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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2010
or
     
o   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
(State or other jurisdiction of
incorporation or organization)
  77-0156584
(I.R.S. Employer
Identification Number)
     
1170 Kifer Road
Sunnyvale, California

(Address of principal executive offices)
  94086-5303
(Zip Code)
(408)-962-5000
(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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No þ
At July 31, 2010, the number of shares of the Registrant’s common stock outstanding was 176,692,392.
 
 

 


 

TRIDENT MICROSYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2010
INDEX
         
    3  
    3  
    3  
    4  
    5  
    6  
    27  
    38  
    39  
    40  
    40  
    42  
    54  
    54  
    54  
    54  
    54  
    56  
    57  
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(In thousands, except per share data)   2010     2009     2010     2009  
Net revenues
  $ 171,648     $ 14,912     $ 262,052     $ 21,764  
Cost of revenues
    138,722       10,290       215,340       16,681  
 
                       
 
                               
Gross profit
    32,926       4,622       46,712       5,083  
 
                               
Operating expenses:
                               
Research and development
    49,866       15,802       87,081       27,236  
Selling, general and administrative
    22,311       7,421       42,447       11,047  
Goodwill impairment
    7,851             7,851       1,432  
In process research and development
          697             697  
Restructuring charges
    4,470       8       12,865       49  
 
                       
 
                               
Total operating expenses
    84,498       23,928       150,244       40,461  
 
                       
 
                               
Loss from operations
    (51,572 )     (19,306 )     (103,532 )     (35,378 )
 
                               
Interest income
    228       116       498       576  
Gain on acquisition
                44,784        
Other income (expense), net
    59       (922 )     107       (95 )
 
                       
 
                               
Loss before provision for income taxes
    (51,285 )     (20,112 )     (58,143 )     (34,897 )
Provision for (benefit from) income taxes
    (2,255 )     963       (1,529 )     2,782  
 
                       
 
                               
Net loss
  $ (49,030 )   $ (21,075 )   $ (56,614 )   $ (37,679 )
 
                       
 
                               
Net loss per share — basic and diluted
  $ (0.28 )   $ (0.32 )   $ (0.37 )   $ (0.59 )
 
                       
 
                               
Shares used in computing net loss per share -basic and diluted
    174,018       65,565       152,059       63,708  
 
                       
 
                               
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
                 
    June 30,     December 31,  
(In thousands, except par values)   2010     2009  
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 96,915     $ 147,995  
Accounts receivable, net
    97,813       4,582  
Accounts receivable from related party
    8,488        
Inventories
    32,475       14,536  
Notes receivable from related parties
    7,476        
Prepaid expenses and other current assets
    26,812       13,962  
 
           
 
               
Total current assets
    269,979       181,075  
 
               
Property and equipment, net
    33,544       26,168  
Goodwill
          7,851  
Intangible assets, net
    108,046       5,635  
Long-term note receivable from related party
    20,882        
Other assets
    18,664       7,764  
 
           
 
               
Total assets
  $ 451,115     $ 228,493  
 
           
 
               
Liabilities and Stockholders’ Equity
               
 
               
Current liabilities:
               
Accounts payable
  $ 20,242     $ 18,883  
Accounts payable to related parties
    38,362       2,401  
Accrued expenses and other current liabilities
    71,235       27,068  
Income taxes payable
    2,532       1,696  
 
           
 
               
Total current liabilities
    132,371       50,048  
 
               
Long-term income taxes payable
    22,265       22,262  
Deferred income tax liabilities
    94       94  
Other long-term liabilities
    3,768        
 
           
Total liabilities
    158,498       72,404  
 
           
 
               
Commitments and contingencies (Note 5)
               
 
               
Stockholders’ equity:
               
Preferred stock, $0.001 par value; 500 shares authorized; .004 shares issued and outstanding at June 30, 2010
           
Common stock, $0.001 par value; 250,000 shares authorized; 176,283 and 70,586 shares issued and outstanding at June 30, 2010, and December 31, 2009, respectively
    176       71  
Additional paid-in capital
    430,864       237,827  
Accumulated deficit
    (138,423 )     (81,809 )
 
               
 
           
Total stockholders’ equity
    292,617       156,089  
 
           
 
               
Total liabilities and stockholders’ equity
  $ 451,115     $ 228,493  
 
           
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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TRIDENT MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    Six Months Ended  
    June 30,  
(In thousands)   2010     2009  
Cash flows from operating activities:
               
Net loss
  $ (56,614 )   $ (37,679 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Stock-based compensation expense
    2,898       6,063  
Depreciation and amortization
    13,294       5,197  
Amortization of acquisition-related intangible assets
    30,589       1,542  
In-process research and development
          697  
Loss on disposal of property and equipment
    4       79  
Impairment of goodwill
    7,851       1,432  
Impairment of technology licenses and prepaid royalties
    2,078       2,302  
Severance paid by NXP
    3,588        
Gain on acquisition
    (44,784 )      
Loss on sales of investments
    209       7  
Deferred income taxes
    (2,259 )     112  
Changes in assets and liabilities, net of effects of acquisitions:
               
Accounts receivable
    (93,231 )     (3,367 )
Accounts receivable from related parties
    (8,488 )     (5,289 )
Inventories
    (6,397 )     (3,180 )
Prepaid expenses and other assets
    (1,389 )     2,546  
Accounts payable
    1,359       2,030  
Accounts payable to related parties
    35,961       5,513  
Accrued expenses and other liabilities
    28,500       3,416  
Income taxes payable
    839       (341 )
 
           
Net cash used in operating activities
    (85,992 )     (18,920 )
 
           
 
               
Cash flows from investing activities:
               
Purchases of property and equipment
    (3,222 )     (946 )
Proceeds from sale of investments
          2  
Acquisition of businesses, net of cash acquired
    46,380       (2,531 )
Proceeds from sale of property and equipment
    134       106  
Purchases of technology licenses
    (8,436 )     (1,969 )
 
           
Net cash provided by (used in) investing activities
    34,856       (5,338 )
 
           
 
               
Cash flows from financing activities:
               
Proceeds from issuance of common stock to employees
    56       1  
 
           
Net cash provided by financing activities
    56       1  
 
           
Net decrease in cash and cash equivalents
    (51,080 )     (24,257 )
Cash and cash equivalents at beginning of the period
    147,995       212,194  
Cash and cash equivalents at end of the period
  $ 96,915     $ 187,937  
 
           
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Condensed Consolidated Financial Statements include the accounts of Trident Microsystems, Inc., or Trident, and its subsidiaries (collectively the “Company”) after elimination of all significant intercompany accounts and transactions. In the opinion of the Company, the Condensed Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the financial position, operating results and cash flows for those periods presented. The Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC, and are not audited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted pursuant to such rules and regulations. These Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the six months ended December 31, 2009 included in the Company’s transition report on Form 10-KT, for the transition period ended December 31, 2009, filed with the SEC. 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 ending December 31, 2010.
Change in Fiscal Year End
On November 16, 2009, the Board of Directors approved a change in the fiscal year end from June 30 to December 31. The change became effective at the end of the December 31, 2009 quarter. All references to “years”, unless otherwise noted, refer to the twelve-month fiscal year, which prior to July 1, 2009, ended on June 30, and beginning with December 31, 2009, ends on December 31, of each year.
Business Combinations
On February 8, 2010, the Company and its wholly-owned subsidiary Trident Microsystems, (Far East), Ltd., or TMFE, a corporation organized under the laws of the Cayman Islands, completed the acquisition of the television systems and set-top box business lines from NXP B.V., a Dutch besloten vennootschap; or NXP. As a result of the acquisition, the Company issued 104,204,348 shares of Trident common stock to NXP, or Shares, equal to 60% of the Company’s total outstanding shares of Common Stock, after giving effect to the share issuance to NXP, in exchange for the contribution of selected assets and liabilities of the television systems and set-top box business lines from NXP and cash proceeds in the amount of $44 million. In addition, the Company issued to NXP four shares of a newly created Series B Preferred Stock or the “Preferred Shares.” For details of the acquisition, see Note 12, “Business Combinations,” of Notes to Condensed Consolidated Financial Statements.
On May 14, 2009, the Company completed its acquisition of selected assets of the frame rate converter or FRC, demodulator or DRX, and audio decoder product lines from Micronas Semiconductor Holding AG, or Micronas, a Swiss corporation. In connection with the acquisition, the Company issued 7.0 million shares of its common stock and warrants to acquire up to 3.0 million additional shares of its common stock, with a combined fair value of approximately $12.1 million, and incurred approximately $5.2 million of acquisition-related transaction costs and liabilities, for a total purchase price of approximately $17.3 million. In connection with the acquisition, the Company established three new subsidiaries in Europe, Trident Microsystems (Europe) GmbH, or TMEU, Trident Microsystems Nederland B.V., or TMNM, and Trident Microsystems Holding B.V., or TMH, to primarily provide sales liaison, marketing and engineering services in Europe. TMEU is located in Munich, Germany and TMNM and TMH are located in Nijmegen, The Netherlands.
Revenue Recognition
The Company recognizes revenues in accordance with applicable accounting guidance, when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. The Company recognizes revenues for certain distributors at point of shipment to end customers, based on contractual terms with these distributors. The Company recognizes revenue on this basis for the majority of shipments made to distributors. The Company recognizes revenue for the remaining portion of its revenues at the point it ships product to distributors or to end customers. The Company records estimated reductions to revenues for incentive offerings and sales returns allowances in the same period that the related revenues are recognized.

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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company also records a provision for doubtful accounts based on historical experience and for specific accounts receivable balances for which collectability is not reasonably assured.
The Company’s incentive offerings primarily involve volume rebates for its products in various target markets. The Company may take actions to increase customer incentive offerings, possibly resulting in an incremental reduction of revenue at the time the incentive is offered. A sales returns allowance, which is presented as a reduction to accounts receivable on the Company’s Condensed Consolidated Balance Sheet, is established based primarily on known factors at that time and historical rates of sales returns. Additional reductions to revenue could result if actual results are different from estimates. A limited amount of the Company’s revenue is generated through its distributors under agreements allowing for rights of return.
Reclassifications
Prior period amounts presented in these Condensed Consolidated Financial Statements include reclassifications to conform to the current period presentation. The preliminary purchase price allocation, associated with the acquisition of the television systems and set-top box business lines from NXP, assigned $48.5 million to gain on acquisition. Subsequently, in accordance with applicable accounting guidance, the gain on acquisition and the Company’s deferred tax assets, were reduced by $3.7 million resulting from new information received by the Company subsequent to filing the Company’s Form 10-Q for the three months ended March 31, 2010. See Note 12, “Business Combinations,” of Notes to Condensed Consolidated Financial Statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Recent Accounting Pronouncements
In April 2010, new accounting guidance was issued for the milestone method of revenue recognition. Under the new guidance, an entity can recognize revenue from consideration that is contingent upon achievement of a milestone in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. This guidance is effective prospectively for milestones achieved in fiscal years, and interim period within those years, beginning on or after June 15, 2010. Early adoption is permitted, and if this update is adopted early in other than the first quarter of an entity’s fiscal year, then it must be applied retrospectively to the beginning of that fiscal year. The Company is currently assessing the impact of the adoption on its consolidated financial statements. The Company does not expect the new guidance to significantly impact its Condensed Consolidated Financial Statements.

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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. BALANCE SHEET COMPONENTS
The following table provides details of selected balance sheet components:
                 
    June 30,     December 31,  
(Dollars in thousands)   2010     2009  
Cash and cash equivalents:
               
Cash
  $ 45,280     $ 86,382  
Money market funds invested in U.S. Treasuries
    51,635       61,613  
 
           
Total cash and cash equivalents
  $ 96,915     $ 147,995  
 
           
Accounts receivable:
               
Accounts receivable, gross
  $ 99,273     $ 4,902  
Allowances for sales returns and for doubtful accounts
    (1,460 )     (320 )
 
           
Total accounts receivable
  $ 97,813     $ 4,582  
 
           
Inventories:
               
Work in process
  $ 10,384     $ 12,539  
Finished goods
    22,091       1,997  
 
           
Total inventories
  $ 32,475     $ 14,536  
 
           
Prepaid expenses and other current assets:
               
Prepaid licenses
  $ 8,477     $ 6,605  
VAT receivable
    6,397       3,886  
Israel, severance plan assets
    2,829        
Miscellaneous receivables
    1,770        
Prepaid insurance
    1,249        
Prepaid and deferred taxes
    1,108        
Other
    4,982       3,471  
 
           
Total prepaid expenses and other current assets:
  $ 26,812     $ 13,962  
 
           
Property and equipment, net:
               
Machinery and equipment
  $ 29,187     $ 15,427  
Building and leasehold improvements
    21,016       19,522  
Software
    4,429       4,096  
Furniture and fixtures
    3,173       2,296  
 
           
 
    57,805       41,341  
Accumulated depreciation and amortization
    (24,261 )     (15,173 )
 
           
Total property and equipment, net
  $ 33,544     $ 26,168  
 
           
Accrued expenses and other current liabilities:
               
Compensation and benefits
  $ 19,681     $ 4,482  
Price rebate
    10,047       5,913  
Deferred revenues less cost of revenues
    7,594       329  
Professional fees
    4,970       2,912  
Royalties
    4,606       939  
Israel, severance plan liability
    3,008        
Contingent liabilities
    2,758       4,336  
Vat payable
    2,514       1,256  
Wafer and substrate fees
    2,415       2,227  
Other
    13,642       4,674  
 
           
Accrued expenses and other current liabilities
  $ 71,235     $ 27,068  
 
           

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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. GOODWILL AND INTANGIBLE ASSETS
Goodwill and impairment
The following table presents goodwill balance activity for the six months ended June 30, 2010 and six months ended December 31, 2009:
                 
    Six Months Ended  
    June 30,     December 31,  
(In thousands)   2010     2009  
Balance at beginning of period
  $ 7,851     $ 7,708  
Goodwill acquired
           
