Back to GetFilings.com



Table of Contents

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, 2002

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
incorporation or organization)
  (I.R.S. Employer identification No.)

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    

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     
Yes      No   X

The number of shares of the registrant’s $0.001 par value Common Stock outstanding at December 31, 2002 was 13,696,166.


TABLE OF CONTENTS

CONDENSED CONSOLIDATED BALANCE SHEET
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Item 4: Controls and Procedures
Part II: Other Information
Item 1: Legal Proceedings
Item 2: Changes in Securities and Use of Proceeds
Item 3: Defaults upon Senior Securities
Item 4: Submissions of Matters to a Vote of Security Holders
Item 5: Other Information
Item 6: Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
EXHIBIT INDEX
EXHIBIT 99.1
EXHIBIT 99.2


Table of Contents

TRIDENT MICROSYSTEMS, INC.

INDEX

               
          Page
         
Part I: Financial Information        
Item 1: Unaudited Financial Information
       
 
Condensed Consolidated Balance Sheet – December 31, 2002 and June 30, 2002
    3  
 
Condensed Consolidated Statement of Operations for the three months and six months ended December 31, 2002 and 2001
    4  
 
Condensed Consolidated Statement of Cash Flows for the six months ended December 31, 2002 and 2001
    5  
 
Notes to the Condensed Consolidated Financial Statements
    6  
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
    15  
Item 3: Quantitative and Qualitative Disclosures About Market Risk
    29  
Item 4: Controls and Procedures
    30  
Part II: Other Information
       
Item 1: Legal Proceedings
    31  
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
    32  
Item 5: Other Information
  Not Applicable
Item 6: Exhibits and Reports on Form 8-K
    33  
Signatures
    34  
Certifications
    35  


Table of Contents

TRIDENT MICROSYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, unaudited)

ASSETS

                       
          December 31,   June 30,
          2002   2002
         
 
Current assets:
               
   
Cash and cash equivalents
  $ 13,688     $ 21,193  
   
Short-term investment – UMC
    39,126       61,672  
   
Short-term investments – other
    954       1,153  
   
Accounts receivable, net
    946       4,284  
   
Inventories
    2,879       3,190  
   
Deferred income taxes
          1,247  
   
Prepaid expenses and other current assets
    1,441       1,953  
   
 
   
     
 
     
Total current assets
    59,034       94,692  
Property and equipment, net
    4,380       4,710  
Long-term investment – UMC
    6,563       10,063  
Long-term investments – other
    6,654       8,642  
Other assets
    345       417  
   
 
   
     
 
     
Total assets
  $ 76,976     $ 118,524  
   
 
   
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
   
Accounts payable
  $ 3,556     $ 6,709  
   
Accrued expenses and other liabilities
    11,030       10,201  
   
Income taxes payable
    1,385       3,980  
   
 
   
     
 
     
Total current liabilities
    15,971       20,890  
   
Deferred income taxes – non-current
          6,338  
   
Minority interest in subsidiary
    222       640  
   
 
   
     
 
     
Total liabilities
    16,193       27,868  
   
 
   
     
 
Stockholders’ equity:
               
   
Common stock and additional paid-in capital
    56,591       56,319  
   
Treasury stock, at cost
    (17,952 )     (17,952 )
   
Retained earnings
    26,713       39,345  
   
Accumulated other comprehensive gain (loss)
    (4,569 )     12,944  
   
 
   
     
 
     
Total stockholders’ equity
    60,783       90,656  
   
 
   
     
 
     
Total liabilities and stockholders’ equity
  $ 76,976     $ 118,524  
   
 
   
     
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 3 -


Table of Contents

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,
   
 
    2002   2001   2002   2001
   
 
 
 
Net sales
  $ 13,283     $ 30,178     $ 26,518     $ 55,918  
Cost of sales
    9,202       24,523       18,559       44,325  
 
   
     
     
     
 
Gross profit
    4,081       5,655       7,959       11,593  
Research and development expenses
    5,800       5,765       11,573       11,292  
Sales, general and administrative expenses
    3,199       3,570       6,114       6,948  
 
   
     
     
     
 
Loss from operations
    (4,918 )     (3,680 )     (9,728 )     (6,647 )
(Loss) gain on investments, net
    (1,966 )     150       (1,966 )     (41,915 )
Interest and other income (expense), net
    82       (41 )     108       188  
 
   
     
     
     
 
Loss before income taxes
    (6,802 )     (3,571 )     (11,586 )     (48,374 )
(Benefit) provision for income taxes
          (237 )     1,046       (16,831 )
 
   
     
     
     
 
Net loss
  $ (6,802 )   $ (3,334 )   $ (12,632 )   $ (31,543 )
 
   
     
     
     
 
Basic and diluted loss per share
  $ (0.50 )   $ (0.25 )   $ (0.93 )   $ (2.36 )
 
   
     
     
     
 
Common shares used in computing basic and diluted per share amounts
    13,655       13,380       13,628       13,339  
 
   
     
     
     
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 4 -


Table of Contents

TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands, unaudited)
                         
            Six Months Ended
            December 31,
           
            2002   2001
           
 
Cash flows from operating activities:
               
 
Net loss
  $ (12,632 )   $ (31,543 )
 
Adjustments to reconcile net loss to cash used in operating activities:
               
   
Depreciation and amortization
    655       821  
   
Provision for doubtful accounts and sales returns
    (1,067 )     542  
   
Loss on investments
    1,966       41,915  
   
Deferred income taxes
    3,642       (15,991 )
   
Changes in assets and liabilities:
               
     
Accounts receivable, net
    4,405       846  
     
Inventories
    311       1,792  
     
Prepaid expenses and other current assets
    512       (10 )
     
Other assets
    72       239  
     
Accounts payable
    (3,153 )     1,782  
     
Accrued expenses and other liabilities
    432       (609 )
     
Income taxes payable
    (2,595 )     (839 )
 
 
   
     
 
