss on investments for the quarter ended September 30, 2001. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2001, our principal sources of liquidity included cash and cash equivalents of $25.3 million, which decreased from $26.7 million at June 30, 2001. In the six months ended December 31, 2001, $1.1 million of cash was used by operations, compared to the six months ended December 31, 2000, in which $1.2 million of cash was provided by operations. Cash used by operations was primarily due to unprofitable operations offset by a decrease in the purchases of inventories and an increase in accounts payable. Capital expenditures were $1.2 million for the six months ended December 31, 2001, compared to $886,000 for the six months ended December 31, 2000. Inventories decreased to $8.9 million at December 31, 2001 from $10.7 million at June 30, 2001. The primary reason for the decrease is that we have reduced our orders for product manufacturing during the six months ended December 31, 2001 due to a change in product mix to more integrated notebook products which are purchased on a just in time basis minimizing the level of inventory which is stored. Accounts payable increased to $13.6 million at December 31, 2001 from $11.8 million at June 30, 2001. The increase mainly reflected our use of extended terms with suppliers during December 2001. We believe our current resources are sufficient to meet our needs for at least the next twelve months. We regularly consider transactions to finance our activities, including debt and equity offerings and new credit facilities or other financing transactions. We believe our current reserves are adequate. On February 10, 2000, we entered into an agreement with UMC affiliates, Unipac Optoelectronics Corp. and Hsun Chieh Investment Co., Ltd., to sell 1,057,828 shares of our common stock to Unipac and 3,173,484 shares of our common stock to Hsun Chieh representing approximately 23.5% of the common stock that would be outstanding after the new issuance. We have not formally terminated this agreement. However, to date the conditions have not been satisfied, and we do not expect the transaction to close, at least not on the terms originally agreed to. - 15 - As of December 31, 2001, the market value of our short-term investment in UMC was $70.2 million. In addition, we held $12.6 million in stock which was not available for resale as it is subject to certain contractual and other restrictions. In order to preserve our wafer capacity guarantee with UMC, there are certain limitations on our ability to sell the UMC shares. If our total shareholdings fall below one-half of their initial percentage of shares, our production capacity will be reduced by at least 50%, and depending on the interpretation of the foundry capacity agreement between the parties, our production capacity could be reduced by substantially more than 50%. In addition, one-third of the shares is subject to a two-year lock-up period in accordance with an investment agreement entered into with UMC. After a two-year period, one-fifth of the shares will be available for sale from the lock-up portion every six months. As of December 31, 2001, approximately 16.1 million shares are subject to this lock-up restriction. While we are an operating company and not in the business of investing, reinvesting, owning, holding or trading in securities, we do intend to monitor the advisability of disposing of our UMC stock and intend to sell all or part of the stock when it is in the best interests of our shareholders to do so. We do not currently intend to sell any of the UMC stock in the immediate future. FACTORS THAT MAY AFFECT OUR RESULTS OPERATING LOSS IN THE SIX MONTHS ENDED DECEMBER 31, 2001 We incurred an operating loss of $6.6 million in the six months ended December 31, 2001. Future performance will substantially depend upon numerous factors, such as: - - whether there is improvement in PC sales, and notebook sales in particular; - - timely introduction of new products and product enhancements to the marketplace; - - whether customers successfully incorporate our technologies into end products with high levels of customer acceptance; - - fluctuating price levels for our products. We are trying to expedite new product launchings and to control operating expenses. However, there is no guarantee that our efforts will be successful. Sales and marketing, product development and general and administrative expenses may increase as a result of shifts in the market place, our efforts in new markets such as DPTV(TM) and our need to respond to these shifts, which could result in the need to generate significantly higher revenue to achieve and sustain profitability. FLUCTUATIONS IN QUARTERLY RESULTS We plan to control our operating expenses relating to any expansion of our sales and marketing activities, broadening of our customer support capabilities, development of new distribution channels, and any increase in our research and development capabilities. However, our quarterly revenue and operating results have varied in the past and may fluctuate in the future due to a number of factors including: - uncertain demand in new markets in which we have limited experience; - fluctuations in demand for our products, including seasonality; - unexpected product returns or the cancellation or rescheduling of significant orders; - our ability to develop, introduce, ship and support new products and product enhancements and to manage product transitions; - new product introductions by our competitors; - 16 - - our ability to achieve required cost reductions; - our ability to attain and maintain production volumes and quality levels for our products; - delayed new product introductions; - unfavorable responses to new products; - adverse