Impairment charge
    (7,851 )     143  
 
           
Balance at end of period
  $     $ 7,851  
 
           
The Company operates in one reportable segment called digital media solutions. The Company has two operating segments, television systems and set-top boxes, aggregated as one reportable segment. In accordance with applicable accounting guidance, the Company assigned it goodwill, resulting from the acquisition of the Micronas product lines, to its television systems operating segment.
The Company assesses potential impairment of goodwill on an annual basis, and more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. The Company performed its annual goodwill impairment analysis and recorded an impairment charge of $7.9 million for the three months ended June 30, 2010, due to the excess of the carrying value over the estimated market value for the television systems operating segment. The market approach method and the Company’s stock price at June 30, 2010, were used to determine the estimated market value of the television systems operating segment.
Intangible assets and impairment
The following table summarizes the components of intangible assets and related accumulated amortization, including impairment, for the periods presented:
                                                 
    June 30, 2010     December 31, 2009  
    Gross     Accumulated             Gross     Accumulated     Net  
    Carrying     Amortization     Net Carrying     Carrying     Amortization     Carrying  
(In thousands)   Amount     and Impairment     Amount     Amount     and Impairment     Amount  
Intangible assets:
                                               
Core & developed
  $ 76,645     $ (31,448 )   $ 45,197     $ 28,645     $ (23,260 )   $ 5,385  
Customer relationships
    25,535       (6,736 )     18,799       2,535       (2,359 )     176  
Backlog
    15,166       (12,495 )     2,671       166       (92 )     74  
Patents
    13,000       (1,143 )     11,857                    
In-process R&D
    18,000             18,000                    
Service agreements
    16,000       (4,478 )     11,522                    
 
                                   
Total
  $ 164,346     $ (56,300 )   $ 108,046     $ 31,346     $ (25,711 )   $ 5,635  
 
                                   
Additions to intangible assets during the first six months of 2010 resulted primarily from the February 8, 2010, acquisition of the television systems and set-top box business lines from NXP. The preliminary purchase price allocation assigned $48.5 million to gain on acquisition. Subsequently, in accordance with applicable accounting guidance, the preliminary estimate was reduced by $3.7 million as a result of new information received by the Company subsequent to filing the Company’s Form 10-Q for the three months ended March 31, 2010. Gain on acquisition represents the amount of the purchase price which is less than the fair value of the underlying net tangible and identifiable intangible assets acquired. Gain on acquisition is not considered income for tax purposes. See Note 12, “Business Combinations” of Notes to Condensed Consolidated Financial Statements.

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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents details of the amortization of intangible assets included in the cost of revenue, research and development and selling, general and administrative expense categories for the periods presented:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(In thousands)   2010     2009     2010     2009  
Cost of revenue
  $ 16,972     $ 769     $ 27,187     $ 1,699  
Research and development
    823             1,308        
Selling, general and administrative
    1,339       51       2,094       421  
Net revenues
          18             18  
 
                       
 
  $ 19,134     $ 838     $ 30,589     $ 2,138  
 
                       
As of June 30, 2010, the estimated future amortization expense of intangible assets in the table above is as follows, excluding in-process research and development intangible asset:
         
(In thousands)   Estimated  
Fiscal Year Ending   Amortization  
2010 (remaining 6 months)
  $ 24,636  
2011
    35,358  
2012
    23,751  
2013
    4,556  
2014
    1,745  
Thereafter
     
 
     
Total
  $ 90,046  
 
     
As of June 30, 2010, the status of in-process research and development is consistent with the Company’s expectation at the time the in-process research and development was acquired. Future period intangible assets amortization expense will include the amortization of in-process research and development, if and when the technology reaches technical feasibility.
4. GUARANTEES
The Company provides for estimated future costs of warranty obligations in accordance with applicable accounting guidance, which requires an entity to disclose and recognize a liability for the fair value of the obligation it assumes upon issuance of a guarantee. The Company warrants its products against material defects for a period of time, usually between 90 days and one year. The Company replaces defective products that are expected to be returned by its customers under its warranty program.
5. COMMITMENTS AND CONTINGENCIES
Commitments
NXP Acquisition Related Commitments
On February 8, 2010, as a result of the acquisition of selected assets and liabilities of the television systems and set-top box business lines from NXP, the Company entered into a Transition Services Agreement, pursuant to which NXP provides to the Company, for a limited period of time, specified transition services and support. Depending on the service provided, the term for the majority of services range from three to eighteen months, and limited services could continue into the fourth quarter of 2011. The total remaining payment obligation under the Transition Services Agreement is approximately $9.4 million as of June 30, 2010. The Company also entered into a Manufacturing Services Agreement pursuant to which NXP provides manufacturing services to the Company for a limited period of time. The term of the agreement ends on the readiness of the Company’s enterprise resource planning system which is estimated to be June 30, 2011. The terms of the agreements allow the Company to cancel either or both the Transition Services Agreement and the Manufacturing Services Agreement with minimum notice periods. Also see Note 13, “Related Party Transactions,” of Notes to Condensed Consolidated Financial Statements.

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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Contingencies
Intellectual Property Proceedings
In March 2010, Intravisual Inc. filed complaints against Trident and multiple other defendants, including NXP, in the United States District Court for the Eastern District of Texas, No. 2:10-CV-90 TJW alleging that certain Trident products infringe a patent relating generally to compressing and decompressing digital video. The complaint seeks a permanent injunction against the Company as well as the recovery of unspecified monetary damages and attorneys’ fees. On May 28, 2010, Trident filed its answer, affirmative defenses and counterclaims. No date for trial has been set. The Company intends to contest this action vigorously. Because this action is in the very early stages, and due to the inherent uncertainty surrounding the litigation process, the Company is unable to reasonably estimate the ultimate outcome of this litigation at this time.
From time to time, the Company receives communications from third parties asserting patent or other rights allegedly covering its products and technologies. Based upon its evaluation, the Company may take no action or the Company may seek to obtain a license, redesign an accused product or technology, initiate a formal proceeding with the appropriate agency (e.g., the U.S. Patent and Trademark Office) and/or initiate litigation. There can be no assurance in any given case that a license will be available on terms the Company considers reasonable or that litigation can be avoided if the Company’s desire is to do so. If litigation does ensue, the adverse third party will likely seek damages (potentially including treble damages) and may seek an injunction against the sale of the Company’s products that incorporate allegedly infringed intellectual property or against the operation of its business as presently conducted, which could result in the Company having to stop the sale of some of its products or to increase the costs of selling some of its products. Such lawsuits could also damage the Company’s reputation. The award of damages, including material royalty payments, or the entry of an injunction against the sale of some or all of the Company’s products, could have a material adverse affect on the Company. Even if the Company were to initiate litigation, such action could be extremely expensive and time-consuming and could have a material adverse effect on the Company. The Company cannot assure you that litigation related to its patent or other rights or the patent or other rights of others can always be avoided or successfully concluded.
Shareholder Derivative Litigation
Trident has been named as a nominal defendant in several shareholder derivative lawsuits concerning the granting of stock options. The federal court cases have been consolidated as In re Trident Microsystems Inc. Derivative Litigation, Master File No. C-06-3440-JF. A case also has been filed in State court, Limke v. Lin et al., No. 1:07-CV-080390. Plaintiffs in all cases allege that certain of the Company’s current or former officers and directors caused it to grant options at less than fair market value, contrary to the Company’s public statements (including its financial statements), and that this represented a breach of their fiduciary duties to the Company, and as a result those officers and directors are liable to the Company. The Company’s Board of Directors has appointed a Special Litigation Committee, or SLC, which has been composed solely of independent directors, to review and manage any claims that the Company may have relating to the stock option granting practices and related issues investigated by the SLC. The scope of the SLC’s authority includes the claims asserted in the derivative actions. In federal court, the Company moved to stay the case pending the assessment by the SLC that was formed to consider nominal plaintiffs’ claims.
On March 26, 2010, the federal court approved settlements with all defendants other than Frank Lin, the Company’s former CEO, and all defendants other than Mr. Lin were dismissed with prejudice from the state and federal actions. In connection with the approved settlements, payments of approximately $1.7 million were made to the Company, by certain of the defendants, and recorded in other income (expense), net on the Company’s Condensed Consolidated Statement of Operations during the three months ended June 30, 2010. The state court derivative action was dismissed following the approval of the settlement in the federal action. No particular amount of damages has been alleged in the federal action, and by the nature of the lawsuit no damages will be alleged against the Company. On June 8, 2010, Mr. Lin filed a counterclaim against Trident. In that counterclaim, Mr. Lin seeks recovery of payments he claims he was promised during the negotiations surrounding his eventual termination and also losses he claims he has suffered because he was not permitted to exercise his Trident stock options between January 2007 and March 2008. The Company cannot predict whether the federal action against Mr. Lin and his counterclaims are likely to result in any material recovery by or expense to Trident. In addition, on July 1, 2010, the derivative plaintiffs filed an amended complaint in the federal action stating claims against Mr. Lin relating to his actions in connection with the Company’s stock option granting practices. The Company expects to continue to incur legal fees in responding to this lawsuit, including expenses for the reimbursement of certain legal fees of at least Mr. Lin under its advancement obligations. The expense of defending such litigation may be significant. The amount of time to

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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
resolve this and any additional lawsuits is unpredictable and these actions may divert management’s attention from the day-to-day operations of the Company’s business, which could adversely affect its business, results of operations and cash flows.
Regulatory Actions
As previously disclosed, the Company was subject to a formal investigation by the Securities and Exchange Commission, or “SEC,” in connection with its investigation into the Company’s historical stock option granting practices and related issues. On July 16, 2010, the Company entered into a settlement with the SEC regarding this investigation. The Company agreed to settle with the SEC without admitting or denying the allegations in the SEC’s complaint. The Company consented to entry of a permanent injunction against future violations of anti-fraud provisions, reporting provisions and the books and records requirements of the Securities Exchange Act of 1934 and the Securities Act of 1933. On July 19, 2010, the U.S. District Court for the District of Columbia entered a final judgment incorporating the judgment consented to by the Company. The final judgment did not require the Company to pay a civil penalty or other money damages. Although the Department of Justice, or “DOJ,” commenced an informal investigation relating to the same issues, the DOJ has not requested information from the Company since February 20, 2009 and the Company believes that the DOJ has concluded its investigation without taking any action against the Company. The Company believes that the settlement with the SEC concluded the government’s investigations into its historical stock option practices.
Indemnification Obligations
The Company indemnifies, as permitted under Delaware law and in accordance with its Bylaws, Company officers, directors and members of the Company’s senior management for certain events or occurrences, subject to certain limits, while they were serving at the Company’s request in such capacity. In this regard, the Company has received, or expects to receive, requests for advancement and indemnification by certain current and former officers, directors and employees in connection with the Company’s investigation of its historical stock option granting practices and related issues, and the related governmental inquiries and shareholder derivative litigation. The maximum amount of potential future advancement and indemnification is unknown and potentially unlimited; therefore, it cannot be estimated. The Company has directors’ and officers’ liability insurance policies that may enable it to recover a portion of such future advancement and indemnification claims paid, subject to coverage limitations of the policies, and plan to make claim for reimbursement from the Company’s insurers of any potentially covered future indemnification payments. In certain circumstances, the Company also would have the right to seek to recover sums advanced to an indemnitee.
Commercial Litigation
In June 2010, Exatel Visual Systems, Ltd. filed a complaint against NXP Semiconductors USA, Inc. and Trident, in Superior Court for the State of California, No. 1-10-CV-174333, alleging breach of contract and related tort claims relating generally to an alleged product development project undertaken by Trident’s predecessor, NXP, and its predecessor, Conexant Systems, Inc. Trident has not yet filed an answer and no date for trial has been set. Because this action is in the very early stages, and due to the inherent uncertainty surrounding the litigation process, the Company is unable to reasonably estimate the ultimate outcome of this litigation at this time.
General
From time to time, the Company is involved in other legal proceedings arising in the ordinary course of its business. While the Company cannot be certain about the ultimate outcome of any litigation, management does not believe any pending legal proceeding will result in a judgment or settlement that will have a material adverse effect on the Company’s business, financial position, results of operation or cash flows.
6. EMPLOYEE STOCK PLANS
Voluntary stock option exchange program
On February 10, 2010, the Company commenced a voluntary stock option exchange program, or Exchange Program, previously approved by stockholders at the Company’s annual stockholder meeting on January 25, 2010. The Exchange Program offer period commenced on February 10, 2010 and concluded at 9:00 p.m., Pacific Standard Time, on March 10, 2010.