       
Net cash used in operating activities
    (7,452 )     (1,055 )
 
 
   
     
 
Cash flows from investing activities:
               
 
Sales of investments
          450  
 
Purchase of property and equipment
    (325 )     (1,195 )
 
 
   
     
 
       
Net cash used in investing activities
    (325 )     (745 )
 
 
   
     
 
Cash flows from financing activities:
               
 
Issuance of common stock
    272       450  
 
 
   
     
 
       
Net cash provided by financing activities
    272       450  
 
 
   
     
 
Net decrease in cash and cash equivalents
    (7,505 )     (1,350 )
Cash and cash equivalents at beginning of period
    21,193       26,677  
 
 
   
     
 
Cash and cash equivalents at end of period
  $ 13,688     $ 25,327  
 
 
   
     
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 5 -


Table of Contents

TRIDENT MICROSYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

Note 1. The Company

     Trident Microsystems, Inc. (the “Company”) designs, develops and markets integrated circuits for videographics, multimedia and digitally processed television products for the desktop and notebook PC market and consumer television market.

Note 2. Basis of Presentation

     The unaudited condensed 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.

     In the opinion of the Company, the unaudited 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 unaudited 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 unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2002 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, 2003.

Note 3. Revenue Recognition

     Revenue from product sales is generally recognized upon shipment when persuasive evidence of an arrangement exists, the price is fixed or determinable, shipment is made and collectibility is reasonably assured. Provision is made for expected future sales returns and allowances when revenue is recognized. The Company has no obligation to provide any modification or customization upgrades, enhancements or other post-sale customer support. The Company grants certain distributors limited rights of return and price protection on unsold products. Product revenue on shipments to distributors with such rights is deferred until the Company is notified by the distributors that the products are shipped to end customers by the distributors.

     The Company’s license revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and the collectibility is reasonably assured. The Company’s license revenue does not require significant production,modification or customization of software. Royalty revenue is recognized when the Company is informed that the related products have been sold provided that collectibility is reasonably assured.

- 6 -


Table of Contents

Note 4. Recent Accounting Pronouncements

     In July 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” The principal difference between SFAS No. 146 and EITF Issue No. 94-3 relates to SFAS No.146’s timing for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 94-3 a liability for an exit cost as generally defined in EITF Issue No. 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. SFAS No. 146 is applied prospectively upon adoption and, as a result, would not have any impact on the Company’s current financial position or results of operations.

     In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee and further requires a guarantor to provide additional disclosures regarding guarantees. The Interpretation’s provisions for initial recognition and measurement should be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of periods that end after December 15, 2002. The adoption of this Interpretation did not have any effect on the Company’s consolidated financial statements.

Note 5. Inventories

     Inventories consisted of the following (in thousands):

                 
    December 31, 2002   June 30, 2002
   
 
Work in process
  $ 695     $ 585  
Finished goods
    2,184       2,605  
 
   
     
 
 
  $ 2,879     $ 3,190  
 
   
     
 

- 7 -


Table of Contents

Note 6. Loss Per Share

     Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is calculated using the weighted average number of outstanding shares of common stock plus potential common stock shares. The calculation of diluted net loss per share excludes potential common stock if the effect is antidilutive. Potential common stock shares consist of common stock options, computed using the treasury stock method based on the average stock price for the period.

     Reconciliations of the numerators and denominators of the basic and diluted net loss per share calculations are as follows:

                                 
    Three Months Ended   Six Months Ended
    December 31,   December 31,
 

 
(In thousands, except per share data)   2002   2001   2002   2001
   
 
 
 
Basic and Diluted Net Loss per Share
                               
Net loss available to Common Shareholders
  $ (6,802 )   $ (3,334 )   $ (12,632 )   $ (31,543 )
 
   
     
     
     
 
Weighted average common shares
    13,655       13,380       13,628       13,339  
 
   
     
     
     
 
Basic and diluted net loss per share
  $ (0.50 )   $ (0.25 )   $ (0.93 )   $ (2.36 )
 
   
     
     
     
 
Common stock equivalents not included in the calculation because they are antidilutive
    23       754       105       747  
 
   
     
     
     
 

Note 7. 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. Subsequently, UMC announced a 20% stock dividend paid to shareholders of record on May 16, 2000, a 15% stock dividend paid to shareholders of record on July 21, 2001 and a 15% stock dividend paid to shareholders of record on August 22, 2002. The only change in the number of shares in UMC held by the Company from January 3, 2000 to December 31, 2002 was the increase resulting from the stock dividends. As of December 31, 2002, the Company owned approximately 73.8 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 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.

- 8 -


Table of Contents

     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 March 31, 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 against 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 a decrease in the market value of UMC’s stock price from October 1, 2001 to December 31, 2002, an unrealized loss of $4.5 million was recorded in equity as “accumulated other comprehensive loss” in accordance with SFAS No. 130, “Reporting Comprehensive Income.” The $4.5 million is equal to a $4.5 million decrease in market value of our short-term investment in UMC from October 1, 2001 to December 31, 2002.

     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, 2002, approximately 64.1 million shares with a carrying value of $39.1 million were included as short-term investments. As of December 31, 2002, approximately 9.7 million shares with a carrying value of $6.6 million are subject to this lock-up restriction. These shares are accounted for as long-term investments using the cost method in accordance with APB No. 18.

     Shares of the Company’s UMC investment are listed on the Taiwan Stock Exchange. In accordance with SFAS No. 115, the 64.1 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 $39.1 million as of December 31 2002. Unrestricted shares include shares that may need to be held by the Company to retain wafer capacity, as described in the prior paragraph.