economic conditions, particularly in Asia; - the mix of products sold and the mix of distribution channels through which they are sold; - availability of foundry and assembly capacities; - delay of joint development efforts due to unexpected market conditions; and - length of sales cycle. DEVELOPMENT OF NEW PRODUCTS AND PRODUCT ENHANCEMENTS The graphic controller industry is characterized by rapidly changing technology, frequent new product introductions, changes in customer requirements and evolving industry standards. Our future success depends on our ability to anticipate market needs and develop products that address those needs. As a result, our products could quickly become obsolete if we fail to predict market needs accurately or develop new products or product enhancements in a timely manner. Any return to profitability and long term success in the graphics business will depend on the introduction of successive generations of products in time to meet the design cycles as well as to specifications of PC manufacturers. Our failure to predict market needs accurately or to develop new products or product enhancements in a timely manner will harm market acceptance and sales of our products. If the development or enhancement of these products or any other future products takes longer than we anticipate, or if we are unable to introduce these products to market, our sales will not increase. Even if we are able to develop and commercially introduce these new products, the new products may not achieve widespread market acceptance necessary to provide an adequate return on our investment. RELIANCE ON FEW KEY ACCOUNTS To date, a limited number of distributors and customers have accounted for a significant portion of our revenue. In recent quarters, we have depended in particular on sales to Inno Micro, a supplier to Toshiba, and expect that this customer will continue to account for a substantial percentage of our sales in coming quarters. If Inno Micro or any of our large distributors or customers stops or delays purchases, our revenue and profitability would be adversely affected. Although our largest customers may vary from period-to-period, we anticipate that our operating results for any given period will continue to depend to a significant extent on large orders from a small number of customers. Our distributor and customer agreements generally are not exclusive, there is no obligation to renew agreements, and minimum purchases are generally not required. The significant terms of our agreements with distributors are described as follows: - - The products are shipped by us to a distributor with terms of F.O.B. shipping point, with risk of loss transferring to the distributor upon delivery of the products by us to the common carrier. - - Payment terms are net 30-days. - - The distributors return privileges are in the form of stock rotation and warranty and return resulting from functionality and quality issues for one year. RELIANCE ON INTERNATIONAL CUSTOMERS Our revenues have historically been generated primarily from Asian customers, particularly Taiwan and Japan. While we intend to continue our marketing efforts to North American OEMs, we expect to be primarily dependent on international sales and operations, particularly in Taiwan and Japan, - 17 - which are expected to constitute a significant portion of our sales in the future. There are a number of risks arising from our international business which could adversely affect future results, including: - potentially longer accounts receivable collection cycles; - import or export licensing requirements; - potential adverse tax consequences; and - unexpected changes in regulatory requirements. Our international sales currently are U.S. dollar-denominated. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets. INTENSE COMPETITION IN THE MARKET FOR GRAPHICS CONTROLLERS The graphics controller industry in the sub-$1,000 PC segment has experienced reduced margins due to a number of factors including: competitive pricing pressures, processing difficulties and rapid technological change. We anticipate that the discrete graphics controller demand from sub-$1,000 PC's will continuously decrease in the future, while the demand for integrated graphics controllers will increase. Also, there is intense competition in the notebook graphics controller market. We compete in the notebook controller market with competitors such as ATI Technologies, NVIDIA Corporation, VIA/S3, and Intel. Therefore, to maintain our revenue and gross margin, we must develop and introduce on a timely basis new products and product enhancements and continually reduce our product cost. Our failure to do so would cause our revenue and gross margins to decline, which could have a materially adverse affect on our operating results. The market for graphics controllers is intensely competitive. Many of our current competitors in graphics have substantially greater financial, technical, sales, marketing and other resources, as well as greater name recognition and market share than we do. To remain competitive, we believe we must, among other things, invest significant resources in developing new products, including products for new markets, increasing the ability of our products to integrate various functions and enhancing quality product performance. If we fail to do so, our products may not compete favorably with those of our competitors, which could have a materially adverse affect on our revenue and future profitability. We are in the process of developing our next generation 3D graphics technology. The new technology is intended to be used in both the discrete and integrated products. Our graphics product development strategy is to focus on a totally balanced design with consideration