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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Under the Exchange Program, eligible employees were able to exchange certain outstanding options to purchase shares of the Company’s common stock having a per share exercise price equal to or greater than $4.69 for a lesser number of shares of restricted stock or restricted stock units. Eligible employees participating in the offer who were subject to U.S. income taxation receive shares of restricted stock, while all other eligible employees participating in the offer received restricted stock units. Members of the Company’s Board of Directors and the Company’s executive officers and “named executive officers,” as identified in the Company’s definitive proxy statement filed on December 18, 2009, were not eligible to participate in the Exchange Program.
Pursuant to the terms and conditions of the Exchange Program, the Company accepted for exchange eligible options to purchase 1,637,750 shares of the Company’s common stock, representing 88.83% of the total number of options originally eligible for exchange. These surrendered options were cancelled on March 11, 2010 and in exchange therefore the Company granted a total of 120,001 new shares of restricted stock and a total of 198,577 new restricted stock units under the Trident Microsystems, Inc. 2010 Equity Incentive Plan, in accordance with the applicable Exchange Program conversion ratios. Under applicable accounting guidance, the exchange was accounted for as a modification and the incremental stock-based compensation expense recognized by the Company as a result of the Exchange Program was immaterial.
Employee Stock Incentive Plans
The Company grants nonstatutory and incentive stock options, restricted stock awards, restricted stock units and performance share awards to attract and retain officers, directors, employees and consultants. For the six months ended June 30, 2010, the Company made awards under the 2010 Equity Incentive Plan, or 2010 Plan, which was approved by the Company’s stockholders on January 25, 2010. Previously, the Company had also adopted the 2001 Employee Stock Purchase Plan, however, purchases under this plan have been suspended for several years. Options to purchase Trident’s common stock remain outstanding under the following incentive plans which have expired or been terminated: the 1992 Stock Option Plan, the 1994 Outside Directors Stock Option Plan, the 1996 Nonstatutory Stock Option Plan, or 1996 Plan, the 2002 Stock Option Plan, or 2002 Plan, and the 2006 Equity Incentive Plan, or 2006 Plan. In addition, options to purchase Trident’s common stock are outstanding as a result of the assumption by the Company of options granted to Trident Technologies, Inc., or TTI, officers, employees and consultants under the TTI 2003 Employee Option Plan, or TTI Plan. The options granted under the TTI Plan were assumed in connection with the acquisition of the minority interest in TTI on March 31, 2005 and converted into options to purchase Trident’s common stock. Except for the 1996 Plan, all of the Company’s equity incentive plans, as well as the assumption and conversion of options granted under the TTI Plan, have been approved by the Company’s stockholders.
The 2010 Plan provides for the grant of equity incentive awards, including stock options, stock appreciation rights, restricted stock purchase rights, restricted stock bonuses, restricted stock units, performance shares, performance units and cash-based and other stock-based awards of up to 32,200,000 shares, subject to increase for unissued predecessor plan shares as set forth in the 2010 Plan. For purposes of the total number of shares available for grant under the 2010 Plan, any shares that are subject to awards of stock options, stock appreciation rights or other awards that require the option holder to purchase shares for monetary consideration equal to their fair market value determined at the time of grant are counted against the available-for-grant limit as one share for every one share issued, and any shares issued in connection with any other awards, or “full value” awards, are counted against the available-for-grant limit as 1.2 shares for every one share issued. Stock options granted under the 2010 Plan generally must have an exercise price equal to the closing market price of the underlying stock on the grant date and generally expire no later than ten years from the grant date. Options generally become exercisable beginning one year after the date of grant and vest as to a percentage of shares annually over a period of three to four years following the date of grant. The 2010 Plan supersedes the 2006 Plan and the 2002 Plan. The 2006 Plan and 2002 Plan were terminated on January 26, 2010 following approval of the 2010 Plan by the Company’s stockholders.
Valuation of Employee Stock Options
The Company values its stock-based incentive awards granted using the Black-Scholes model, except for performance-based restricted stock awards with a market condition granted during the fiscal year ended June 30, 2008 and during the six months ended June 30, 2010, for which the Company used a Monte Carlo simulation model to value the awards.
The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Black-Scholes model requires the input of certain assumptions. The Company’s stock options have

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
characteristics significantly different from those of traded options, and changes in the assumptions can materially affect the fair value estimates.
For the three and six months ended June 30, 2010 and 2009, the fair value of options granted were estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions:
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
Employee Incentive Plans   2010   2009   2010   2009
Expected term (in years)
    5.03       4.74       4.78       4.11  
Expected volatility
    69.88 %     69.37 %     68.95 %     67.98 %
Risk-free interest rate
    2.43 %     2.42 %     2.28 %     1.86 %
Expected dividend rate
                       
Weighted average fair value at grant date
  $ 1.08     $ 1.07     $ 1.03     $ 0.79  
The expected term of stock options represents the weighted average period the stock options are expected to remain outstanding. The expected term is based on the observed and expected time to exercise and post-vesting cancellations of options by employees. The Company uses historical volatility in deriving its expected volatility assumption because it believes that future volatility over the expected term of the stock options is not likely to differ from the past. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of options to purchase Trident common stock. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts.
As stock-based compensation expense recognized in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.
Stock-Based Compensation Expense
The following table summarizes Trident’s stock-based award activities for the three and six months ended June 30, 2010 and 2009:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(In thousands)   2010     2009     2010     2009  
Cost of revenues
  $ 86     $ 149     $ 190     $ 294  
Research and development
    902       1,710       1,782       3,050  
Selling, general and administrative
    1,246       1,401       2,505       2,719  
 
                       
Total stock-based compensation expense
  $ 2,234     $ 3,260     $ 4,477     $ 6,063  
 
                       
The Company has not capitalized any stock-based compensation expense in inventory for the three and six months ended June 30, 2010 and 2009 as such amounts were immaterial.
During the three and six months ended June 30, 2010, total stock-based compensation expense recognized in income before taxes was $2.2 million and $4.5 million, respectively, with no related recognized tax benefit. Total stock-based compensation expense recognized in income before taxes for the six months ended June 30, 2010, includes a $1.6 million reduction in a contingent liability that was recorded as a reduction in Selling, general and administrative expenses on the Company’s Condensed Consolidated Statement of Operations. This contingent liability related to the investigation by the Company’s Special Litigation Committee and is further described in the “Contingent Liabilities” section below. During the three and six months ended June 30, 2009, total stock-based compensation expense recognized in income before taxes was $3.3 million and $6.1 million, respectively, with no related recognized tax benefit.

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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock Option Awards
The following table summarizes the Company’s stock option and restricted stock activities for the six months ended June 30, 2010:
                                         
            Options Outstanding  
                            Weighted        
                            Average        
                            Remaining        
    Shares             Weighted     Contractual        
    Available for     Number of     Average     Term (in     Aggregate  
(In thousands, except per share data and contractual term)   Grant     Shares     Exercise Price     years)     Intrinsic Value  
Balance at December 31, 2009
    1,682       6,690     $ 7.48                  
Newly authorized (2010 Plan)
    42,300                                  
Plan shares expired
    (3,785 )           $                  
Granted
    (769 )     769     $ 1.80                  
Exercised
          (50 )   $ 1.02                  
Cancelled, forfeited or expired
    1,900       (1,900 )   $ 14.51                  
Restricted stock granted (1)
    (3,887 )                              
Restricted stock cancelled, forfeited or expired (1)
    297                                
 
                                   
Balance at June 30, 2010
    37,738       5,509     $ 4.34       7.12     $ 300  
 
                                   
 
                                       
Vested and expected to vest at June 30, 2010
            5,246     $ 4.44       7.02     $ 299  
 
                                     
Exercisable at June 30, 2010
            2,469     $ 6.06       5.06     $ 289  
 
                                     
 
(1)   Restricted stock is deducted from and added back to shares available for grant under the 2010 Plan at a 1 to 1.20 ratio and at a 1 to 1.38 ratio for restricted stock deducted and canceled or expired under other previous Plans.
The aggregate intrinsic value represents the total pre-tax intrinsic value, which is computed based on the difference between the exercise price and Trident’s closing common stock price of $1.42 as of June 30, 2010, which would have been received by the option holders had all option holders exercised their options as of that date. Total unrecognized compensation cost of options granted but not yet vested as of June 30, 2010 was $3.4 million, which is expected to be recognized over the weighted average service period of 2.36 years.
Restricted Stock Awards and Restricted Stock Units
The following table summarizes the activity for Trident’s restricted stock awards (“RSA”) and restricted stock units (“RSU”) for the six months ended June 30, 2010:
                 
    Restricted Stock Awards and  
            Weighted  
            Average Grant  
    Number of     Date Fair  
(In thousands, except per share data)   Shares     Value  
Restricted stock balance at December 31 2009
    2,028     $ 4.44  
Granted
    3,239     $ 1.84  
Vested
    (519 )   $ 2.87  
Forfeited
    (225 )   $ 2.89  
 
             
Restricted stock balance at June 30, 2010
    4,523     $ 2.84  
 
             
Both RSAs and RSUs typically vest over a three or four year period. The fair value of the RSAs and RSUs was based on the closing market price of the Company’s common stock on the date of award. The table above includes an RSA of 110,000 performance-based shares with vesting subject to achievement of specific market conditions granted under the 2006 Plan. This RSA was issued to the Company’s Chief Executive Officer on October 23, 2007 as part of her initial new hire award. The award will vest in four equal tranches, with the vesting of each tranche requiring that Trident’s common stock price target, established by the Compensation Committee, be achieved on or after one of the first four anniversaries of her employment start date. The CEO needs to be employed with the Company as of each anniversary date in order for vesting to occur. The table above also includes performance-based RSU

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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
awards of 67,000 shares and 35,000 shares under the 2006 Plan, granted on October 4, 2009, to the Company’s Chief Executive Officer and Senior Vice President of Engineering, respectively. The RSUs vest subject to achievement of specific Company earnings during the year ending December 31, 2011. The units vest only if the performance goal has been met in full. The RSU award granted to the Vice President of Engineering was cancelled during January 2010 and an insignificant amount of expense was recognized for the six month period ended June 30, 2010. The table above also includes awards of 650,000 performance-based shares with market conditions and service conditions that were granted to certain Company executives during the six months ended June 30, 2010. These awards vest subject to achievement of a minimum price for the Company’s stock for fiscal years 2011 through 2013.
The fair value of the performance share awards with market and service conditions was estimated at the grant date using a Monte Carlo simulation with the following weighted-average assumptions: volatility of Trident’s common stock of 72%; and a risk-free interest rate of 1.83%. The weighted-average grant-date fair value of the performance share awards was $1.11. During the three and six months ended June 30, 2010, stock-based compensation expense of $0.09 million and $0.17 million was recorded, respectively for these performance share awards based on service conditions having been met. As of June 30, 2010, none of these performance share awards had vested.
The Company recognized an insignificant amount of expense for RSAs and RSUs granted under the Employee Stock Plans for the six months ended June 30, 2010. A total of $9.6 million of unrecognized compensation cost is expected to be recognized over a weighted average period of 2.29 years.
Modification of Certain Options
Extended Exercise
Effective at the close of trading on September 25, 2006, the Company temporarily suspended the ability of optionees to exercise vested options to purchase shares of the Company’s common stock until the Company became current in the filing of its periodic reports with the SEC and filed a Registration Statement on Form S-8 for the shares issuable under the 2006 Plan (“2006 Plan S-8”). This suspension continued in effect through August 22, 2007, the date of the filing of the registration statement on Form S-8 covering issuances under the 2006 Plan, which followed the Company’s filing, on August 21, 2007, of its Quarterly Reports on Form 10-Q for the periods ended September 30, 2006, December 31, 2006, and March 31, 2007.
As a result, the Company extended the exercise period of approximately 550,000 fully vested options held by 10 employees, who were terminated during the suspension period, giving them either 30 days or 90 days after the Company became current in the filings of its periodic reports with the SEC and filed the 2006 Plan S-8 in order to exercise their vested options. During the quarter ended September 30, 2007, eight of these ten former employees stated above exercised all of their vested options. However, on September 21, 2007, the Special Litigation Committee of the Board of Directors (“SLC”) decided that it was in the best interests of the Company’s stockholders not to allow the remaining two former employees, as well as the Company’s former CEO and two former non-employee directors, to exercise their vested options during the pendency of the SLC’s proceedings, and extended, until March 31, 2008, the period during which these five former employees could exercise approximately 428,000 of their fully vested options. Moreover, the SLC allowed one former employee to exercise all of his fully vested stock options and another former employee agreed to cancel all of such individual’s fully vested stock options during the second quarter of fiscal year ended June 30, 2008. On January 31, 2008, the SLC extended, until August 31, 2008, the period during which the two former non-employee directors could exercise their unexpired vested options. For the fiscal year ended June 30, 2008, the Company recorded aggregate incremental stock-based compensation expense totaling approximately $5.4 million related to the modifications of option exercise rights of the five former employees as described above, and the related expenses were included in “Selling, General and Administrative Expenses” in the Consolidated Statement of Operations as of that date.
Contingent Liabilities
As stated in the “Extended Exercise” section above, on September 21, 2007, the SLC decided not to allow the Company’s former CEO and two former non-employee directors to exercise their vested options until March 31, 2008. Moreover, on January 30, 2008, the SLC extended, until August 1, 2008, the period during which the two former non-employee directors could exercise their vested options. On March 31, 2008, the SLC entered into an agreement with the Company’s former CEO allowing him to exercise all of his fully vested stock options. Under this agreement, he agreed that any shares obtained through these exercises or net proceeds obtained

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
through the sale of such shares would be placed in an identified securities brokerage account and not withdrawn, transferred or otherwise removed without either (i) a court order granting him permission to do so or (ii) the written permission of the Company. On May 29, 2008, the SLC permitted one of the Company’s former non-employee directors to exercise his fully vested stock options without seeking the authorization of the SLC and entered into an agreement with the other former non-employee director on terms similar to the agreement entered into with the Company’s former CEO, allowing him to exercise all of his fully vested stock options without seeking the authorization from the SLC. Because Trident’s stock price was lower than the prices at which the Company’s former CEO and each of the two former directors had desired to exercise their options, as indicated in previous written notices to the SLC, the Company recorded a contingent liability totaling $4.3 million, which was included in “Accrued expenses and other current liabilities” in the Condensed Consolidated Balance Sheets as of December 31, 2009 and the related expenses were included in “Selling, General and Administrative Expenses” in the Consolidated Statement of Operations for the quarter ended December 31, 2009. On March 26, 2010, the claims by these two former non-employee directors against the Company, valued at approximately $1.6 million in the aggregate, were waived as part of a comprehensive settlement with the Company. Currently, the SLC investigation is still in progress only with respect to the Company’s former CEO. In June 2010, he filed a claim against the Company seeking compensation from the Company relating to the exercise of his fully vested stock options. As a result, as of June 30, 2010, the Company maintained a contingent liability totaling $2.8 million in “Accrued expenses and other current liabilities” in the Condensed Consolidated Balance Sheets and the related expenses were included in “Selling, General and Administrative Expenses” in the Consolidated Statement of Operations for the six months ended June 30, 2010. See Note 5, “Shareholder Derivative Litigation” in “Commitment and Contingencies,” of Notes to Condensed Consolidated Financial Statements.
7. INCOME TAXES
The Company accrued an insignificant amount for interest and penalties, following applicable accounting guidance, related to gross unrecognized tax benefits, which are included in the provision for income taxes for the three and six months ended June 30, 2010. The Company included in its unrecognized tax benefit of $43.3 million at June 30, 2010, $22.2 million of tax benefits that, if recognized, would reduce the Company’s annual effective tax rate. It is reasonably possible that the Company’s unrecognized tax benefits could decrease by a range between zero and $2.8 million within the next twelve months, depending on the outcome of certain tax audits or statutes of limitations in foreign jurisdictions.
A benefit from income taxes of $2.3 million and $1.5 million was recorded for the three and six months ended June 30, 2010, respectively. A provision for income taxes of $1.0 million and $2.8 million was recorded for the three and six months ended June 30, 2009, respectively. The effective income tax rate for the three and six months ended June 30, 2010, increased by 9.2 and 10.6 percentage points, respectively, compared to the three and six months ended June 30, 2009. The increase in the Company’s effective tax rate was primarily due to the recognition of the tax benefit resulting from net operating losses generated in foreign jurisdictions as a result of restructuring activities, the release of tax reserves in a foreign jurisdiction associated with the remeasurement of an unrecognized tax benefit due to new information received in the period associated with legal guidance provided, and a lapse of a statute of limitation in the jurisdiction relevant the Company’s business operations, as compared to tax expense incurred on a loss in the three and six months ended June 30, 2009.
The Company’s ability to use federal and state net operating loss and credit carry forwards to offset future taxable income and future taxes, respectively, is subject to restrictions attributable to equity transactions that result from changes in ownership as defined by Internal Revenue Code (“IRC”) Sections 382 and 383. As discussed in Note 12, “Business Combinations”, on February 8, 2010, Trident issued 104,204,348 newly issued shares of Trident common stock to NXP, equal to 60% of the total outstanding shares of Trident common stock. The impact of this event reduced the Company’s availability of net operating loss and tax credit carry forwards for federal and state income tax purposes.