Note 8. Investments in other companies

     During the six months ended December 31, 2002, the Company recognized impairment losses on investments totaling $1,966,000 as follows:

         
Optical applications company
  $ 987,000  
Fiber optic technology company
    151,000  
Venture capital fund
    200,000  
Circuit design company
    250,000  
Analog circuit design company
    378,000  
 
   
 
Total
  $ 1,966,000  
 
   
 

- 9 -


Table of Contents

     In May 2000, the Company invested $750,000 in a private company engaged in optical applications technology. In June 2001, an additional $509,000 was invested in the company. In the quarter ended December 31, 2002, the Company determined that the fair value of the shares had decreased significantly. Therefore, the Company assessed the fair value of its investment based on the latest financing transaction and concluded that the impairment was other-than-temporary. Accordingly, an amount of the investment of $987,000 was written off against earnings in accordance with APB No. 18.

     In June 2000, the Company invested $500,000 in a private company engaged in fiber optic technology. In the quarter ended June 30, 2002, the Company recorded an other than-temporary impairment of $349,000. In the quarter ended December 31, 2002, the Company further 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 remaining investment of $151,000 was written off against earnings in accordance with APB No. 18.

     From December 1999 to October 2000, the Company invested $1,400,000 in a venture capital fund. In the quarter ended December 31, 2002, substantial losses were recorded by the fund. Accordingly, the company recorded an other-than-temporary impairment of $200,000 based on the latest financial statements available.

     In February 2000, the Company invested $500,000 in a private company engaged in integrated circuit design. In the quarter ended December 31, 2002, the Company determined that the prospects for recovery of the investment were unfavorable given the poor cash position of the company and the company’s operating losses. Therefore, the Company concluded that the impairment was other-than-temporary. Accordingly, 50% of its investment of $250,000 was written off against earnings in accordance with APB No. 18.

     In May 2000 to May 2002, the Company invested $753,000 in a private company engaged in analog integrated circuit design. In the quarter ended December 31, 2002, the Company determined that the cash position of the company was poor and there was reasonable doubt the company may not be able to raise additional funds. Therefore, the Company concluded that the impairment was other-than-temporary. Accordingly, 50% of its investment of $378,000 was written off against earnings in accordance with APB No. 18.

     During the six months ended December 31, 2001, the Company also recognized impairment losses on investments other than UMC totaling $1,936,000 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

- 10 -


Table of Contents

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 $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.

- 11 -


Table of Contents

Note 9. Comprehensive Income (Loss)

     Under SFAS No. 130, “Reporting Comprehensive Income” 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. The components of accumulated other comprehensive income (loss) as of September 30, 2002 and June 30, 2002 are as follows (in thousands):

                   
      December 31,   June 30,
      2002   2002
     
 
Unrealized gain (loss) on short-term investments:
               
 
UMC
  $ (4,472 )   $ 12,973  
 
Other
    (97 )     (29 )
 
 
   
     
 
 
Total
  $ (4,569 )   $ 12,944  
 
 
   
     
 

The total comprehensive loss for the six months ended December 31, 2002 and 2001 are as follows (in thousands):

                 
    Six Months Ended
    December 31,
    2002   2001
   
 
Net loss
  $ (12,632 )   $ (31,543 )
Other comprehensive loss, change in unrealized gain on short-term investments
    (17,513 )     26,559  
 
   
     
 
Total comprehensive loss
  $ (30,145 )   $ (4,984 )
 
   
     
 

Note 10. 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 and an amendment to this agreement approved by the Company’s Board of Directors on April 22, 2002, 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, 2003. The loan bears interest at variable market rates which are 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.

- 12 -


Table of Contents

Note 11. Segment information

     The Company has two reportable segments: videographics and digital media. As of December 31, 2002 and June 30, 2002, the assets attributed to the digital media segment were negligible. The following is a summary of the Company’s segment information (in thousands):

                                   
      Three Months Ended   Six Months Ended
      December 31,   December 31,
     
 
      2002   2001   2002   2001
     
 
 
 
Videographics:
                               
Net sales
  $ 5,960     $ 29,332     $ 13,736     $ 54,024  
Operating loss
  $ (4,520 )   $ (1,766 )   $ (8,165 )   $ (2,506 )
Digital Media:
                               
Net sales
  $ 7,157     $ 817     $ 12,505     $ 1,846  
Operating income (loss)
  $ 467     $ (1,066 )   $ 539     $ (2,230 )
Other:
                               
Net sales
  $ 166     $ 29     $ 277     $ 48  
Unallocated general and administrative expenses
  $ (865 )   $ (848 )   $ (2,102 )   $ (1,911 )
Total:
                               
Net sales
  $ 13,283     $ 30,178     $ 26,518     $ 55,918  
Operating loss
  $ (4,918 )   $ (3,680 )   $ (9,728 )   $ (6,647 )

The following is a summary of the Company’s geographic operations:

                                                           
(in thousands)   United States   Taiwan   Japan   Hong Kong   China   Other   Consolidated

 
 
 
 
 
 
 
Net sales
 
Six months ended December 31,
 
  2002   $ 46     $ 2,960     $ 11,298     $ 7,675     $ 2,619     $ 1,920     $ 26,518  
 
2001
  $ 262     $ 19,443     $ 29,742     $ 1,693     $ 833       3,945     $ 55,918  
Long-lived assets:
                                                       
As of December 31, 2002
  $ 2,156     $ 478           $ 93     $ 1,653           $ 4,380  
As of June 30, 2002
  $ 2,339     $ 499           $ 15     $ 1,857           $ 4,710  

Net sales are attributed to countries based on delivery locations. Long-lived assets comprise property and equipment.

- 13 -


Table of Contents

Note 12. Contingencies

     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 and requesting a reasonable royalty, lost profits and price erosion damages. 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. On April 16, 2002, the Federal Circuit affirmed summary judgment on NeoMagic’s ‘955 patent in favor of the Company. The Federal Circuit affirmed portions of the district court’s claim construction on NeoMagic’s ‘806 patent, reversed others, and remanded the case to the district court for further proceedings on the ‘806 patent. However, the district court judge retired within days of the remand order, and the case has been reassigned to a yet-to-be-confirmed new judge. Magistrate Judge Thynge heard argument on claim construction, and both sides’ renewed motions for summary judgment on infringement issues, on November 5, 2002. A decision is not expected for some time.