of not only high performance, but also low cost and low power consumption. INTENSE COMPETITION IN THE MARKET FOR DIGITAL MEDIA PRODUCTS We also plan to continue developing the next generation DPTV(TM) product as well as other advanced products for digital TV and digital STB for the digital television market in China, Japan, Korea and Taiwan. We believe the market for digital television will be competitive, and will require substantial research and development, sales and other expenditures to stay competitive in this market. In the digital television market our principal competitors are Toshiba, Philips Electronics, and Siemens AG. However, we believe that DPTV(TM) products will have a longer product life cycle than other current products. Therefore we expect to devote significant resources to the DPTV(TM) market even though competitors are substantially more experienced than we are in this market. - 18 - VULNERABLE TO UNDETECTED PRODUCT PROBLEMS Although we establish and implement test specifications, impose quality standards upon our suppliers and perform separate application-based compatibility and system testing, our products may contain undetected defects, which may or may not be material, and which may or may not have a feasible solution. We have experienced such errors in the past, and we can't ensure that such errors will not be found from time to time in new or enhanced products after commencement of commercial shipments. These problems may materially adversely affect our business by causing us to incur significant warranty and repair costs, diverting the attention of our engineering personnel from our product development efforts and causing significant customer relations problems. In part due to pricing and other pressures in the PC graphics market and in the desktop market in particular, we are developing products for introduction in non-PC markets. However, there can be no assurance that we will be successful in eliminating undetected defects in these new products which may or may not be material. DEPENDENCE ON INDEPENDENT FOUNDRIES If the demand for our products grows, we will need to increase our material purchases, contract manufacturing capacity and internal test and quality functions. Any disruptions in product flow could limit our revenue, adversely affect our competitive position and reputation and result in additional costs or cancellation of orders under agreements with our customers. We currently rely on a limited number of third-party foundries to manufacture our products either in finished form or wafer form. Generally, these foundries are not obligated to manufacture our products on a long term fixed price base; however, due to the company's investment in one foundry, a certain level of guaranteed wafer capacity does exist. If we encounter shortages and delays in obtaining components, our ability to meet customer orders could be materially adversely affected. We have experienced delays in product shipments from a contract manufacturer in the past, which in turn delayed product shipments to our customers. Such delays often result in purchasing at a higher per unit product cost from other foundries or the payment of expediting charges so that we can obtain the required supply in a timely manner. We may in the future experience delays in shipments from foundries or other problems, such as inferior quality and insufficient quantity of product, any of which could materially adversely affect our business and operating results. There can be no assurance that these manufacturers will meet our future requirements for timely delivery of products of sufficient quality and quantity. The inability of our contract manufacturers to provide us with adequate supplies of high-quality products would cause a delay in our ability to fulfill orders while we obtain a replacement manufacturer and would have a material adverse effect on our business, operating results and financial condition. UNSTABLE STOCK PRICE The market price of our common stock has been, and may continue to be volatile. Factors such as new product announcements by us or our competitors, quarterly fluctuations in our operating results and unfavorable conditions in the graphics controller market may have a significant impact on the market price of our common stock. These conditions, as well as factors that generally affect the market for stocks in general and stocks in high-technology companies in particular, could cause the price of our stock to fluctuate from time to time. - 19 - DEPENDENCE ON KEY PERSONNEL Our success depends to a significant degree upon the continued contributions of the principal members of our technical sales, marketing, engineering and management personnel, many of whom perform important management functions and would be difficult to replace. We particularly depend upon the continued services of our executive officers, particularly Frank Lin, our President and Chief Executive Officer, Dr. Jung-Herng Chang, Senior Vice President, Engineering, and Peter Jen, our Senior Vice President, Asia Operations and other key engineering, sales, marketing, finance, manufacturing and support personnel. In addition, we depend upon the continued services of key management personnel at our overseas subsidiaries. Our officers and key employees are not bound by employment agreements for any specific term, and may terminate their employment at any time. In addition, we do not have "key person" life insurance policies covering any of our employees. In order to continue to expand our product offerings both in the U.S. and abroad, we must hire a number of research and development personnel. Hiring technical sales personnel in our industry is very competitive due to the limited number of people available with the necessary