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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per share for the three and six months ended June 30, 2010 and 2009:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(In thousands, except per share amounts)   2010     2009     2010     2009  
Net loss
  $ (49,030 )   $ (21,075 )   $ (56,614 )   $ (37,679 )
 
                       
 
                               
Shares used in computing net loss per share — basic and diluted
    174,018       65,565       152,059       63,708  
 
                       
Net loss per share — basic and diluted
  $ (0.28 )   $ (0.32 )   $ (0.37 )   $ (0.59 )
 
                       
Potentially dilutive common shares are excluded from the computation of basic and diluted net loss per share for the above periods because their effect would have been anti-dilutive. Potentially dilutive common shares, for the three and six months ended June 30, 2010, respectively, were 5.7 million and 5.6 million. Potentially dilutive common shares, for both the three and six months ended June 30, 2009, were 7.0 million.
9. FAIR VALUE MEASUREMENTS
The Company follows applicable accounting guidance for its fair value measurements. The guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The guidance establishes three levels of inputs that may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s insurance policies and mutual funds, that are used to fund the pension liability for our Israeli employees, are classified within Level 2, and are used as the market inputs to value these investments, and are observable, for example market yields, but the assets are not actively traded.
Level 3 — Unobservable inputs to the valuation methodology significant to the measurement of fair value of assets or liabilities.
Determination of fair value
Cash equivalents are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.
Assets Measured at Fair Value on a Recurring Basis
The following table presents the Company’s financial assets, measured at fair value, as of June 30, 2010:
                                 
    Fair Value Measurement at Reporting Date  
            Quoted Prices              
            In Active     Significant     Significant  
            Markets for     Observable     Unobservable  
            Identical Assets     Inputs     Inputs  
(In thousands)   Fair Value     (Level 1)     (Level 2)     (Level 3)  
Israel, severance plan assets invested in insurance policies and mutual funds (1)
  $ 2,829     $     $ 2,829     $  
Money market funds invested in U.S. Treasuries (2)
    51,635       51,635              
 
                       
Total
  $ 54,464     $ 51,635     $ 2,829     $  
 
                       

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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the Company’s financial assets, measured at fair value, as of December 31, 2009:
                                 
                    Fair Value Measurement at Reporting Date
            Quoted Prices In           Significant
            Active Markets for   Significant   Unobservable
            Identical Assets   Observable   Inputs
(In thousands)   Fair Value   (Level 1)   Inputs (Level 2)   (Level 3)
Money market funds invested in U.S. Treasuries (2)
  $ 61,613     $ 61,613     $     $  
 
(1)   Included in Prepaid and other current assets on the Company’s Condensed Consolidated Balance Sheets.
 
(2)   Included in Cash and cash equivalents on the Company’s Condensed Consolidated Balance Sheets.
10. RESTRUCTURING
During the first quarter of 2010, the Company began procedures to streamline its operations. As a result of this decision, the Company recorded for the three and six months ended June 30, 2010, $4.5 million and $12.9 million, respectively, of restructuring expenses related to severance and related employee benefits. The restructuring is expected to be completed by the end of the calendar year. Restructuring charges are recorded under “Restructuring charges” in the Company’s Condensed Consolidated Statement of Operations.
Prior to the close of the Company’s acquisition of selected assets and liabilities of NXP’s television systems and set-top box business lines, NXP initiated a restructuring plan pursuant to which the employment of some NXP employees was terminated upon the close of the merger. The Company has determined that the restructuring plan was a separate plan from the business combination because the plan to terminate the employment of certain employees was made in contemplation of the acquisition. Therefore, a severance cost of $3.6 million was recognized by the Company as an expense on the acquisition date and is included in the total restructuring charge of $12.9 million for the six months ended June 30, 2010. The $3.6 million of severance cost was paid by NXP after the close of the acquisition, effectively reducing the purchase consideration transferred. See Note 12, “Business Combinations,” of Notes to Condensed Consolidated Financial Statements.
The following table presents the changes in the Company’s restructuring accrual for the three and six months ended June 30, 2010 and 2009:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(In thousands)   2010     2009     2010     2009  
Restructuring liabilities, beginning of period
  $ 153     $     $     $  
Severance and related charges
    4,470       8       12,875       49  
Cash payments
    (3,518 )     (8 )     (11,770 )     (49 )
 
                       
Restructuring liabilities, end of period
  $ 1,105     $     $ 1,105     $  
 
                       
11. GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
Geographic Information
The Company operates in one reportable segment called digital media solutions. The digital media solutions business segment designs, develops and markets integrated circuits for digital media applications, such as digital television, set-top boxes, and liquid crystal display, or LCD, television. The Company has determined its operating segments based on current applicable accounting literature. The Company has two operating segments, television systems and set-top boxes, aggregated as one reportable segment, based on current applicable accounting literature.

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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenues by region are classified based on the locations of the customer’s principal offices even though customers’ revenues are attributable to end customers that are located in a different location. The following is a summary of the Company’s net revenues by geographic operations for the periods presented:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(In thousands)   2010     2009     2010     2009  
Revenues:
                               
South Korea
  $ 60,756     $ 4,987     $ 99,969     $ 5,345  
Europe
    43,216       2,673       64,621       3,681  
Asia Pacific
    36,586       3,152       51,749       5,043  
Japan
    22,123       3,702       33,386       7,297  
Americas
    8,967       398       12,327       398  
 
                       
Total revenues
  $ 171,648     $ 14,912     $ 262,052     $ 21,764  
 
                       
Major Customers
The following table shows the percentage of the Company’s revenues during the three and six months ended June 30, 2010 and 2009 that were derived from customers who individually, or through their Electronic Manufacturing Service providers accounted for more than 10% of revenues for those periods:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
Revenues:
                               
Samsung Electronics, Co., Ltd.
    24 %     23 %     26 %     16 %
Philips Consumer Electronics International B.V.
    14 %     *       13 %     *  
Sony
    *       11 %     *       18 %
 
*   Less than 10% of net revenues
The Company recognizes revenues for its largest distributors at the point these distributors ship to end customers (sell-through basis), representing approximately 86% of shipments made to distributors for the six months ended June 30, 2010. For the three and six months ended June 30, 2010, distribution revenue recognized on a sell-through basis was 27% and 24% of total revenues, respectively. For the three and six months ended June 30, 2009, distribution revenue recognized on a sell-through basis was 36% and 50% of total revenues, respectively.
As of June 30, 2010, the Company had a high concentration of accounts receivable with Samsung Electronics, Co., Ltd., representing 28% of net accounts receivable.
Deferred revenues, cost of revenues and gross profit
The following table presents deferred revenues, cost of revenues and gross profit as of June 30, 2010 and December 31, 2009:
                 
    June 30,     December 31,  
(Dollars in thousands)   2010     2009  
Deferred revenues
  $ 16,046     $ 709  
Deferred cost of revenues
    8,452       380  
 
           
Deferred gross profit
  $ 7,594     $ 329  
 
           

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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. BUSINESS COMBINATIONS
Acquisition of the television systems and set-top box business lines from NXP B.V.
On February 8, 2010, the Company and its wholly-owned subsidiary, TMFE, a corporation organized under the laws of the Cayman Islands, completed the acquisition of the television systems and set-top box business lines from NXP B.V., a Dutch besloten vennootschap. As a result of the acquisition, the Company issued 104,204,348 shares of Trident common stock to NXP, equal to 60% of the Company’s total outstanding shares of Common Stock, after giving effect to the share issuance to NXP, in exchange for the contribution of selected assets and liabilities of the television systems and set-top box business lines from NXP and cash proceeds in the amount of $44 million. In addition, the Company issued to NXP four shares of a newly created Series B Preferred Stock or the “Preferred Shares.”
The following is the consideration transferred by Trident representing the total purchase price:
                 
            (In thousands)  
    Shares     Amount  
Issuance of Trident common shares to NXP
    104,204     $ 188,610  
Issuance of Trident preferred shares to NXP
    4        
Purchase of Trident common shares by NXP
            (30,000 )
Net cash payment by NXP
            (14,235 )
Contingent returnable consideration (g)
            (3,588 )
 
             
Acquisition date fair value of total consideration transferred
          $ 140,787  
 
             
The acquisition was accounted for using the purchase method of accounting, and the Company was deemed to be the acquirer, in accordance with applicable accounting guidance. Under the purchase method of accounting, the total estimated purchase price is allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed in connection with the acquisition based on their estimated fair value as of the closing of the acquisition. Total acquisition related expenses incurred through March 31, 2010, recorded as operating expenses, were approximately $11.7 million.
The total purchase price of $140.7 million was allocated to the net tangible and intangible assets acquired and liabilities assumed as follows:
         
    (In thousands)  
    Amount  
Cash
  $ 2,145  
Prepaid expenses and other current assets
    14,375  
Inventory notes receivable (a)
    39,900  
Fixed assets (b)
    11,869  
Non-current assets
    4,500  
Service agreements (c)
    16,000  
Acquired intangible assets (d)
    117,000  
Deferred tax asset (e)
    796  
 
     
Liabilities assumed:
       
Accrued liabilities
    (16,199 )
Non-current liabilities
    (4,815 )
 
     
Fair market value of the net assets acquired
    185,571  
Gain on acquisition (f)
    (44,784 )
 
     
Total purchase price
  $ 140,787  
 
     
 
(a)   As of the effective date of the asset acquisition, Trident acquired two inventory notes receivable (the “Note” or “Notes”). The first Note is for $19.6 million and allowed Trident to purchase finished goods inventory on March 22, 2010. The second Note is for $20.3 million and allows Trident to purchase work-in-process inventory on the readiness of the Company’s enterprise resource planning system which is projected to be implemented in June 2011. The first Note bears interest at an annual interest

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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
    rate of 2.75%, and the second Note bears interest at a rate per annum of 250 basis points in excess of the 3-month LIBOR rate. The Company settled the first Note, totaling $19.0 million, during the three months ended June 30, 2010, of which $11.6 million was settled in finished goods inventory, and $7.4 million was settled in cash. The Company received the cash during the quarter ended September 30, 2010. The Company expects the second Note to be settled by June 30, 2011. For additional details related to notes receivable, see Note 13, “Related Party Transactions,” of Notes to Condensed Consolidated Financial Statements.
 
(b)   Fixed assets (property and equipment) are required to be measured at fair value and these acquired assets could include assets that are not intended to be used in a manner other than their highest and best use. Depreciation is calculated on a straight-line basis over the expected useful lives. Expected useful lives are deemed to be one to two years.
 
(c)   Service agreements are required to be measured at fair value and these acquired assets are amortized over the remaining life of the agreement or up to 33 months from the closing date of the transaction. These service agreements include manufacturing and distributor agreements and other services from NXP. The other services include payroll processing, benefits administration, accounting, information technology and real estate administration.
 
(d)   Identifiable intangible assets are required to be measured at fair value and these acquired assets could include assets that are not intended to be used in a manner other than their highest and best use.
Assets acquired in the acquisition as of February 8, 2010 were reviewed and adjusted, if required, to their estimated fair value. The Company utilized a methodology referred to as the income approach, which discounts expected future cash flows to present value. The discount rate used in the present value calculations was derived from a weighted-average cost of capital analysis, adjusted to reflect additional risks.
Developed technology consisted of products which have reached technological feasibility. The value of the developed technology was determined by using the income approach and discounting estimated net future cash flows of these products.
Customer relationships relate to the Company’s ability to sell existing and future versions of products to existing NXP customers. The fair value of the customer relationships was determined by using the income approach and discounting estimated net future cash flows from the customer contracts.
Patents represent various patents previously owned by NXP. The fair value of patents was determined by using the royalty relief method and estimating a benefit from owning the asset rather than paying a royalty to a third party for the use of the asset.
The backlog fair value relates represents the value of the standing orders for the products acquired in the acquisition as of the close of the acquisition.
In-process research and development, or IPR&D, consisted of the in-process projects to complete development. The value assigned to IPR&D was determined by considering the importance of products under development to the overall development plan, estimating costs to develop the purchased IPR&D into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. Acquired IPR&D assets are initially recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. Accordingly, during the development period after the acquisition date, these assets are not amortized as charges to earnings; instead this asset will be subject to periodic impairment testing. At the completion of the development process for the acquired IPR&D project, when and if technological feasibility is achieved, it will be considered a finite-lived intangible asset and amortization will commence. As of June 30, 2010, the status of in-process research and development is consistent with the Company’s expectation at the time the in-process research and development was acquired.