- 14 -


Table of Contents

Item 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)

Special Note Regarding Forward-Looking Statements

     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:

  our expectations and beliefs with respect to future revenues and financial results,
 
  the level of future digital process television product sales and development
 
  the level of sales to foreign and key customers
 
  the timing of availability and functionality of products under development,
 
  plans for and timing regarding development and introduction of future products,
 
  the effect of future values of our investments on financial performance,
 
  the timing and effect of liquidation of investments
 
  adequacy of financial reserves,
 
  trends in average selling prices,
 
  the percentage of export sales,
 
  outcome of pending litigation,
 
  demand for and trends in revenue 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.

The following discussion should be read in conjunction with our Financial Statements and Notes thereto.

Overview of Business

     We design, develop and market very large scale integrated circuits (“IC”) for videographics, multi-media and digitally processed television products for the desktop and notebook personal computer (“PC”) and consumer television market. Our graphics and video controllers typically are sold with software drivers, a BIOS (basic input/output system) and related system integration support. Our strategy is to apply our design expertise, which helped us succeed in the market for Super Video Graphics Array (“SVGA”) graphics controllers and Graphical User Interface (“GUI”) accelerators, to other high volume graphics, multimedia and digitally processed television markets for the general mass public, acceleration of Digital Versatile Disc (“DVD”) based live-video playback, and three-dimensional (“3D”) display for game and entertainment application markets.

Critical Accounting Policies, Judgments and Estimates

     Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and

- 15 -


Table of Contents

expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to customer programs and incentives, product returns, bad debts, inventories, equity investments, income taxes, financing operations, warranty obligations, excess component order cancellation costs, restructuring, long-term service contracts, pensions and other post-retirement benefits, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

     We record estimated reductions to revenue for customer programs and incentive offerings including special pricing agreements, promotions, historical returns, inventory levels at distributors and other volume-based incentives. If market conditions were to decline, we may take actions to increase customer incentive offerings possibly resulting in an incremental reduction of revenue at the time the incentive is offered.

     We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

     We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates and material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

     We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

     We hold minority interests in companies having operations or technology in areas within our strategic focus, four of which are publicly traded and have highly volatile share prices. We record an investment impairment charge when we believe an investment has experienced a decline in value that is other-than-temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

- 16 -


Table of Contents

Results of Operations

     The following table sets forth the results of operations expressed as percentages of total net sales for the three and six months ended December 31, 2002 and 2001:

                                 
    Three Months Ended   Six Months Ended
    December 31,   December 31,
   
 
    2002   2001   2002   2001
   
 
 
 
Net sales
    100 %     100 %     100 %     100 %
Cost of sales
    69       81       70       79  
 
   
     
     
     
 
Gross margin
    31       19       30       21  
Research and development expenses
    44       19       44       20  
Selling, general and administrative expenses
    24       12       23       12  
 
   
     
     
     
 
Loss from operations
    (37 )     (12 )     (37 )     (11 )
Other expense
    (15 )           (7 )     (75 )
Interest income, net
    1                    
 
   
     
     
     
 
Loss before income taxes
    (51 )     (12 )     (44 )     (86 )
Provision (benefits) for income taxes
          (1 )     4       (30 )
 
   
     
     
     
 
Net loss
    (51 )%     (11 )%     (48 )%     (56 )%
 
   
     
     
     
 

Net sales

     Net sales for the three months ended December 31, 2002 decreased 56% to $13.3 million from the $30.2 million reported in the three months ended December 31, 2001. Net sales for the six months ended December 31, 2002 decreased 53% to $26.5 million from the $55.9 million reported in the six months ended December 31, 2001. The decrease in net sales in the three months ended December 31, 2002 over the three months ended December 31, 2001 is primarily attributed to a decrease in sales of integrated notebook products and production difficulties relating to chip manufacturing and yield of our new XP4 product. We have continued to experience yield problems at the foundry for our XP4 product and are working with the foundry to improve yields. While we believe this situation is improving and we believe it will be resolved, it continues to delay volume shipments of the XP4.

     Net sales decreased during the six months ended December 31, 2002 compared to the six months ended December 31, 2001 due to an overall decrease in the sales of notebook and desktop products. Notebook, and desktop products accounted for 39% and 1% of net sales, respectively, in the three months ended December 31, 2002, and 47% and 2% of net sales, respectively, for the six months ended December 31, 2002. Notebook and desktop products accounted for 94% and 3% of net sales, respectively, for both the three and six months ended December 31, 2001.

     Digital process television (DPTV) chips, accounted for 53% of net sales in the three months ended December 31, 2002, and 46% of net sales for the six months ended December 31, 2002. Digital process television chips accounted for 3% of net sales for both the three and six months ended December 31, 2001. We expect the growth momentum for our digital process television products will continue in future quarters. Our customer base continues to widen as existing customers ramp up their production volume and expand their market shares. By executing on our strategy, we have increased our market presence in CRT-progressive TVs, Projection TVs, LCD TVs, Plasma TVs, and TV Boxes. The DPTV-powered products have already been deployed in the US market by industry leaders, including Projection TVs from Changhong, LCD TVs from Samsung, Plasma TVs from Sampo, and TV Boxes from ViewSonic. On the product development side, we recently announced the third generation DPTV-family product,

- 17 -


Table of Contents

DPTV™3DPRO. This new product delivers cinema-realistic motion and still images for high-performance LCD, Projection, and Plasma TVs. We are firmly committed to bringing advanced video technology and visual satisfaction to the masses. Following the United States Federal Communications Commission (FCC)’s ruling on August 8, 2002 for HDTV deployment, a landmark agreement for Cable-ready HDTV (plug-and-play) was reached between the Cable and the Consumer Electronics Companies on December 20, 2002. We are encouraged by this recent development in favor of digital TVs and firmly believe that we are well positioned to be a leader in the worldwide emerging market opportunity for digital TVs.