technical skills and understanding of our technologies. Our ability to continue to attract and retain highly skilled personnel will be a critical factor in determining whether we will be successful in the future. Competition for highly skilled personnel is intense, particularly in Northern California. We may also have difficulty hiring experienced and skilled engineers at our research and development facility in Taiwan and China. If we are not successful in attracting, assimilating or retaining qualified personnel to fulfill our current or future needs, our business may be harmed. PROTECTION OF INTELLECTUAL PROPERTY RIGHTS The graphic controller market is a highly competitive industry in which we, and most other participants, rely on a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures and licensing arrangements to establish and protect proprietary rights. The competitive nature of our industry, rapidly changing technology, frequent new product introductions, changes in customer requirements and evolving industry standards heighten the importance of protecting proprietary technology rights. Since the United States Patent and Trademark Office keeps patent applications confidential until a patent is issued, our pending patent applications may attempt to protect proprietary technology claimed in a third party patent application. Our existing and future patents may not be sufficiently broad to protect our proprietary technologies as policing unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly in foreign countries where the laws may not protect our proprietary rights as fully as U.S. law. Our competitors may independently develop similar technology, duplicate our products or design around any of our patents or other intellectual property. If we are unable to adequately protect our proprietary technology rights, others may be able to use our proprietary technology without having to compensate us, which could reduce our revenues and negatively impact our ability to compete effectively. We have filed a number of lawsuits to enforce our intellectual property rights or to determine the validity or scope of the proprietary rights of others. As a result of any such litigation, we could lose our proprietary rights and incur substantial unexpected operating costs. Any action we take to protect our intellectual property rights could be costly and could absorb significant management time and attention. In addition, failure to adequately protect our trademark rights could impair our brand identity and our ability to compete effectively. - 20 - INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS Our industry is very competitive and is characterized by frequent intellectual property litigation based on allegations of infringement of intellectual property rights. Numerous patents in our industry have already been issued and as the market further develops and additional intellectual property protection is obtained by participants in our industry, litigation is likely to become more frequent. From time to time, third parties have asserted and are likely in the future to assert patent, copyright, trademark and other intellectual property rights to technologies or rights that are important to our business. We are currently involved in such disputes with NeoMagic and others. See Part II, Item 1 ("Legal Proceedings"). In addition, we may in the future enter into agreements to indemnify our customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. Our pending litigation and any future litigation arising from claims asserting that our products infringe or may infringe the proprietary rights of third parties, whether the litigation is with or without merit, has been and may in the future be, time-consuming, resulting in significant expenses and diverting the efforts of our technical and management personnel. We do not have insurance against our alleged or actual infringement of intellectual property of others. These claims, if resolved adversely to us, could cause us to stop selling our products which incorporate the challenged intellectual property and could also result in product shipment delays or require us to redesign or modify our products or to enter into licensing agreements. These licensing agreements, if required, would increase our product costs and may not be available on terms acceptable to us, if at all. If there is a successful claim of infringement or we fail to develop non-infringing technology or license the proprietary rights on a timely basis, our business could be harmed. THE CALIFORNIA ENERGY CRISIS COULD LEAD TO INCREASING OPERATING EXPENSES We rely on the major Northern California public utility, Pacific Gas & Electric Company, or PG&E, to supply electric power to our headquarters facility in Sunnyvale, California. Due to problems associated with the deregulation of the power industry in California and shortages in wholesale electricity supplies, customers of PG&E have been faced with increased electricity prices, power shortages and rolling blackouts. Increased energy prices will increase our operating expenses which will decrease our profits. NATURAL DISASTERS THAT COULD LIMIT OUR ABILITY TO SUPPLY PRODUCTS Our primary suppliers are located in California and Taiwan, both active earthquake fault zones. These regions have experienced large earthquakes in the past and may experience them in the future. A large earthquake in any of these areas could disrupt our manufacturing operations for an extended period of time, which would limit our ability to supply our products to our customers in sufficient quantities on a timely basis, harming our customer relationships. TERRORIST ATTACKS We can not guarantee that our business will be unaffected by terrorist attacks in the future. The impact and