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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The acquired intangible assets, their fair values and estimated weighted average amortized lives, are as follows (dollars in thousands):
                 
            Weighted  
            Average  
    Fair Value     Amortized Life  
Backlog
  $ 15,000     0.5 years  
Customer relationships
    23,000     2.24 years  
Developed technology
    48,000     3.0 years  
Patents
    13,000     4.5 years  
In-process research and development
    18,000          
 
             
 
  $ 117,000          
 
             
 
(e)   The preliminary purchase price allocation assigned $4.5 million to deferred tax assets associated with the fair value adjustment of the intangible assets acquired. Subsequently, in accordance with applicable accounting assets guidance, the preliminary estimate was reduced by $3.7 million as a result of new information received by the Company subsequent to filing the Company’s Form 10-Q for the three months ended March 31, 2010.
 
(f)   The preliminary purchase price allocation assigned $48.5 million to gain on acquisition. Subsequently, in accordance with applicable accounting guidance, the preliminary estimate was reduced by $3.7 million as a result of new information received by the Company subsequent to filing the Company’s Form 10-Q for the three months ended March 31, 2010. Gain on acquisition represents the amount of the purchase price which is less than the fair value of the underlying net tangible and identifiable intangible assets acquired.
 
(g)   Prior to the close of the Acquisition, NXP initiated a restructuring plan pursuant to which the employment of some NXP employees was terminated upon the close of the Acquisition. The Company has determined that the restructuring plan was a separate plan from the business combination because the plan to terminate the employment of certain employees was made in contemplation of the Acquisition. Therefore, the full severance cost of $3.6 million was recognized by the Company as an expense on the Acquisition close date. The entire severance cost was paid by NXP after the close of the Acquisition, was reflected under applicable accounting guidance as contingent returnable consideration, effectively reducing the purchase consideration transferred.
Acquisition of the Frame Rate Converter, Demodulator and Audio Decoder product lines of the Consumer Division of Micronas Semiconductor Holding AG
On May 14, 2009, the Company completed its acquisition of the selected assets of the FRC, DRX, and audio product lines of Micronas, or Micronas Assets. In connection with the acquisition, the Company issued 7.0 million shares of its common stock, representing approximately 10% of its outstanding common stock, and warrants to acquire up to 3.0 million additional shares of its common stock, with a fair value of approximately $12.1 million and incurred approximately $5.2 million of acquisition-related costs and liabilities, for a total purchase price of approximately $17.3 million.
Due to the acquisition of the FRC, DRX, and Audio Decoder product lines from Micronas on May 14, 2009, the Company entered into the following agreements with Micronas.
On May 14, 2009, the Company entered into a Service Level Agreement or SLA, with Micronas. Under the SLA, Micronas agreed to provide to the Company specified transition services and support, including intellectual property transitional services for a limited period of time to assist the Company in achieving a smooth transition of the acquired products and product lines. The transition services include certain manufacturing design, maintenance and support services, sales of inventory and newly-manufactured products and certain finance and administration, IT, infrastructure, warehousing and similar services, to be provided pursuant to specified service level agreements. Moreover, on May 14, 2009, the Company entered into an exclusive Distributor Agreement with Micronas. Under the Distributor Agreement, Micronas served as the exclusive supplier and OEM to the Company on the FRC, DRX, and Audio Decoder product lines from May 15, 2009 to June 15, 2009.
On May 14, 2009, the Company entered into a Cross License Agreement, or Cross License, with Micronas, pursuant to which Micronas has granted to the Company a royalty-free, perpetual, irrevocable, fully assignable and transferable worldwide license,

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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
including the right to sublicense, to patents that are relevant to, but not exclusive to, the FRC line of frame-rate converters, the DRX line of demodulators and all of the audio processing product lines acquired in the acquisition. Ownership of these patents remains with Micronas following completion of the acquisition. The license is exclusive for the first three years, subject to certain exceptions, and is non-exclusive thereafter. The Company has granted to Micronas a royalty-free, perpetual, irrevocable, non-exclusive, fully assignable and transferable worldwide license, including the right to sublicense, to patents exclusively relevant to the FRC line of frame rate converters, the DRX line of demodulators and all of the audio processing product lines acquired in the acquisition. During the first three years, the license granted by the Company to Micronas is limited to use for products that are not a DRX, Audio or FRC Product. Following this three year period, Micronas may use the licensed rights on any product.
On May 14, 2009, the Company entered into a Stockholder Agreement, or Stockholder Agreement, with Micronas, setting forth specified registration rights associated with the shares, including demand and piggyback registration rights, restrictions on transfer of the Shares and provides Micronas certain pre-emptive rights to acquire additional shares of its Common Stock. Under the Stockholders Agreement, Micronas has agreed to vote the Shares in support of acquisition proposals approved by the disinterested members of its Board of Directors, and together with the recommendation of the disinterested members of the Board of Directors on other stockholder proposals, and Micronas ability to engage in certain solicitations and activities encouraging support for or against proposals inconsistent with its voting agreements is restricted.
On May 14, 2009, the Company and Micronas entered into a lease agreement. Micronas agreed to sublease 17,000 square footage of the office spaces located in Munich, Germany to the Company. The Company is currently using the office spaces for general and administration, research and engineering services. The lease expires on May 31, 2012.
Unaudited Pro Forma Financial Information
The following unaudited pro forma information presents a summary of the results of operations of the Company assuming the acquisition of the television systems and set-top box business lines of NXP B.V. had occurred at the beginning of the period presented below, and that the acquisition of the Micronas assets had occurred on January 1, 2009. This pro forma financial information is for informational purposes only and does not reflect any operating efficiencies or inefficiencies which may result from the business combination and therefore is not necessarily indicative of results that would have been achieved had the businesses been combined during the periods presented (amounts in thousands, except per share date):
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2010   2009   2010   2009
Pro forma net revenues
  $ 171,648     $ 144,575     $ 309,470     $ 250,780  
Pro forma net loss
  $ (49,030 )   $ (88,056 )   $ (55,520 )   $ (171,639 )
Pro forma net loss per share — Basic
  $ (0.28 )   $ (0.50 )   $ (0.37 )   $ (0.98 )
Shares used in computing pro forma net loss per share — Basic
    174,018       176,769       152,059       174,901  
The Company recorded net revenues of approximately $124 million and $172 million and net operating losses of approximately $10 million and $31 million, from the Acquisition for the three and six months ended June 30, 2010.
13. RELATED PARTY TRANSACTIONS
NXP
Total purchases from NXP for the three and six months ended June 30, 2010 were $63.9 million and $110.6 million, respectively. Total purchases for the three and six months ended June 30, 2010 include approximately $7.2 million and $15.0 million of transition services, respectively, and approximately $56.7 million and $95.6 million of primarily product purchases, respectively. As of June 30, 2010, the outstanding accounts payable to NXP was $36.8 million, and the outstanding accounts receivable from NXP was $8.5 million. At June 30, 2010, the Company had a note receivable from NXP of $28.4 million associated with inventory purchases from NXP, of which $7.5 million was a current asset, and $20.9 million was a noncurrent asset, on the Company’s Condensed Consolidated Balance Sheet. During the period from February 8, 2010 to March 22, 2010, the Company and NXP had a commissionaire’s agreement whereby NXP acted on the Company’s behalf for product sales. Total revenue during this period was $52.6 million, all of

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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
which was paid by June 30, 2010. The accounts receivable from NXP of $8.5 million at June 30, 2010, was not related to the sales of product.
In connection with the Acquisition, Trident and NXP entered into the following agreements, each effective as of February 8, 2010:
An Intellectual Property Transfer and License Agreement, or License Agreement, between TMFE and NXP, pursuant to which NXP has transferred to a newly formed Dutch besloten vennootschap acquired by TMFE, or Dutch Newco, certain patents, software and technology, including those exclusively related to the acquired business lines. Pursuant to the terms of the License Agreement, NXP has granted a license to Dutch Newco to certain patents, software and technology used in other parts of NXP’s business and Dutch Newco has granted a license back to NXP to certain of the patents, software and technology.
A Stockholder Agreement, or NXP Stockholder Agreement, between the Company and NXP, setting forth the designation of nominees to the Trident Board, providing certain restrictions on the right of NXP to freely vote its shares of Trident common stock received pursuant to the Share Exchange Agreement, and providing a two year lock up during which NXP cannot transfer its shares of Trident common stock, subject to certain exceptions, including transfers to affiliates. In addition, under the NXP Stockholder Agreement, NXP has agreed to standstill restrictions for six years, including restrictions on future acquisition of Trident securities, participation in a solicitation of proxies, and effecting or seeking to effect a change of control of Trident. The NXP Stockholder Agreement also sets forth certain major decisions that may only be taken by the Trident Board upon a supermajority vote of two-thirds of the directors present. The NXP Stockholder Agreement provides NXP with certain demand and piggy-back registration rights related to the Shares, and grants certain preemptive rights to NXP with respect to future issuances of Trident common stock.
A Transition Services Agreement, between Trident and NXP, pursuant to which NXP agrees to provide to Trident for a limited period of time specified transition services and support, including order fulfillment and delivery; accounting services and financial reporting services; human resources management (including compensation and benefit plan management, payroll services and training); pensions; office and infrastructure services (including access to certain facilities for a limited period of time); sales and marketing support; supply chain management (including logistics and warehousing); quality control; financial administration; ICT hardware and ICT software and infrastructure; general IT services; export, customs and licensing services; and telecommunications. Depending on the service provided, the term ranges from three to 18 months, provided that the services for IT and ITC could continue into the fourth quarter of 2011.
A Manufacturing Services Agreement, or MSA, between Trident and NXP relating to contract manufacturing services to be provided by NXP for a limited period of time for finished goods as well as certain front end, back end and other related manufacturing services for products acquired by Trident. The term of the MSA ends on the readiness of the Company’s enterprise resource planning system which is projected to be implemented in June 2011.
A Contract Services Agreement between Trident and NXP whereby certain employees of NXP shall provide contract services to Trident for a limited period of time for services including R&D, IP development, design in support and account management, as well as support for the transition of these activities to Trident personnel. Depending on the service provided, the term ranges from 2 to 12 months.
The total remaining payment obligation for services through the end of the terms of these agreements was approximately $9.4 million as of June 30, 2010.
Micronas
Total purchases from Micronas for the three and six months ended June 30, 2010, were $12.1 million and $17.4 million, respectively. As of June 30, 2010, the outstanding accounts payable to Micronas was $1.6 million. Total purchases from Micronas for the six months ended December 31, 2009, were $16.2 million. As of December 31, 2009, the outstanding accounts payable to Micronas was $2.4 million, and the outstanding accounts receivable from Micronas was $0.3 million.
See Note 12, “Business Combinations,” of Notes to Condensed Consolidated Financial Statements, which provides a summary of the related party agreements entered into with Micronas due to the acquisition of the FRC, DRX, and Audio Decoder product lines from Micronas on May 14, 2009.

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TRIDENT MICROSYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. EMPLOYEE BENEFIT PLANS
The Company’s Israeli subsidiary has a pension and severance investment plan pursuant to which the Company is required to make pension and severance payments to its retired or former Israeli employees, and in certain circumstances, other Israeli employees whose employment is terminated. The Company’s severance investment plan liability is calculated based on the salary of employees multiplied by years of service, and the resulting balance is included in accrued expenses and other current liabilities on the Company’s Condensed Consolidated Balance Sheets. A corresponding asset is included in prepaid and other current assets, on the Company’s Condensed Consolidated Balance Sheets. The severance investment plan underfunded balance was $0.2 million as of June 30, 2010. Israeli severance investment plan asset and liability balances are disclosed in Note 2, “Balance Sheet Components,” of Notes to Condensed Consolidated Financial Statements.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can also be identified by words such as “anticipates,” “expects,” “believes,” “plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in “Item 1A — Risk Factors”. The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included in Item 1 of this report. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Change in Fiscal Year End
On November 16, 2009 the Board of Directors approved a change in our fiscal year end from June 30 to December 31. The change became effective at the end of the quarter ended December 31, 2009. All references to “years”, unless otherwise noted, refer to our twelve-month fiscal year, which prior to July 1, 2009, ended on June 30 and beginning with December 31, 2009 ends on December 31 of each year. For example a reference to “2009” or “fiscal year 2009” means the twelve-month period that ended on June 30, 2009.
Overview
Trident Microsystems, Inc. (including our subsidiaries, referred to collectively in this Report as “Trident,” “we,” “our” and “us”) is a provider of high-performance multimedia semiconductor solutions for the digital home entertainment market. We design, develop and market integrated circuits, or ICs, and related software for processing, displaying and transmitting high quality audio, graphics and images in home consumer electronics applications such as digital TVs (DTV), PC and analog TVs, and set-top boxes. Our product line includes system-on-a-chip, or SoC, semiconductors that provide completely integrated solutions for processing and optimizing video, audio and computer graphic signals to produce high-quality and realistic images and sound. Our products also include frame rate converter, or FRC, demodulator or DRX and audio decoder products, DOCSISR modems, interface devices and media processors. Trident’s customers include many of the world’s leading original equipment manufacturers, or OEMs, of consumer electronics, computer display and set-top box products. Our goal is to become a leading provider for the “connected home,” with innovative semiconductor solutions that make it possible for consumers to access their entertainment and content (music, pictures, internet, data) anywhere and at anytime throughout the home.
Trident was incorporated in California in 1987 and reincorporated in Delaware in 1992. Our principal executive offices are located at 1170 Kifer Road, Sunnyvale, California 94086-5303, and our telephone number at that location is (408) 962-5000. Our internet address is www.tridentmicro.com. The inclusion of our website address in this Report does not include or incorporate by reference into this Report any information on our website. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other SEC filings are available free of charge through our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC.
Business Structure
In June 2003, when we announced a restructuring of our business to divest our legacy graphics business, we focused our business primarily in the high definition television, or HDTV, market and related areas. In a separate transaction completed in June 2003, we merged our digital media segment with Trident Technologies, Inc., or TTI, a Taiwanese company, to strengthen and extend our DTV business. TTI, which was liquidated in September 2006, had previously operated primarily as a Taiwan-based semiconductor design house, developing video processing technologies useful for digital media applications. Starting September 1, 2006, we conducted business primarily through a Cayman Islands subsidiary, Trident Microsystems (Far East) Ltd., or TMFE. Research and development services relating to existing projects and certain new projects have been conducted principally by Trident Microsystems, Inc. and our subsidiaries, Trident Multimedia Technologies (Shanghai) Co. Ltd., or TMT, and Trident Microsystems (Beijing) Co., Ltd., or TMBJ. TMBJ was previously a privately held company known as Beijing Tiside Electronics Design Co., Ltd., or Tiside, which we acquired in March 2008 and subsequently renamed TMBJ. Operations, field application engineering support and certain sales activities have been conducted principally through our Taiwanese subsidiaries, Trident Microelectronics Co. Ltd., or TML, and Trident Microsystems (Taiwan) Ltd., or TMTW, and other affiliates. On May 14, 2009, we completed the acquisition of selected assets of certain product