     Sales to Asian customers, primarily in Japan, Taiwan, Hong Kong and China accounted for almost all of our net sales in the three months ended December 31, 2002. Sales to Asian customers, primarily in Taiwan and Japan accounted for almost all of our net sales in the three months ended December 31, 2001. Sales to North American and European customers decreased to 0.3% and 0.5% of net sales in the three months ended December 31, 2002 and 2001, respectively. Sales to Asian customers, primarily in Japan, Taiwan, Hong Kong and China accounted for almost all of our net sales in the six months ended December 31, 2002. Sales to Asian customers, primarily in Taiwan and Japan, accounted for almost all of our net sales in the six months ended December 31, 2001. Sales to North American and European customers represented 0.2% of net sales in the six months ended December 31, 2002, a decrease from approximately 0.5% in the six months ended December 31, 2001. We expect Asian customers will continue to account for a significant portion of our sales.

     In the three months ended December 31, 2002, sales to three customers, Inno Micro (a supplier to Toshiba), Skyworth and TCL Electronics (television original equipment manufacturers located in China) accounted for 36%, 15% and 12% of total net sales, respectively. In the three months ended December 31, 2001, sales to two customers, Inno Micro and Acer accounted for 62%, and 19% of total net sales, respectively. In the six months ended December 31, 2002 sales to two customers, Inno Micro and Skyworth accounted for 42% and 16% of total net sales, respectively, and in the six months ended December 31, 2001 sales to three customers, Inno Micro, Acer and Quanta (a supplier to Compaq) accounted for 56%, 15% 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 are also expanding our product focus into markets outside the PC area, including digitally processed television applications. Our future success depends upon the regular and timely introduction of these and other new products and 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.

Gross Profit

     Gross profit decreased to $4.1 million for the three months ended December 31, 2002, from $5.7 million in the three months ended December 31, 2001. Gross profit decreased to $8.0 million for the six months ended December 31, 2002, from $11.6 million in the six months ended December 31, 2001. The decrease was primarily the result of lower sales of 3D notebook products. The gross margin as a percentage of net sales for the three months ended December 31, 2002, increased to 31% of net sales as compared to 19% for the three months ended December 31, 2001. The gross margin as a percentage of net sales for the six months ended December 31, 2002, increased to 30% of net sales as compared to 21% for

- 18 -


Table of Contents

the six months ended December 31, 2001. The increase in gross margin as a percentage of net sales was primarily attributable to higher sales of DPTV products which have higher sales margins.

     We believe that the prices of high-technology 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. Our revenues are substantially dependent on significant sales of our XP4™ product, which we expect to ship in volume later in the fiscal year, and increases in sales of PCs in general. Unless these occur, we do not expect our revenues to increase.

Research and Development

     Research and development expenses remained flat at $5.8 million for both the three months ended December 31, 2002 and 2001. As a percent of net sales, research and development expenses increased to 44% for the three months ended December 31, 2002, from 19% of net sales for the three months ended December 31, 2001. Research and development expenses for the six months ended December 31, 2002 increased slightly to $11.6 million from $11.3 million for the six months ended December 31, 2001. As a percent of net sales, research and development expenses increased to 44% for the six months ended December 31, 2002, from 20% for the six months ended December 31, 2001 and increased to 44% for the six months ended December 31, 2002, from 20% for the six months ended December 31, 2001. The increase in research and development expenses as a percentage of net sales for the three and six months ended December 31, 2002 compared to the three and six months ended December 31, 2001 was primarily the result of lower sales.

     We are in the process of developing our next generation 3D graphics technology. The new technology, which we call XP4, will be used in both the discrete and integrated products. Our graphics product development strategy is to focus on a balanced design with consideration of not only high performance, but also low cost and low power consumption. We also plan to continue developing the next generation DPTV™ product as well as other advanced products for digitally processed television and digital Set Top Boxes (“STB”) for the digital television market in China, Japan, Korea and Taiwan. However, we have experienced delays in availability of the XP4 and there can be no assurance that these products will be quickly or widely accepted by consumers in the market place, or that the new products will be developed and shipped in a timely manner.

Selling, General and Administrative

     Selling, general and administrative expenses decreased to $3.2 million for the three months ended December 31, 2002 from $3.6 million for the three months ended December 31, 2001. As a percent of total net sales, selling, general and administrative expenditures increased to 24% for the three months ended December 31, 2002 from 12% for the three months ended December 31, 2001. Selling, general and administrative expenses decreased to $6.1 million in the six months ended December 31, 2002 from $6.9 million for the six months ended December 31, 2001. As a percent of total net sales, selling, general and administrative expenditures increased to 23% for the six months ended December 31, 2002 from 12% for the six months ended December 31, 2001. The decrease in selling and administrative expenditures in actual dollars was attributed primarily to our tight expenses control and the reversal of provisions for doubtful accounts and sales returns. The Company intends to continue to monitor and control its selling, general and administrative expenses.

- 19 -


Table of Contents

Investment in UMC and Other Investments

     As of December 31, 2002, the Company owned approximately 73.8 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 7 and 9 above (“Investment in UMC” and “Comprehensive Income (Loss),” respectively) for discussion of this investment and related losses.

     During the six months ended December 31, 2002, the Company also recognized impairment losses on investments other than UMC totaling $1,966,000 million as follows:

         
Optical applications company
  $ 987,000  
Fiber optic technology company
    151,000  
Venture capital fund
    200,000  
Circuit design company
    250,000  
Analog circuit design company
    378,000  
 
   
 
Total
  $ 1,966,000  
 
   
 

See Part I, Item 1, Notes 8 and 9 above (“ Investments in other companies” and “Comprehensive income (loss) on short-term investments,” respectively) for discussion of these investments and related losses.