future effects of terrorism are currently uncertain, and we are unable to predict the future impact that terrorist attacks may have on our business and operations, the international markets in which we operate and the global economy in general. - 21 - POTENTIAL DILUTION OF SHAREHOLDERS' INTEREST As part of our business strategy, we review acquisition and strategic investment prospects that would complement our current product offerings, augment our market coverage or enhance our technical capabilities, or that may otherwise offer growth opportunities. We are very aggressively seeking investment opportunities in new businesses, and we expect to make investments in and may acquire businesses, products or technologies in the future. In the event of any future acquisitions, we could issue equity securities which would dilute current stockholders' percentage ownership. These actions could harm our operating results and/or the price of our common stock. Acquisitions and investment activities also entail numerous risks, including: difficulties in the assimilation of acquired operations, technologies or products; unanticipated costs associated with the acquisition or investment transaction; adverse effects on existing business relationships with suppliers and customers; risk associated with entering markets in which we have no or limited prior experience; and potential loss of key employees of acquired organizations. We cannot assure you that we will be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future, and our failure to do so could harm our business, operating results and financial condition. We are exposed to fluctuations in the market values of our investments. We have invested in numerous privately held companies, many of which can still be considered in the startup or development stages. These investments are inherently risky as the market for the technologies or products they have under development are typically in the early stages and may never materialize. We have in the past and could in the future lose our entire initial investment in these companies. Our exposure to fluctuating market conditions could harm our business, operating results and financial condition. UNCERTAINTY OF BUSINESS REORGANIZATION To better enable us to advance in the 3D graphics and digital TV marketplace, we are now organized into two business units: the videographics business unit and the digital media business unit. The videographics business unit continues our entire 3D videographics business with worldwide PC OEMs, and intends to expand further into System-On-Chip (SOC) solutions for state-of-the-art 3D graphics, especially the 3D video and core logic integrated video graphic chips. This business unit is under the management of Frank Lin as business unit president. Our other division, the digital media business unit, focuses on the System-On-Chip (SOC) opportunities for the TV-centric digital appliance market including Internet-ready digital TVs and digital set-top boxes. Its immediate new product sales are expected to come from our single-chip digital television video processor DPTV(TM) which entered production during fiscal year 2001. The digital media business unit is under the management of Dr. Jung-Herng Chang as its president. We believe that this organization will permit us to more effectively grow our digital television product offerings, and continue to expand our videographics chip markets by efficiently allocating resources between the two divisions. However, there is no assurance that this strategy will be successful. For the six months ended December 31, 2001 and 2000, the percentage of revenues contributed by the digital media segment accounted for 3% and 2%, respectively. At both December 31, 2001 and December 31, 2000, the assets attributed to the digital media segment were negligible. On January 18, 2000, our Board of Directors approved a spin-off of our Trident Technologies Inc. subsidiary and our Trident Multimedia Technologies (Shanghai) Co. Ltd. subsidiary. It is our belief that - 22 - these subsidiaries will operate more efficiently if their operations were managed as independent entities. The Trident Technologies, Inc. subsidiary will be developing the LCD panel video controller chip product. The Trident Multimedia Technologies (Shanghai) Co. Ltd. subsidiary will be involved in the joint development with Trident of graphic and digital media chips, and will sell digital media chips as our sales representative in the China market. Trident Technologies Inc. and Trident Multimedia Technologies (Shanghai) Co. Ltd. have total assets equal to $3.5 million and $2.2 million respectively, as of December 31, 2001. We own a majority interest in both Trident Technologies, Inc. and in Trident Multimedia Technologies (Shanghai) Co. Ltd. It is our intention to spin-off these subsidiaries during our fiscal year 2002. However, the timing and effect of these spin-offs will depend on a number of organizational, operational and marketing factors and the spin-offs may not occur at the time currently anticipated. UNCERTAINTY OF PERFORMANCE OF EQUITY INVESTMENTS We maintain an investment portfolio including minority equity investments in several publicly traded companies. The values of these investments are subject to market price volatility. For example, as a result of recent market price volatility of our publicly traded equity investments, we experienced a $24.3 million after-tax unrealized loss during the quarter ended September 30, 2001. We have also made investments in a number of privately held companies, many of which are in the start-up development stages. These investments are inherently risky as the market for the technologies or products they have under development are typically in the early stages and may never materialize. We have in the past and could in the future lose our entire investment in these companies. For instance, we recorded a $1.8 million after-tax unrealized loss during the quarter ended September 30, 2001 as a result of the impairment in value of our investments in two private companies. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK We currently maintain our cash equivalents primarily in money market funds and highly liquid marketable securities. We do not have any derivative financial instruments. As of December 31, 2001, $25.3 million of our investments matured in less than three months. We will continue to invest a significant portion of our existing cash equivalents in interest bearing, investment grade securities, with maturities of less than twelve months. We do not believe that our investments, in the aggregate, have significant exposure to interest rate risk. EXCHANGE RATE RISK We currently have operations in the United States, Taiwan and China. The functional currency of all our operations is the U.S. dollar. Though some expenses are incurred in local currencies by our Taiwan and China operations, substantially all of our transactions are made in U.S. dollars, hence, we have minimal exposure to foreign currency rate fluctuations relating to our transactions. While we expect our international revenues to continue to be denominated predominately in U.S. dollars, an increasing portion of our international revenues may be denominated in foreign currencies in the future. In addition, we plan to continue to expand our overseas operations. As a result, our operating results may become subject to significant fluctuations based upon changes in exchange rates of certain currencies in relation to the U.S. dollar. We intend to analyze our exposure to currency fluctuations and may engage in financial hedging techniques in the future to attempt to minimize the effect of these potential fluctuations; however, exchange rate fluctuations may adversely affect our financial results in the future. - 23 - INVESTMENT RISK We are exposed to market risk as it relates to changes in the market value of our investments in public companies. We invest in equity instruments of public companies for business and strategic purposes and we have classified these securities as available-for-sale. These available-for-sale equity investments, primarily in technology companies, are subject to significant fluctuations in fair market value due to the volatility of the stock market and the industries in which these companies participate. We have realized significant gains and losses on our equity investments. For the fiscal year ended June 30, 2000, we recognized a pre-tax gain on investments of $115.0 million, primarily related to a $117.0 million gain on receiving shares in UMC in exchange for shares we held in UICC, a private company. For the fiscal year ended June 30, 2001, we recognized a pre-tax loss of $77.8 million of which $76.4 million related to a decline in the market value of shares in UMC that we concluded was other-than-temporary. For the quarter ended September 30, 2001 we recognized a pre-tax loss of $40.3 million of our investments in public companies of which $40.0 million related to a decline in the market value of shares in UMC that we concluded was other-than-temporary. As of December 31, 2001, we had available-for-sale equity investments with a fair market value of $70.9 million including $70.2 million related to shares of UMC. Our objective in managing our exposure to stock market fluctuations is to minimize the impact of stock market declines to our earnings and cash flows. There are, however, a number of factors beyond our control. Continued market volatility, as well as mergers and acquisitions, have the potential to have a material impact on our results of operations in future periods. We are also exposed to changes in the value of our investments in non-public companies, including start-up companies. These long-term equity investments in technology companies are subject to significant fluctuations in fair value due to the volatility of the industries in which these companies participate and other factors. As of December 31, 2001 the balance of our long-term equity investments in non-public companies was $10.0 million. - 24 - PART II: OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS On December 14, 1998, NeoMagic Corporation ("NeoMagic") filed a patent infringement lawsuit in the U.S. District Court, District of Delaware, asserting infringement of two patents against the Company. On February 1, 2001, the Court granted summary judgment in favor of the Company that it did not infringe either patent. Other motions for summary judgment relating to damages issues remain unresolved. The Company expects the Court to enter judgment in its favor. NeoMagic has appealed the summary judgment on its infringement claims but the Company believes the appeal is premature. The Company expects to move to dismiss the appeal unless the Court permits NeoMagic to pursue the appeal before the Company's antitrust counterclaim is resolved in the trial court. The Company asserted an antitrust counterclaim against NeoMagic, seeking compensatory damages, trebled damages, costs and attorney fees, which was stayed pending resolution of NeoMagic's infringement claims at the District Court level. After the District Court granted summary judgment, the Company moved to lift the stay on its antitrust counterclaim. The briefing on this motion is completed and the parties are awaiting oral argument. On May 7, 2001, NeoMagic filed its opening appeal brief. On May 17, 2001, the Company filed a motion to dismiss NeoMagic's appeal for lack of jurisdiction arguing that there is no final appealable order and