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lines from the Consumer Division of Micronas Semiconductor Holding AG, or Micronas, a Swiss corporation. In May 2009, in connection with this acquisition, we established three new subsidiaries in Europe: Trident Microsystems (Europe) GmbH, or TMEU, Trident Microsystems Nederland B.V., or TMNM, and Trident Microsystems Holding B.V., or TMH. The purpose of these entities is primarily to provide sales liaison, marketing and engineering services in Europe. TMEU is located in Munich, Germany and TMNM and TMH are located in Nijmegen, The Netherlands. On February 8, 2010 we acquired selected assets and liabilities of the television systems and set-top box business lines of NXP B.V., a Dutch besloten vennootschap, or NXP. As a result of this acquisition, we now have subsidiaries in three additional new countries, the United Kingdom, Israel and India. The primary purpose of these subsidiaries is to provide sales liaison, marketing and engineering services to us.
In the fiscal period ended June 30, 2009, we established a new subsidiary in South Korea, Trident Microsystems Korea Limited, or TMK, primarily to provide sales liaison and marketing services in South Korea and a new subsidiary in Hong Kong, Trident Microsystems Hong Kong Ltd., or TMHK, to handle sales and inventory distribution for the entire Company. Trident Multimedia Systems, Inc., or TMS, was inactive at June 30, 2009.
Business Combinations
On October 4, 2009, Trident and TMFE entered into a Share Exchange Agreement, or Share Exchange Agreement, with NXP B.V., a Dutch besloten vennootschap, or NXP, providing for the acquisition of selected assets and liabilities of NXP’s television systems and set-top box business lines, or Purchase, through a pre-closing restructuring by NXP and subsequent transactions at closing, or NXP Transaction. We completed the NXP Transaction on February 8, 2010. Upon completion, we issued to NXP 104,204,348 newly issued shares of Trident common stock, equal to 60% of the total outstanding shares of Trident Common Stock, or Shares, after giving effect to the share issuance to NXP, in exchange for the contribution of selected assets and liabilities of the television systems and set-top box business lines from NXP, or Business, and cash proceeds in the amount of $44 million, or Cash Payment. In addition, we issued to NXP four shares of a newly created Series B Preferred Stock, or Preferred Shares. The Preferred Shares were issued pursuant to an Amended and Restated Certificate of Designation of Series B Preferred Stock that we filed with the Secretary of State of Delaware in February 2010, or Certificate of Designation. The holder of the Preferred Shares has the voting rights set forth in the Certificate of Designation, including the right to designate four nominees to our Board of Directors.
Critical Accounting Estimates
The preparation of our financial statements and related disclosures in conformity U.S. generally accepted accounting principles, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. References included in this Quarterly Report on Form 10-Q to “accounting guidance” means GAAP. These estimates and assumptions are based on historical experience and on various other factors that we believe are reasonable under the circumstances. We periodically review our accounting policies and estimates and make adjustments when facts and circumstances dictate. In addition to the accounting policies that are more fully described in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, we consider the critical accounting policies to be affected by critical accounting estimates. Our critical accounting policies that are affected by accounting estimates include revenue recognition, allowance for sales returns, stock-based compensation expense, goodwill and purchased intangible assets, valuation of equity investments in privately held companies and funds, inventories, fair value measurements, product warranty, income taxes, litigation and other loss contingencies and business combinations. Such accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the condensed consolidated financial statements, and actual results could differ materially from these estimates. Discussion of these critical accounting estimates can be found in the Management’s Discussion & Analysis of Financial Condition and Results of Operations section included in our Transition Report on Form 10-KT for the six months ended December 31, 2009.
Results of Operations
Because the NXP Transaction closed on February 8, 2010, approximately 21 weeks of activity related to this acquisition are included in our financial results for the six months ended June 30, 2010. Net revenues, gross profit, research and development expenses, and selling, general and administrative expenses all increased substantially in the three and six months ended June 30, 2010, as compared to the same three and six month periods in the prior year, as a result of this acquisition. Net revenues, gross profit, research and development expenses, and selling, general and administrative expenses also increased in the three months ended June 30, 2010, as compared to the three months ended March 31, 2010, because the three months ended June 30, 2010, included the results of the NXP business lines for the entire period.

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Financial Data for the Three and Six Months Ended June 30, 2010 Compared to the Three and Six Months Ended June 30, 2009
Net Revenues
Our revenue has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, market demand; supply constraints, including manufacturing capacity at the foundries that are our primary source for manufacturing our products; capabilities of our products relative to market requirements and the timeliness of our products relative to our customers’ design-in windows; and competitive factors, including product pricing.
From time to time, our key customers may cancel purchase orders with us, thereby causing our net revenues to fluctuate significantly. Our products are manufactured primarily by two foundries, Taiwan Semiconductor Manufacturing Corp., or TSMC, and United Microelectronics Corporation, or UMC, both based in Taiwan. We also use certain manufacturing capabilities that currently are provided by Micronas and NXP.
Digital media solutions revenues represented all of our revenues for the three and six months ended June 30, 2010 and 2009. Net revenues are revenues less reductions for rebates and allowances for sales returns.
The following tables present the comparison of net revenues by regions in dollars and in percentages for the three and six months ended June 30, 2010 and 2009:
Net revenues comparison by dollars
                                                                 
    Three Months Ended                     Six Months Ended              
(Dollars in thousands)   June 30,                     June 30,              
                    Dollar     Percent                     Dollar     Percent  
Revenues by region (1)   2010     2009     Variance     Variance     2010     2009     Variance     Variance  
South Korea
  $ 60,756     $ 4,987     $ 55,769       1118 %   $ 99,969     $ 5,345     $ 94,624       1770 %
Europe
    43,216       2,673       40,543       1517 %     64,621       3,681       60,940       1656 %
Asia Pacific (2)
    36,586       3,152       33,434       1061 %     51,749       5,043       46,706       926 %
Japan
    22,123       3,702       18,421       498 %     33,386       7,297       26,089       358 %
Americas
    8,967       398       8,569       2153 %     12,327       398       11,929       2997 %
 
                                                   
Total net revenues
  $ 171,648     $ 14,912     $ 156,736       1051 %   $ 262,052     $ 21,764     $ 240,288       1104 %
 
                                                   
As a result of the acquisition of the television systems and set-top box business lines from NXP, net revenues increased in all regions for the three and six months ended June 30, 2010, compared to the three and six months ended June 30, 2009.
Net revenues comparison by percentage of total net revenues
                                                 
    Three Months Ended             Six Months Ended        
    June 30,             June 30,        
Revenues by region (1)   2010     2009     Variance     2010     2009     Variance  
South Korea
    35.4 %     33.4 %     2.0 %     38.1 %     24.6 %     13.6 %
Europe
    25.2 %     17.9 %     7.3 %     24.7 %     16.9 %     7.7 %
Asia Pacific (2)
    21.3 %     21.1 %     0.2 %     19.7 %     23.2 %     (3.4 )%
Japan
    12.9 %     24.8 %     (11.9 )%     12.7 %     33.5 %     (20.8 )%
Americas
    5.2 %     2.7 %     2.6 %     4.7 %     1.8 %     2.9 %
 
                                       
 
    100 %     100 %             100 %     100 %        
 
                                       
 
(1)   Net revenues by region are classified based on the locations of the customers’ principal offices even though our customers’ revenues may be attributable to end customers that are located in a different location.
 
(2)   Net revenues from China, Taiwan and Singapore are included in the Asia Pacific region.

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The following table shows the percentage of our revenues during the three and six months ended June 30, 2010 and 2009 that were derived from customers who individually, or through their Electronic Manufacturing Service providers accounted for more than 10% of revenues for those periods:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
Revenues:   2010     2009     2010     2009  
Samsung Electronics, Co., Ltd.
    24 %     23 %     26 %     16 %
Philips Consumer Electronics International B.V.
    14 %     *       13 %     *  
Sony
    *       11 %     *       18 %
 
*   Less than 10% of net revenues
We recognize revenues for our largest distributors at the point these distributors ship to end customers (sell-through basis), representing approximately 86% of shipments made to distributors for the six months ended June 30, 2010. For the three and six months ended June 30, 2010, distribution revenue recognized on a sell-through basis was 27% and 24% of total revenues, respectively. For the three and six months ended June 30, 2009, distribution revenue recognized on a sell-through basis was 36% and 50% of total revenues, respectively.
As of June 30, 2010, we had a high concentration of accounts receivable with Samsung Electronics, Co., Ltd., representing 28% of net accounts receivable.
Gross Profit
                                                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
                    Dollar   Percent                   Dollar   Percent
(Dollars in thousands)   2010   2009   Variance   Variance   2010   2009   Variance   Variance
Gross profit
  $ 32,926     $ 4,622     $ 28,304       612.4 %   $ 46,712     $ 5,083     $ 41,629       819.0 %
Percentage of net revenues
    19.2 %     31.0 %                     17.8 %     23.4 %                
Cost of revenues includes the cost of purchasing wafers manufactured by independent foundries, costs associated with our purchase of assembly, test and quality assurance services, royalties, product warranty costs, provisions for excess and obsolete inventories, provisions related to lower of cost or market adjustments for inventories, operation support expenses that consist primarily of personnel-related expenses including payroll, stock-based compensation expenses, and manufacturing costs related principally to the mass production of our products, tester equipment rental and amortization of acquisition-related intangible assets. Gross profit is calculated as net revenues less cost of revenues.
Gross profit increased significantly in the three and six months ended June 30, 2010, compared with the three and six months ended June 30, 2009, as a result of significantly higher revenues recognized during the current period related to the television systems and set-top box business lines acquired on February 8, 2010.
Cost of revenues includes impairment charges of $0.9 million and $2.1 million for the three and six months ended June 30, 2010, respectively, due to changes in our roadmap and project cancellations, and consisted primarily of prepaid royalties and other intellectual property. No impairment charges were included in cost of revenues for the three months ended June 30, 2009, and $0.3 million were included in cost of revenues for the six months ended June 30, 2009.
The net impact on gross profit due to an increase in inventory write-downs and reserves and sales of previously reserved product is as follows:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(Dollars in thousands)   2010     2009     2010     2009  
Additions to inventory reserves
  $ 9     $ 1,274     $ 576     $ 1,317  
Accrual for ordered product with no demand
    702       325       702       650  
Lower of cost or market adjustment
                135        
Sales of previously reserved product
    (260 )     (3,902 )     (746 )     (4,574 )
 
                       
Net (increase) decrease in gross profit
  $ 451     $ (2,303 )   $ 667     $ (2,607 )
 
                       

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No cost of revenues was recorded with respect to sales of previously reserved product, for the three and six months ended June 30, 2010 and 2009. For the three months and six months ended June 30, 2010, inventory write-downs and reserves and sales of previously reserved product represents 0.3% and 0.3% of total net revenues, respectively. For the three and six months ended June 30, 2009, inventory write-downs and reserves and sales of previously reserved product represents 15.4% and 12% and of total net revenues, respectively.
Sales of previously reserved inventory largely depend on the timing of transitions to newer generations of similar products. We typically expect declines in demand of current products when we introduce new products that are designed to enhance or replace our older products. We provide inventory reserves on our older products based on the expected decline in customer purchases of the new product. The timing and volume of the new product introductions can be significantly affected by events outside of our control, including changes in customer product introduction schedules. Accordingly, we may sell older fully reserved product until the customer is able to execute on its changeover plan.
Research and Development
                                                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
                    Dollar   Percent                   Dollar   Percent
(Dollars in thousands)   2010   2009   Variance   Variance   2010   2009   Variance   Variance
Research and development
    49,866       15,802       34,064       215.6 %     87,081       27,236       59,845       219.7 %
Percentage of net revenues
    29.1 %     106.0 %                     33.2 %     125.1 %                
Research and development expenses consist primarily of personnel-related expenses including payroll expenses, stock-based compensation, engineering costs related principally to the design of our new products, depreciation of property and equipment and amortization of intangible assets. Because the number of new designs we release to our third-party foundries can fluctuate from period to period, research, development and related expenses may fluctuate significantly.
Research and development expenses increased for the three and six months ended June 30, 2010, compared to the same periods last year, primarily due to significant increases in headcount resulting from the February 8, 2010, acquisition of the television systems and set-top box business lines, as well as subsequent attrition, and hiring activity. As a result of these activities, we incurred $17.4 million and $31.7 million, respectively, of additional headcount related costs during the current periods not incurred in the comparable periods last year. Also as a result of these activities, during the three and six months ended June 30, 2010, we incurred $4.5 million and $7.1 million, respectively, of additional depreciation and amortization expense not incurred in the same periods last year. We incurred $7.1 million and $13.2 million, respectively, of transition service costs during the three and six months ended June 30, 2010, that were not incurred during the same periods last year. These transition service costs consisted principally of personnel and facilities provided by NXP.
Selling, General and Administrative
                                                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
                    Dollar   Percent                   Dollar   Percent
(Dollars in thousands)   2010   2009   Variance   Variance   2010   2009   Variance   Variance
Selling, general and administrative
    22,311       7,421       14,890       200.6 %     42,447       11,047       31,400       284.2 %
Percentage of net revenues
    13.0 %     49.8 %                     16.2 %     50.8 %                
Selling, general and administrative expenses consist primarily of personnel related expenses including salary and benefits, stock-based compensation, commissions paid to sales representatives and distributors and professional fees.
Selling, general and administrative expenses increased for the three and six months ended June 30, 2010, compared to the same periods last year, primarily due to significant increases in headcount from the February 8, 2010 acquisition of the television systems and set-top box business lines, as well as subsequent restructuring, attrition, and hiring activity. As a result of these activities, we incurred $6.8 million and $10.4 million, respectively, of additional headcount related costs during the current periods not incurred in the comparable periods last year. We also incurred $2.8 million and $8.7 million, respectively, of additional professional fees related costs during the three and six months ended June 30, 2010, not incurred during the same periods last year. During the three and six months ended June 30, 2010, we also incurred $1.3 million and $3.2 million, respectively, of transition service costs that were not incurred during the same periods last year. These transition service costs consisted principally of personnel and facilities provided by NXP.