     During the six months ended December 31, 2001, the Company also recognized impairment losses on investments other than UMC totaling $1,936,000 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  
 
   
 

     See Part I, Item 1, Notes 8 and 9 above (“ Investments in other companies” and “Comprehensive income (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.

Interest and Other Income (Expense), Net

     Interest and other income, net, was $82,000 in the three months ended December 31, 2002 representing primarily interest income of $60,000 increased by $22,000 in net other income. This compares to net expense of $41,000 in the three months ended December 31, 2001 representing other

- 20 -


Table of Contents

expense of $187,000, offset by interest income of $146,000. In the six months ended December 31, 2002, interest and other income was $108,000, representing primarily interest income of $80,000 and $28,000 in net other income. This compares to interest and other income of $188,000 representing primarily interest income of $339,000 offset by $151,000 in net other expense in the six months ended December 31, 2001. The decline in interest income for the six months and three months ended December 31, 2002 was primarily attributed to lower average cash balances, and lower interest rates, as compared to the corresponding periods in 2001. 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 provision for income taxes of $1.0 million was recorded for the six months ended December 31, 2002. This provision mainly represents an adjustment to the valuation allowance. This is related to the decrease in unrealized gain from our UMC investments during the quarter which decreased deferred tax liabilities, causing deferred tax assets to exceed deferred tax liabilities. The valuation allowance was increased so that the deferred tax assets would not exceed deferred tax liabilities.

     A benefit for income taxes of $16.8 million was recorded for the six months ended December 30, 2001. The benefit for income taxes was due to a decrease in deferred tax liabilities as a result of our loss on investments for the six months ended December 31, 2001.

Liquidity and Capital Resources

     As of December 31, 2002, our principal sources of liquidity included cash and cash equivalents of $13.7 million, which decreased from $25.3 million at December 31, 2001. During the six months ended December 31, 2002, $7.5 million of cash was used by operations, compared to the six months ended December 31, 2001, during which $1.1 million of cash was used by operations. Cash used by operations in the six months ended December 31, 2002 was primarily due to operating losses, a decrease in accounts payable and income taxes payable, partially offset by a decrease in accounts receivable. Capital expenditures were $325,000 for the six months ended December 31, 2002, compared to $1.2 million for the six months ended December 31, 2001.

     Accounts payable decreased to $3.6 million at December 31, 2002 from $6.7 million at June 30, 2002. The decline was due primarily to the settlements of accounts payable brought forward from September 30, 2002 and a decreased level of inventory purchases.

     Accounts receivable decreased to $946,000 at December 31, 2002 from $4.3 million at June 30, 2002 primarily due to a decline in sales.

     We occupy our facilities under several non-cancelable operating lease agreements expiring at various dates through 2006, and require payment of property taxes, insurance, maintenance and utilities. Future minimum lease payments under non-cancelable operating leases at December 31, 2002 were as follows (in thousands):

             
 
Six months ending June 30, 2003
  $ 1,000  
 
Year ending June 30,
       
   
2004
    1,800  
   
2005
    1,500  
   
2006
    1,600  
 
 
   
 
 
Total minimum lease payments
  $ 5,900  
 
 
   
 

- 21 -


Table of Contents

As of December 31, 2002, we had unconditional purchase order commitments of approximately $8.4 million for wafers and chipsets.

     As of December 31, 2002, our investment in UMC, classified as short-term investment, was valued at $39.1 million. In addition, we held $6.6 million in UMC stock which is not available for resale as it is subject to certain contractual and other restrictions, including restrictions relating to retention of our allocated foundry capacity at UMC. In order to preserve our wafer capacity guarantee with UMC, there are certain limitations on our ability to sell the 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, 2002, approximately 9.7 million shares are subject to this lock-up restriction. While we are an operating company 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.

     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.

Factors That May Affect Our Results

We incurred an operating loss in the six months ended December 31, 2002.

     We incurred an operating loss of $9.7 million in the six months ended December 31, 2002. Future performance will substantially depend upon numerous factors, such as:

  whether there is improvement in PC sales, notebook and digital media sales in particular;
 
  timely introduction of new products, particularly the XP4™ 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 developing and marketing new products such as DPTV-3D™ and XP4™ and our need to respond to these shifts, which could result in the need to generate significantly higher revenue to achieve and sustain profitability, and it is uncertain when we will be able to generate sufficient revenue to be profitable.

We have had fluctuations in quarterly results in the past and will continue to do so in the future.

     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:

- 22 -


Table of Contents

  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;
 
  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.

To be successful, we must continue to develop new products and to enhance our existing products.

     The graphics 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.

We currently rely on a few key accounts for a significant portion of our revenue.

     To date, a limited number of customers have accounted for a significant portion of our revenue. 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 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.

We currently rely on certain international customers for a substantial portion of our revenue.

     Our revenues have historically been generated primarily from Asian customers, particularly customers in 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 Japan,

- 23 -


Table of Contents

Hong Kong, Taiwan, and China, 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 exists in the market for graphics controllers.

     The graphics controller industry has experienced reduced margins due to a number of factors including: competitive pricing pressures, processing difficulties and rapid technological change. 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 and introducing our next generation 3D graphics technology.

Intense competition exist is in the market for digital media products.

     We also plan to continue developing the next generation DPTV™ product as well as other advanced products for digitally processed television and digital STB for the digital television market in China, Japan, Korea, Taiwan, Europe and the U.S. Although there is significant market potential, 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 Micronas AG. However, we believe that DPTV™ products will have a longer product life cycle than graphics products. Therefore we expect to devote significant resources to the DPTV™ market even though competitors are substantially more experienced than we are in this market.

We are 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

- 24 -


Table of Contents

solution. We have experienced such errors in the past, and we cannot 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.

We rely upon independent foundries to manufacture our products.

     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. 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.

The market price of our common stock has been, and may continue to be volatile.

     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.

Our success depends to a significant degree on the continued employment of 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

- 25 -


Table of Contents

support personnel. In addition, we depend upon the continued services of key management personnel at our overseas subsidiaries. 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.