that the Company's antitrust counterclaim remains pending. On June 15, 2001, the Company filed its opposition appeal brief and renewed its request that the appeal be dismissed for lack of jurisdiction. On July 2, 2001, NeoMagic filed its reply brief. On July 31, 2001, the Federal Circuit dismissed NeoMagic's appeal without prejudice as premature. NeoMagic subsequently moved the District Court to certify the Company's summary judgment for immediate appeal pursuant to Federal Rules of Civil Procedure Rule 54(b). That motion was granted, as was the Company's motion to lift the stay on its antitrust counterclaim so it could take limited discovery. The Company is currently taking antitrust discovery in the district court. Briefing has been completed on NeoMagic's Federal Circuit appeal of the Company's summary judgment of non-infringement. The Federal Circuit has set oral argument for March 6, 2002. On May 26, 2000, NeoMagic filed a second patent infringement lawsuit in the U.S. District Court, District of Delaware, asserting that the Company infringes a patent issued in March 2000 that is related to the two patents at issue in the first case. NeoMagic is seeking a permanent injunction, damages, including enhanced damages, pre-judgment and post-judgment interest, costs and attorney fees. This case has been stayed pending resolution of the first case. Given the nature of litigation, the lack of any discovery to date, and inherent uncertainties associated with litigation, management cannot predict with certainty the ultimate outcome of this litigation. In January 2001, FIC Corporation's motion to add the Company as a third-party defendant in a patent infringement case brought against FIC by Intel Corporation in the U.S. District Court, Northern District of California was denied. FIC had attempted to add the Company as a third-party defendant because the Company allegedly supplied to FIC the devices which Intel claims infringe its patents. FIC then demanded that the Company assume FIC's defense in the Intel action, which demand the Company rejected. FIC settled its case with Intel and renewed its demand in March 2001, that the Company reimburse it for its costs of defense. The Company rejected this demand, and FIC has threatened to file suit against the Company seeking recovery of its costs of defense. Given the nature of litigation and inherent uncertainties associated with litigation, management cannot predict with certainty whether FIC will bring suit or the ultimate outcome of any such litigation. On April 26, 2001, the Company filed a lawsuit against VIA Technologies, Inc. (of Taiwan and California) and S3 Graphics (of California) in the Superior Court for the State of California, Santa Clara - 25 - County. The Company alleges that VIA and S3 Graphics, together with former Company engineering senior managers, conspired to misappropriate the Company's trade secrets about products in development. The Company further alleges that the corporate and individual defendants used the Company's confidential information to systematically recruit key engineers away from the Company as part of a scheme to gain a competitive advantage by undermining the Company's product development and design win capabilities. The Company also alleges that VIA and S3 Graphics may be planning to use the Company's trade secrets to unfairly compete against the Company. The Company is seeking the following relief: (1) preliminary and/or permanent injunctive relief prohibiting defendants from (a) using, disclosing or transmitting the Company's trade secrets, and (b) employing any person solicited with the use of the Company's trade secrets; (2) general monetary damages in an amount to be determined at trial; (3) disgorgement by the defendants of any monies acquired by means of the accused wrongful acts; (4) punitive damages; (5) reasonable attorneys' fees; (6) costs; and (7) such further relief as the court deems just and proper. Since filing the lawsuit, the Company has defeated two attempts by certain defendants to dismiss or stay the action against them, and the parties have engaged in extensive discovery practice. On November 1, 2001, the Santa Clara County Superior Court entered a Stipulation and Order Staying Case ("Stay Order") staying all litigation activity in the lawsuit through January 31, 2002. The court entered the Stay Order so that the parties could pursue settlement discussions during the period of the stay. The stay period expired on January 31, 2002, without the parties having achieved a settlement of their dispute. Although the parties continued to discuss settlement after January 31, 2002, those efforts were suspended on February 11, 2002, with no settlement having been achieved. Discovery is set to resume February 15, 2002. On May 4, 2001, VIA Technologies, Inc. sued the Company in the U.S. District Court, Northern District of California for breach of contract and related claims arising out of the companies' agreements with respect to the manufacture and sale of Cbi-1 and Cbi-7 chipsets. The complaint seeks payment in an unspecified amount (but later asserted to be approximately $6.3 million) for 686,675 Cbi-7 chipsets the Company allegedly ordered but did not pay for. On May 29, 2001, the Company answered and counterclaimed, asserting claims for breach of the same agreements, interference with the Company's relationships with its customers, and related claims. On July 9, 2001, the Company moved for a preliminary injunction to require VIA to satisfy its agreements with the Company. At the August 13, 2001 scheduled hearing on the Company's motion for preliminary injunction, the Court continued the hearing to September 13 and ordered the parties to mediate their dispute in the interim. The mediation was not successful, but the Company nevertheless withdrew its motion for preliminary injunction. Discovery is currently ongoing. Given the nature of litigation and inherent uncertainties associated with litigation, management cannot predict with certainty the ultimate outcome of this litigation. Statements regarding the possible outcome of litigation and our actions are forward looking statements and actual outcomes could vary based upon future developments on the litigation. ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable ITEM 3: DEFAULTS UPON SENIOR SECURITIES Not applicable - 26 - ITEM 4: SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS At Trident Microsystems' Annual Stockholders' meeting held on December 10, 2001, the following proposals were adopted by the margins indicated: Proposal 1 Directors - the following directors were elected at the meeting to serve a term of three years
Nominees For Withheld - -------- --- -------- Frank C. Lin 12,044,822 388,962 Glen M. Antle 12,015,482 418,302
The following directors continued to serve their terms after the meeting: Yasushi Chikagami - whose term expires at the 2002 Annual Meeting of Stockholders Milliard Phelps - whose term expires at the 2003 Annual Meeting of Stockholders John Luke - whose term expires at the 2003 Annual Meeting of Stockholders Proposal 2 to approve an amendment to the Company's 1994 Outside Directors Stock Option Plan to increase the number of shares reserved for issuance by 110,000
For Against Abstain Broker non-Votes --- ------- ------- ---------------- 11,073,982 1,325,058 33,644 1,100
Proposal 3 to approve the Company's 2001 employee stock purchase plan
For Against Abstain Broker non-Votes --- ------- ------- ---------------- 11,622,708 768,632 42,344 100
Proposal 4 to ratify the appointment of PricewaterhouseCoopers LLP as the Company's independent public accountants
For Against Abstain Broker non-Votes --- ------- ------- ---------------- 12,340,505 67,943 25,336 0
The foregoing matters are described in further detail in our definitive proxy statement dated November 2, 2001 for the Annual Meeting of Stockholders held on December 10, 2001. ITEM 5: OTHER INFORMATION Not applicable - 27 - ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Description ------- ----------- 3.1 Restated Certificate of Incorporation.(1) 3.2 Bylaws of Trident Delaware Corporation, a Delaware Corporation.(2) 4.1 Reference is made to Exhibits 3.1 and 3.2. 4.2 Specimen Common Stock Certificate.(2) 4.3 Form of Rights Agreement between the Company and ChaseMellon Shareholder Services, LLC, as Rights Agent (including as Exhibit A the form of Certificates of Designation, Preferences and Rights of the Terms of the Series A Preferred Stock, as Exhibit B the form of Right Certificate, and as Exhibit C the Summary of Terms of Rights Agreement). (3) 10.5(*) 1990 Stock Option Plan, together with forms of Incentive Stock Option Agreement and Non-statutory Stock Option Agreement.(2) 10.6(*) Form of the Company's Employee Stock Purchase Plan.(2) 10.7(*) Summary description of the Company's Fiscal 1992 Bonus Plan.(2) 10.8(*) Form of the Company's Fiscal 1993 Bonus Plan.(2) 10.9(*) Summary description of the Company's 401(k) plan.(2) 10.10(*) Form of Indemnity Agreement for officers, directors and agents.(2) 10.12(*) Form of Non-statutory Stock Option Agreement between the Company and Frank C. Lin.(4) 10.13(*) Form of 1992 Stock Option Plan amending and restating the 1990 Stock Option Plan included as Exhibit 10.5.(2) 10.14 Lease Agreement dated May 16, 2001 between the Company and iStar Financial , Inc. for the Company's principal offices located at 1090 East Arques Avenue, Sunnyvale, California.(8) 10.15(*) Form of Change of Control Agreement between the Company and Frank C. Lin.(8) 10.16 Foundry Venture Agreement dated August 18, 1995 by and between the Company and United Microelectronics Corporation.(5)(7) 10.17(*) Form of 1998 Stock Option Plan which replaces the 1992 Stock Option Plan. (6)
- -------------------- (1) Incorporated by reference from exhibit of the same number to the Company's Annual Report on Form 10-K for the year ended June 30, 1993. (2) Incorporated by reference from exhibit of the same number to the Company's Registration Statement on Form S-1 (File No. 33-53768), except that Exhibit 3.2 is incorporated from Exhibit 3.4. (3) Incorporated by reference from exhibit 99.1 to the Company's Report on Form 8-K filed August 21, 1998. (4) Incorporated by reference from exhibit of the same number to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. (5) Incorporated by reference from exhibit of the same number to the Company's Annual Report on Form 10-K for the year ended June 30, 1995. (6) Incorporated by reference to the Company's 1998 Employee Stock Purchase Plan Individual Stock Option Agreements and 1996 Nonstatutory Stock Option Plan on Form S-8 filed April 23, 1999 (File No. 333-76895). (7) Confidential treatment has been requested for a portion of this document. (8) 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, 2001. (*) Management contracts or compensatory plans or arrangements covering executive officer directors of the Company. Reports on Form 8-K Not Applicable - 28 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on February 14, 2002, on its behalf by the undersigned thereunto duly authorized. Trident Microsystems, Inc. - -------------------------- (Registrant) /s/ Frank C. Lin - ---------------------------------------- Frank C. Lin President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer) /s/ Peter Jen - ---------------------------------------- Peter Jen Senior Vice President, Asia Operations and Chief Accounting Officer (Principal Financial and Accounting Officer) - 29 - -----END PRIVACY-ENHANCED MESSAGE-----