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Goodwill Impairment
                                                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
                    Dollar   Percent                   Dollar   Percent
(Dollars in thousands)   2010   2009   Variance   Variance   2010   2009   Variance   Variance
Goodwill Impairment
    7,851             7,851       N/A       7,851       1,432       6,419       448.3 %
Percentage of net revenues
    4.6 %     .0 %                     3.0 %     6.6 %                
We assess potential impairment of goodwill on an annual basis, and more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. We performed the annual goodwill impairment analysis and recorded an impairment charge of $7.9 million for the three months ended June 30, 2010, due to the excess of the carrying value over the estimated market value for the television systems operating segment. In prior periods, no events or changes in circumstances indicated that the carrying value of the goodwill might not be recoverable. During the six months ended June 30, 2009, an impairment test was conducted due to a redeployment of engineering resources conducted at our subsidiary TMBJ, to focus on other development projects. As a result, we wrote off the entire goodwill balance of TMBJ, and recorded an impairment charge of $1.4 million for the six months ended June 30, 2009.
In Process Research and Development
                                                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
                    Dollar   Percent                   Dollar   Percent
(Dollars in thousands)   2010   2009   Variance   Variance   2010   2009   Variance   Variance
In process research and development
          697       (697 )     (100.0 )%           697       (697 )     (100.0 )%
Percentage of net revenues
    .0 %     4.7 %                     .0 %     3.2 %                
No in process research and development expense was incurred during the three and six months ended June 30, 2010. During the six months ended June 30, 2009, in process research and development expense was incurred in connection with the acquisition of certain product lines of Micronas related to masks and tools determined to have no alternative future use.
Restructuring Charges
                                                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
                    Dollar   Percent                   Dollar   Percent
(Dollars in thousands)   2010   2009   Variance   Variance   2010   2009   Variance   Variance
Restructuring charges
    4,470       8       4,462       55775.0 %     12,865       49       12,816       26155.1 %
Percentage of net revenues
    2.6 %     0.1 %                     4.9 %     0.2 %                
During the first quarter of 2010, we began procedures to streamline its operations. As a result of this decision, we recorded for the three and six months ended June 30, 2010, $4.5 million and $12.9 million, respectively, of restructuring expenses related to severance and related employee benefits. The restructuring is expected to be completed by the end of the calendar year. Restructuring charges are recorded under “Restructuring charges” in our Condensed Consolidated Statement of Operations.
Prior to the close of our acquisition from NXP of selected assets and liabilities of NXP’s television systems and set-top box business lines, NXP initiated a restructuring plan pursuant to which the employment of some NXP employees was terminated upon the close of the merger. We have determined that the restructuring plan was a separate plan from the business combination because the plan to terminate the employment of certain employees was made in contemplation of the acquisition. Therefore, a severance cost of $3.6 million was recognized as an expense on the acquisition date and is included in the total restructuring charge of $12.9 million for the six months ended June 30, 2010. The $3.6 million of severance cost was paid by NXP after the close of the acquisition, effectively reducing the purchase consideration transferred. See Note 12, “Business Combinations,” of Notes to Condensed Consolidated Financial Statements.
Interest Income
                                                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
                    Dollar   Percent                   Dollar   Percent
(Dollars in thousands)   2010   2009   Variance   Variance   2010   2009   Variance   Variance
Interest income
    228       116       112       96.6 %     498       576       (78 )     (13.5 )%
Percentage of net revenues
    0.1 %     0.8 %                     0.2 %     2.6 %                
We invest our cash and cash equivalents in interest-bearing accounts consisting primarily of certificates of deposits and money market funds investing in U.S. Treasuries. The average interest rates earned during three and six months ended June 30, 2010, were .24% and .23%, respectively. The average interest rates earned during three and six months ended June 30, 2009, were .25% and .62%,

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respectively. The increase in interest income for the three months ended June 30, 2010, compared to the same period last year, was primarily due to interest earned on notes receivable from related parties during 2010. The decrease in interest income for the six months ended June 30, 2010, compared to the same period last year, was primarily due to a larger percentage of our investment portfolio having been shifted to lower yielding money market funds investing in U.S. Treasuries and a decrease in our average cash balance for 2010. Interest earned during the three and six months ended June 30, 2010, includes $0.2 million and $0.4 million, respectively, of interest earned on notes receivable from related parties.
Gain on Acquisition
                                                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
                    Dollar   Percent                   Dollar   Percent
(Dollars in thousands)   2010   2009   Variance   Variance   2010   2009   Variance   Variance
Gain on acquisition
                      0 %     44,784             44,784       100 %
Percentage of net revenues
    (0.0 %)     (0.0 %)                     (17.1 %)     (0.0 %)                
The preliminary purchase price allocation assigned $48.5 million to gain on acquisition. Subsequently, in accordance with applicable accounting guidance, the preliminary estimate was reduced by $3.7 million as a result of new information received by the Company subsequent to filing our Form 10-Q for the three months ended March 31, 2010. Gain on acquisition represents the amount of the purchase price which is less than the fair value of the underlying net tangible and identifiable intangible assets acquired.
Other Income (Expense), Net
                                                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
                    Dollar   Percent                   Dollar   Percent
(Dollars in thousands)   2010   2009   Variance   Variance   2010   2009   Variance   Variance
Other income (expense), net
    59       (922 )     981       (106.4 )%     107       (95 )     202       (212.6 )%
Percentage of net revenues
    0.0 %     (6.2 )%                     0.0 %     (0.4 )%                
The change in other income (expense), net for the three and six months ended June 30, 2010, compared to the same periods last year, was primarily attributable to litigation settlements of approximately $1.7 million received during the six months ended June 30, 2010. See Note 5, “Commitments and Contingencies” of Notes to Condensed Consolidated Financial Statements.
Provision for Income Taxes
                                                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
                    Dollar   Percent                   Dollar   Percent
(Dollars in thousands)   2010   2009   Variance   Variance   2010   2009   Variance   Variance
Provision for income taxes
    (2,255 )     963       (3,218 )     (334.2 )%     (1,529 )     2,782       (4,311 )     (155.0 )%
Effective income tax rate
    4.4 %     (4.8 )%                     2.6 %     (8.0 )%                
We accrued an insignificant amount for interest and penalties, following applicable accounting guidance, related to gross unrecognized tax benefits, which are included in the provision for income taxes for the three and six months ended June 30, 2010. We included in our unrecognized tax benefit of $43.3 million at June 30, 2010, $22.2 million of tax benefits that, if recognized, would reduce our annual effective tax rate. It is reasonably possible that our unrecognized tax benefits could decrease by a range between zero and $2.8 million within the next twelve months, depending on the outcome of certain tax audits or statutes of limitations in foreign jurisdictions.
A benefit from income taxes of $2.3 million and $1.5 million was recorded for the three and six months ended June 30, 2010, respectively. A provision for income taxes of $1.0 million and $2.8 million was recorded for the three and six months ended June 30, 2009, respectively. The effective income tax rate for the three and six months ended June 30, 2010 increased by 9.2 and 10.6 percentage points, respectively, compared to the three and six months ended June 30, 2009. The increase in our effective tax rate was primarily due to the recognition of the tax benefit resulting from net operating losses generated in foreign jurisdictions as a result of restructuring activities, the release of tax reserves in a foreign jurisdiction associated with the remeasurement of an unrecognized tax benefit due to new information received in the period associated with legal guidance provided, and a lapse of a statute of limitation in the jurisdiction relevant to our business operations, as compared to tax expense incurred on a loss in the three and six months ended June 30, 2009.
Our ability to use federal and state net operating loss and credit carry forwards to offset future taxable income and future taxes, respectively, is subject to restrictions attributable to equity transactions that result from changes in ownership as defined by Internal Revenue Code (“IRC”) Sections 382 and 383. As discussed in Note 12, “Business Combinations,” on February 8, 2010, Trident

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issued 104,204,348 newly issued shares of Trident common stock to NXP, equal to 60% of the total outstanding shares of our common stock. The impact of this event reduced our availability of net operating loss and tax credit carry forwards for federal and state income tax purposes.
Liquidity and Capital Resources
Cash and cash equivalents at June 30, 2010 and December 31, 2009 were as follows:
                 
    June 30,     December 31,  
(Dollars in thousands)   2010     2009  
Cash and cash equivalents
  $ 96,915     $ 147,995  
 
           
At June 30, 2010, approximately $34.9 million or 36% of our total cash and cash equivalents was held in the United States. The remaining balance, representing approximately $62.0 million, or 64% of total cash and cash equivalents, was held outside the United States, primarily in Hong Kong, and could be subject to additional taxation if it were to be repatriated to the United States.
Our primary cash inflows and outflows for the six months ended June 30, 2010 and 2009 were as follows:
                 
    Six Months Ended  
    June 30,  
(Dollars in thousands)   2010     2009  
Net cash flow provided by (used in):
               
Operating activities
  $ (85,992 )   $ (18,920 )
Investing activities
    34,856       (5,338 )
Financing activities
    56       1  
 
           
Net decrease in cash and cash equivalents
  $ (51,080 )   $ (24,257 )
 
           
Operating Activities
Cash used in operating activities includes net loss adjusted for certain non-cash items and changes in current assets and current liabilities. For the six months ended June 30, 2010, cash used in operating activities was $86.0 million compared to $18.9 million used in operating activities for the six months ended June 30, 2009. The significant increase in cash usage was primarily due to working capital requirements resulting from the significant revenue increases and corresponding increases in receivables, inventory and payables. The larger working capital requirements are the result of the acquisition of the television systems and set-top box business lines from NXP in February 2010, and the acquisition of Micronas in May 2009, each of which contributed to higher revenue levels in the first six months of 2010 as compared to the same period in the prior year. Additionally, the net loss increased from $37.7 million in the six months ended June 30, 2009, as compared to $56.6 million in the six months ended June 30, 2010. The greater loss for the six months ended 2010 is attributable to a significant increase in expenses since the NXP and Micronas businesses acquired were not profitable when acquired and cost efficiencies anticipated from the acquisitions are not yet fully realized.
Investing Activities
For the six months ended June 30, 2010, cash provided by investing activities was $34.9 million, compared to cash used in investing activities of $5.3 million in the six months ended June 30, 2009. The cash provided in the first six months of 2010 was primarily attributable to $46.4 million from NXP as part of the Company’s acquisition of that business, partially offset by other asset acquisitions related to licensing of software as well as purchases of property and equipment.
Financing Activities
Cash used in financing activities consisted of net cash proceeds from the issuance of common stock to employees upon exercise of stock options and excess tax benefit from stock-based compensation, that were minor amounts for the six months ended June 30, 2010 and 2009.
Liquidity
Our liquidity is affected by many factors, some of which result from the normal ongoing operations of our business and some of which arise from uncertainties and conditions in Asia and the global economy. Although the majority of our cash and cash equivalents is held

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outside the United States, and, therefore, might be subjected to the factors described above, we believe our current resources are sufficient to meet our needs for at least the next twelve months. We will consider transactions to finance our activities, including debt and equity offerings and new credit facilities or other financing transactions, as needed in the future. For example, we expect to enter into an agreement with a major U.S. commercial bank to establish an asset-based credit facility during the quarter ending September 30, 2010.
On February 8, 2010, we issued 104,204,348 new shares of our common stock to NXP, equal to 60% of the total outstanding shares of our Common Stock after giving effect to the share issuance to NXP, in exchange for the contribution of selected assets and liabilities of the television systems and set-top box business lines acquired from NXP and cash proceeds in the amount of $44 million. Our liquidity may also be affected if we fail to realize some or all of the anticipated benefits of our acquisitions of the business lines of NXP and Micronas.
Days Sales Outstanding
Trade accounts receivable days sales outstanding were 52 days as of June 30, 2010 and 15 days as of December 31, 2009.
Commitments
Lease and Purchase Commitments
The following summarizes our contractual obligations as of June 30, 2010:
                                         
            Payments Due by Period        
    Less Than 1                     More Than 5        
    Year     1-3 Years     3-5 Years     Years     Total  
    (Dollars in millions)  
Contractual Obligations:
                                       
Operating Leases (1)
  $ 5.6     $ 5.5     $ 3.1     $ 1.4     $ 15.6  
Purchase Obligations (2)
    12.3                         12.3  
 
                             
Total
  $ 17.9     $ 5.5     $ 3.1     $ 1.4     $ 27.9  
 
                             
 
(1)   At June 30, 2010, we lease office space and have entered into lease commitments, which expire at various dates through August 2019, in North America as well as various locations in Japan, Hong Kong, China, Taiwan, South Korea, Singapore, Germany, The Netherlands, the United Kingdom, Israel and India. Operating lease obligations include future minimum lease payments under non-cancelable operating leases as of June 30, 2010 and includes lease commitments resulting from the acquisition of selected assets and liabilities of NXP on February 8, 2010 and our corporate headquarters lease that commenced on April 1, 2010.
 