Our success depends in part on our ability to protect our intellectual property rights, which may be difficult.

     The graphics controller and digitally processed television market are 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.

We are currently involved in intellectual property infringement claims, and may be involved in others in the future, which can be costly.

     Our industry is very competitive and is characterized by frequent litigation alleging 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. 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

- 26 -


Table of Contents

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.

Natural disasters 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.

Future terrorist attacks may affect our business.

     We cannot 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.

Dilution of shareholders’ interest may occur.

     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 affect 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 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.

- 27 -


Table of Contents

Changes in our business organization could affect our operations.

     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 these subsidiaries will operate more efficiently if their operations were managed as independent entities. The Trident Technologies, Inc. subsidiary is developing the Liquid Crystal Display (“LCD”) panel video controller chip product. The Trident Multimedia Technologies (Shanghai) Co. Ltd. subsidiary is involved in the joint development with us of graphic and digital media chips, and will market digital media chips as our representative in the China market. The operations of either of these entities may change, or may be combined with other parts of our overseas operations. Trident Technologies Inc. and Trident Multimedia Technologies (Shanghai) Co. Ltd. had total assets equal to $928,000 and $2.0 million respectively, as of December 31, 2002. We currently own a majority interest in Trident Technologies, Inc. and a 100% interest in Trident Multimedia Technologies (Shanghai) Co. Ltd. The structure and timing of these spin-offs, and the nature of the operations at the time of spin-off will depend on a number of organizational, operational and marketing factors. We have not made all of the decisions necessary to complete these spin-offs. While we intend to structure the transactions in a manner to enhance our overall operations, the spin-offs will dilute the interests of our shareholders in the operations of the spun off entities and, particularly if the spin-offs do not increase their revenue and profitability, could adversely affect our financial results.

The performance of our equity investments is currently uncertain.

     We maintain an investment portfolio including minority equity investments in several publicly traded companies. Generally, these investments are made to more closely align our interests with those of potential strategic partners. The values of these investments are subject to market price volatility. We have also made investments in a number of privately held companies, many of which are in the early 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 incurred losses on our investments. In the future, we could further lose a portion of or our entire investment in these companies.

Future changes in financial accounting standards may cause adverse unexpected revenue fluctuations and affect our reported results of operations.

     A change in accounting policies can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New pronouncements and varying interpretations of pronouncements have occurred with frequency and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

     Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq Stock Market rules, are creating uncertainty for companies such as ours. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

- 28 -


Table of Contents

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, 2002, $13.7 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 will 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.

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 fiscal year ended June 30, 2002, 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, 2002, we had available-for-sale equity investments with a fair market value of $40.1 million including $39.1 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

- 29 -


Table of Contents

participate and other factors. As of December 31, 2002 the balance of our long-term equity investments in non-public companies was $6.7 million.

Item 4: Controls and Procedures

(a)  Under the supervision and with the participation of our management, including our chief executive officer and chief accounting officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended within the 90 day period prior to the filing date of this report. Based on this evaluation, our chief executive officer and chief accounting officer concluded that our disclosure controls and procedures were effective as of that date.

(b)  There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.

- 30 -


Table of Contents

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 and requesting a reasonable royalty, lost profits and price erosion damages. 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. On April 16, 2002, the Federal Circuit affirmed summary judgment on NeoMagic’s ‘955 patent in favor of the Company. The Federal Circuit affirmed portions of the district court’s claim construction on NeoMagic’s ‘806 patent, reversed others, and remanded the case to the district court for further proceedings on the ‘806 patent. However, the district court judge retired within days of the remand order, and the case has been reassigned to a yet-to-be-confirmed new judge. Magistrate Judge Thynge heard argument on claim construction, and both sides’ renewed motions for summary judgment on infringement issues, on November 5, 2002. A decision is not expected for some time.

Item 2: Changes in Securities and Use of Proceeds

          Not applicable

Item 3: Defaults upon Senior Securities

          Not applicable

- 31 -


Table of Contents

Item 4: Submissions of Matters to a Vote of Security Holders

          At Trident Microsystems’ Annual Stockholders’ meeting held on December 4, 2002, the following proposals were adopted by the margins indicated:

Proposal 1: Election of Director – the following director was elected at the meeting to serve a term of three years

                 
Nominees   For   Withheld

 
 
Yasushi Chikagami
    11,835,725       716,263  

The following Directors continue to serve on the Company’s Board of Directors until their term expires:

Millard Phelps, whose term expires at the 2003 Annual Meeting of Stockholders
John Luke, whose term expires at the 2003 Annual Meeting of Stockholders
Frank C. Lin, whose term expires at the 2004 Annual Meeting of Stockholders
Glen M. Antle, whose term expires at the 2004 Annual Meeting of Stockholders

Proposal 2: Proposal to approve the 2002 Stock Option Plan

                         
For   Against   Abstain Broker non-Votes

 
 

8,686,706
    3,824,779       40,503   0

Proposal 3: Proposal to ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent public accountants

                         
For   Against   Abstain   Broker non-Votes

 
 
 
12,336,532
    194,703       20,753       0  

The foregoing matters are described in further detail in our definitive proxy statement dated October 28, 2002 for the Annual Meeting of Stockholders held on December 4, 2002.

Item 5: Other Information

          Not applicable

- 32 -


Table of Contents

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.(9)
     
10.15(*)   Form of Change of Control Agreement between the Company and Frank C. Lin.(9)
     
10.16   Foundry Venture Agreement dated August 18, 1995 by and between the Company and United Microelectronics Corporation.(5)(8)
     
10.17(*)   Form of 1998 Stock Option Plan which replaces the 1992 Stock Option Plan.(6)
     
10.18(*)   Form of Nonstatutory Stock Option Agreement for non-plan grants to Director(10)
     
10.19(+)   Form of 1996 Nonstatutory Stock Option Plan(10)
     
99.1   Certification of Chief Executive Officer(7)
     
99.2   Certification of Principal Accounting Officer(7)


(1)   Incorporated by reference from exhibit of the same number to the Company’s Annual Report on Form 10-K for the year ended June 30, 1993.
 
(2)   Incorporated by reference from exhibit of the same number to the Company’s Registration Statement on Form S-1 (File No. 33-53768), except that Exhibit 3.2 is incorporated from Exhibit 3.4.
 
(3)   Incorporated by reference from exhibit 99.1 to the Company’s Report on Form 8-K filed August 21, 1998.
 
(4)   Incorporated by reference from exhibit of the same number to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
 
(5)   Incorporated by reference from exhibit of the same number to the Company’s Annual Report on Form 10-K for the year ended June 30, 1995.
 
(6)   Incorporated by reference to the Company’s 1998 Employee Stock Purchase Plan Individual Stock Option Agreements and 1996 Nonstatutory Stock Option Plan on Form S-8 filed April 23, 1999 (File No. 333-76895).
 
(7)   Filed herewith.
 
(8)   Confidential treatment has been requested for a portion of this document.
 
(9)   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.
 
(10)   Incorporated by reference from exhibit of the same number to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.
 
(*)   Management contracts or compensatory plans or arrangements covering executive officers or directors of the Company.
 
(+)   Compensatory plans, contracts or arrangements adopted without the approval of security holders pursuant to which equity may be awarded.

Reports on Form 8-K

          Not Applicable

- 33 -


Table of Contents

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, 2003, on its behalf by the undersigned thereunto duly authorized.

Trident Microsystems, Inc.


(Registrant)

/s/ Frank 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)

- 34 -


Table of Contents

CERTIFICATIONS

I, Frank C. Lin, certify that:

1.  I have reviewed this quarterly report on Form 10-Q of Trident Microsystems, Inc. (the registrant);

2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.  The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.  The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.  The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

     
Dated: February 14, 2003   /s/ FRANK C. LIN

Frank C. Lin
Chief Executive Officer

- 35 -


Table of Contents

I, Peter Jen, certify that:

1.  I have reviewed this quarterly report on Form 10-Q of Trident Microsystems, Inc. (the registrant);

2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.  The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.  The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.  The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

     
Dated: February 14, 2003   /s/ PETER JEN

Peter Jen
Chief Accounting Officer
(Principal Accounting Officer)

- 36 -


Table of Contents

EXHIBIT INDEX

     
Exhibit   Description

 
3.1   Restated Certificate of Incorporation.(1)
     
3.2   Bylaws of Trident Delaware Corporation, a Delaware Corporation.(2)
     
4.1   Reference is made to Exhibits 3.1 and 3.2.
     
4.2   Specimen Common Stock Certificate.(2)
     
4.3   Form of Rights Agreement between the Company and ChaseMellon Shareholder Services, LLC, as Rights Agent (including as Exhibit A the form of Certificates of Designation, Preferences and Rights of the Terms of the Series A Preferred Stock, as Exhibit B the form of Right Certificate, and as Exhibit C the Summary of Terms of Rights Agreement).(3)
     
10.5(*)   1990 Stock Option Plan, together with forms of Incentive Stock Option Agreement and Non-statutory Stock Option Agreement.(2)
     
10.6(*)   Form of the Company’s Employee Stock Purchase Plan.(2)
     
10.7(*)   Summary description of the Company’s Fiscal 1992 Bonus Plan.(2)
     
10.8(*)   Form of the Company’s Fiscal 1993 Bonus Plan.(2)
     
10.9(*)   Summary description of the Company’s 401(k) plan.(2)
     
10.10(*)   Form of Indemnity Agreement for officers, directors and agents.(2)
     
10.12(*)   Form of Non-statutory Stock Option Agreement between the Company and Frank C. Lin.(4)
     
10.13(*)   Form of 1992 Stock Option Plan amending and restating the 1990 Stock Option Plan included as Exhibit 10.5.(2)
     
10.14   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.(9)
     
10.15(*)   Form of Change of Control Agreement between the Company and Frank C. Lin.(9)
     
10.16   Foundry Venture Agreement dated August 18, 1995 by and between the Company and United Microelectronics Corporation.(5)(8)
     
10.17(*)   Form of 1998 Stock Option Plan which replaces the 1992 Stock Option Plan.(6)
     
10.18(*)   Form of Nonstatutory Stock Option Agreement for non-plan grants to Director(10)
     
10.19(+)   Form of 1996 Nonstatutory Stock Option Plan(10)
     
99.1   Certification of Chief Executive Officer(7)
     
99.2   Certification of Principal Accounting Officer(7)


(1)   Incorporated by reference from exhibit of the same number to the Company’s Annual Report on Form 10-K for the year ended June 30, 1993.
 
(2)   Incorporated by reference from exhibit of the same number to the Company’s Registration Statement on Form S-1 (File No. 33-53768), except that Exhibit 3.2 is incorporated from Exhibit 3.4.
 
(3)   Incorporated by reference from exhibit 99.1 to the Company’s Report on Form 8-K filed August 21, 1998.
 
(4)   Incorporated by reference from exhibit of the same number to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
 
(5)   Incorporated by reference from exhibit of the same number to the Company’s Annual Report on Form 10-K for the year ended June 30, 1995.
 
(6)   Incorporated by reference to the Company’s 1998 Employee Stock Purchase Plan Individual Stock Option Agreements and 1996 Nonstatutory Stock Option Plan on Form S-8 filed April 23, 1999 (File No. 333-76895).
 
(7)   Filed herewith.
 
(8)   Confidential treatment has been requested for a portion of this document.
 
(9)   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.
 
(10)   Incorporated by reference from exhibit of the same number to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.
 
(*)   Management contracts or compensatory plans or arrangements covering executive officers or directors of the Company.
 
(+)   Compensatory plans, contracts or arrangements adopted without the approval of security holders pursuant to which equity may be awarded.