(2)   Purchase obligations primarily represent unconditional purchase order commitments with contract manufacturers and suppliers for wafers and software licensing including engineering software license and maintenance.
NXP Acquisition Related Commitments
On February 8, 2010, as a result of the acquisition of selected assets and liabilities of the television systems and set-top box business lines acquired from NXP, we entered into a Transition Services Agreement, pursuant to which NXP provides to the us, for a limited period of time, specified transition services and support. Depending on the service provided, the term for the majority of services range from three to eighteen months, and limited services could continue into the fourth quarter of 2011. The total remaining payment obligation under the Transition Services Agreement is approximately $9.4 million as of June 30, 2010. Also, as a result of the acquisition of the NXP business lines, we entered into a Manufacturing Services Agreement pursuant to which NXP provides manufacturing services to us for a limited period of time. The term of the agreement ends on the readiness of our enterprise resource planning system which is planned to be June 30, 2011. The terms of the agreements allow cancellation of either or both the Transition Services Agreement and the Manufacturing Services Agreement with minimum notice periods.

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Contingencies
Intellectual Property Proceedings
In March 2010, Intravisual Inc. filed complaints against Trident and multiple other defendants, including NXP, in the United States District Court for the Eastern District of Texas, No. 2:10-CV-90 TJW alleging that certain Trident products infringe a patent relating generally to compressing and decompressing digital video. The complaint seeks a permanent injunction against us as well as the recovery of unspecified monetary damages and attorneys’ fees. On May 28, 2010, Trident filed its answer, affirmative defenses and counterclaims. No date for trial has been set. We intend to contest this action vigorously. Because this action is in the very early stages, and due to the inherent uncertainty surrounding the litigation process, we are unable to reasonably estimate the ultimate outcome of this litigation at this time.
From time to time, we receive communications from third parties asserting patent or other rights allegedly covering our products and technologies. Based upon our evaluation, we may take no action or we may seek to obtain a license, redesign an accused product or technology, initiate a formal proceeding with the appropriate agency (e.g., the U.S. Patent and Trademark Office) and/or initiate litigation. There can be no assurance in any given case that a license will be available on terms we consider reasonable or that litigation can be avoided if our desire is to do so. If litigation does ensue, the adverse third party will likely seek damages (potentially including treble damages) and may seek an injunction against the sale of our products that incorporate allegedly infringed intellectual property or against the operation of its business as presently conducted, which could result in us having to stop the sale of some of our products or to increase the costs of selling some of its products. Such lawsuits could also damage our reputation. The award of damages, including material royalty payments, or the entry of an injunction against the sale of some or all of our products, could have a material adverse affect on us. Even if we were to initiate litigation, such action could be extremely expensive and time-consuming and could have a material adverse effect on us. We cannot assure you that litigation related to our patent or other rights or the patent or other rights of others can always be avoided or successfully concluded.
Shareholder Derivative Litigation
Trident has been named as a nominal defendant in several shareholder derivative lawsuits concerning the granting of stock options. The federal court cases have been consolidated as In re Trident Microsystems Inc. Derivative Litigation, Master File No. C-06-3440-JF. A case also has been filed in State court, Limke v. Lin et al., No. 1:07-CV-080390. Plaintiffs in all cases allege that certain of our current or former officers and directors caused us to grant options at less than fair market value, contrary to our public statements (including our financial statements), and that this represented a breach of their fiduciary duties to us, and as a result those officers and directors are liable to us. Our Board of Directors has appointed a Special Litigation Committee, or SLC, which has been composed solely of independent directors, to review and manage any claims that we may have relating to the stock option granting practices and related issues investigated by the SLC. The scope of the SLC’s authority includes the claims asserted in the derivative actions. In federal court, Trident moved to stay the case pending the assessment by the SLC that was formed to consider nominal plaintiffs’ claims. On March 26, 2010, the federal court approved settlements with all defendants other than Frank Lin, our former CEO, and all defendants other than Mr. Lin were dismissed with prejudice from the state and federal actions. In connection with the approved settlements, payments of approximately $1.7 million were made to us, by certain of the defendants, and recorded in other income (expense), net on our Condensed Consolidated Statement of Operations during the three months ended June 30, 2010. The state court derivative action was dismissed following the approval of the settlement in the federal action. No particular amount of damages has been alleged in the federal action, and by the nature of the lawsuit no damages will be alleged against us. On June 8, 2010, Mr. Lin filed a counterclaim against Trident. In that counterclaim, Mr. Lin seeks recovery of payments he claims he was promised during the negotiations surrounding his eventual termination and also losses he claims he has suffered because he was not permitted to exercise his Trident stock options between January 2007 and March 2008. We cannot predict whether the federal action against Mr. Lin and his counterclaims are likely to result in any material recovery by or expense to Trident. In addition, on July 1, 2010, the derivative plaintiffs filed an amended complaint in the federal action stating claims against Mr. Lin relating to his actions in connection with our stock option granting practices. We expect to continue to incur legal fees in responding to this lawsuit, including expenses for the reimbursement of certain legal fees of at least our former CEO under our advancement obligations. The expense of defending such litigation may be significant. The amount of time to resolve this and any additional lawsuits is unpredictable and these actions may divert management’s attention from the day-to-day operations of our business, which could adversely affect our business, results of operations and cash flows.
Regulatory Actions
As previously disclosed, we were subject to a formal investigation by the Securities and Exchange Commission, or SEC, in connection with its investigation into our historical stock option granting practices and related issues. On July 16, 2010, we entered into a settlement with the SEC regarding this investigation. We agreed to settle with the SEC without admitting or denying the allegations in the SEC’s complaint. We consented to entry of a permanent injunction against future violations of anti-fraud provisions, reporting provisions and the books and records requirements of the Securities Exchange Act of 1934 and the Securities Act of 1933. On July 19, 2010, the U.S. District Court for the District of Columbia entered a final judgment incorporating the judgment consented to by us. The final judgment did not require us to pay a civil penalty or other money damages. Although the Department of Justice, or DOJ, commenced an informal investigation relating to the same issues, the DOJ has not requested information from us since February 20, 2009 and we believe that the DOJ has concluded its investigation without taking any action against us. We believe that the settlement with the SEC concluded the government’s investigations into our historical stock option practices.
Special Litigation Committee
Effective at the close of trading on September 25, 2006, we temporarily suspended the ability of optionees to exercise vested options to purchase shares of our common stock, until we became current in the filing of our periodic reports with the SEC and filed a Registration Statement on Form S-8 for the shares issuable under the 2006 Plan, or 2006 Plan S-8. This suspension continued in effect through August 22, 2007, the date of the filing of the 2006 Plan S-8, which followed our filing, on August 21, 2007, of our Quarterly Reports on Form 10-Q for the periods ended September 30, 2006, December 31, 2006 and March 31, 2007. As a result, we extended the exercise period of approximately 550,000 fully vested options held by 10 employees, who were terminated during the suspension period, giving them either 30 days or 90 days after we became current in the filings of our periodic reports with the SEC and filed the

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2006 Plan S-8 in order to exercise their vested options. During the quarter ended September 30, 2007, eight of these ten former employees stated above exercised all of their vested options. However, on September 21, 2007, the SLC decided that it was in the best interests of our stockholders not to allow the remaining two former employees, as well as our former CEO and two former non-employee directors, to exercise their vested options during the pendency of the SLC’s proceedings, and extended, until March 31, 2008, the period during which these five former employees could exercise approximately 428,000 of their fully vested options. Moreover, the SLC allowed one former employee to exercise all of his fully vested stock options and another former employee agreed to cancel all of such individual’s fully vested stock options during the quarter ended March 31, 2008.
On January 31, 2008, the SLC extended, until August 31, 2008, the period during which the two former non-employee directors could exercise their unexpired vested options. On March 31, 2008, the SLC entered into an agreement with our former CEO allowing him to exercise all of his fully vested stock options. Under this agreement, he agreed that any shares obtained through these exercises or net proceeds obtained through the sale of such shares would be placed in an identified securities brokerage account and not withdrawn, transferred or otherwise removed without either (i) a court order granting him permission to do so or (ii) our written permission.
On May 29, 2008, the SLC permitted one of our former non-employee directors to exercise his fully vested stock and entered into an agreement with the other former non-employee director on terms similar to the agreement entered into with our former CEO, allowing him to exercise all of his fully vested stock options. Because Trident’s stock price as of June 30, 2008 was lower than the prices at which our former CEO and each of the two former non-employee directors had desired to exercise their options, as indicated in previous written notices to the SLC, we recorded a contingent liability in accordance with applicable accounting guidance, totaling $4.3 million, which was included in “Accrued expenses and other current liabilities” in the Consolidated Balance Sheet as of June 30, 2008 and the related expenses were included in “Selling, general and administrative expenses” in the Consolidated Statement of Operations for the fiscal year then ended. On March 26, 2010, the claims by these two former non-employee directors against us, valued at approximately $1.6 million, were waived as part of a comprehensive settlement with us. Currently, the SLC investigation is still in progress only with respect to our former CEO. In June 2010, he filed a claim against us seeking compensation from us relating to the exercise of his fully vested stock options. As a result, as of June 30, 2010, we maintained a contingent liability totaling $2.8 million in “Accrued expenses and other current liabilities” in the Condensed Consolidated Balance Sheets and the related expenses were included in “Selling, General and Administrative Expenses” in the Consolidated Statement of Operations for the six months ended June 30, 2010. See Note 5, “Shareholder Derivative Litigation” in “Commitment and Contingencies,” of Notes to Condensed Consolidated Financial Statements.
Indemnification Obligations
We indemnify, as permitted under Delaware law and in accordance with our Bylaws, our officers, directors and members of our senior management for certain events or occurrences, subject to certain limits, while they were serving at our request in such capacity. In this regard, we have received, or expect to receive, requests for advancement and indemnification by certain current and former officers, directors and employees in connection with our investigation of our historical stock option granting practices and related issues, and the related governmental inquiries and shareholder derivative litigation. The maximum amount of potential future advancement and indemnification is unknown and potentially unlimited; therefore, it cannot be estimated. We have directors’ and officers’ liability insurance policies that may enable us to recover a portion of such future advancement and indemnification claims paid, subject to coverage limitations of the policies, and plan to make claim for reimbursement from our insurers of any potentially covered future indemnification payments. In certain circumstances, we also would have the right to seek to recover sums advanced to an indemnitee.
Commercial Litigation
In June 2010, Exatel Visual Systems, Ltd. filed a complaint against NXP Semiconductors USA, Inc. and Trident, in Superior Court for the State of California, No. 1-10-CV-174333, alleging breach of contract and related tort claims relating generally to an alleged product development project undertaken by Trident’s predecessor, NXP, and its predecessor, Conexant Systems, Inc. Trident has not yet filed an answer and no date for trial has been set. Because this action is in the very early stages, and due to the inherent uncertainty surrounding the litigation process, we are unable to reasonably estimate the ultimate outcome of this litigation at this time.

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General
From time to time, we are involved in other legal proceedings arising in the ordinary course of our business. While we cannot be certain about the ultimate outcome of any litigation, management does not believe any pending legal proceeding will result in a judgment or settlement that will have a material adverse effect on our business, financial position, results of operation or cash flows.
Off-Balance Sheet Arrangements
None
Recent Accounting Pronouncements
In April 2010, new accounting guidance was issued for the milestone method of revenue recognition. Under the new guidance, an entity can recognize revenue from consideration that is contingent upon achievement of a milestone in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. This guidance is effective prospectively for milestones achieved in fiscal years, and interim period within those years, beginning on or after June 15, 2010. Early adoption is permitted, and if this update is adopted early in other than the first quarter of an entity’s fiscal year, then it must be applied retrospectively to the beginning of that fiscal year. The Company is currently assessing the impact of the adoption on its consolidated financial statements. We do not expect the new guidance to significantly impact our Condensed Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to three primary types of market risks: foreign currency exchange rate risk, interest rate risk and investment risk.
Foreign currency exchange rate risk
As of June 30, 2010, we had operations in the United States, Taiwan, China, Hong Kong, Germany, The Netherlands, Japan, Singapore, South Korea, the United Kingdom, Israel and India. The functional currency of all of these operations is the U.S. dollar. Approximately $62 million, or 64% of total cash and cash equivalents, was held outside the United States, primarily in Hong Kong, a majority of which is denominated in U.S. dollars. In addition, income tax payable in foreign jurisdictions is denominated in foreign currencies and is subject to foreign currency exchange rate risk. Since we acquired certain product lines from Micronas in May 2009 and NXP in February 2010, we have also incurred manufacturing and related expenses in Euros.
While we expect our international revenues to continue to be denominated primarily in U.S. dollars, an increasing portion of our international revenues may be denominated in foreign currencies, such as Euros. In addition, our operating results may become subject to significant fluctuations based upon changes in foreign currency exchange rates of certain currencies relative to the U.S. dollar. We analyze our exposure to foreign currency fluctuations and may engage in financial hedging techniques in the future to attempt to minimize the effect of these potential fluctuations; however, foreign currency exchange rate fluctuations may adversely affect our financial results in the future. Following the NXP Transaction, we now have research and development facilities in additional foreign locations and a large percentage of our international operational expenses are denominated in foreign currencies. As a result, foreign currency exchange rate volatility, particularly in Euros and China’s currency, Renminbi, could negatively or positively affect our operating costs in the future.
Fluctuations in foreign exchange rates may have an adverse effect on our financial results due to the NXP acquired business lines, as a substantial proportion of expenses of the acquired business lines are incurred in various denominations, while most of the revenues are denominated in U.S. dollars.
Interest rate risk
We currently maintain our cash equivalents primarily in money market funds invested in U.S. Treasuries, and other highly liquid investments. We do not have any derivative financial instruments. We place our cash investments in instruments that meet high credit quality standards, as specified in our investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument.
Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of June 30, 2010, we have $96.9 million in cash and cash equivalents, of which $45.3 million is cash and $51.6 million is money market funds invested in U.S. Treasuries. We currently intend to continue investing a significant portion of our existing cash equivalents in interest bearing, investment grade securities, with maturities of less than three months. We do not believe that our investments, in the

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aggregate, have significant exposure to interest rate risk. However, we will continue to monitor the health of the financial institutions with which these investments and deposits have been made due to the current global financial environment.
Investment risk
Investment in Privately Held Companies and Funds
We are exposed to changes in the value of our investments in privately-held companies and funds, including privately-held start-up companies. Long-term equity investments in technology companies are primarily carried at cost. However, the carrying values of these long-term equity investments could be impaired due to the volatility of the industries in which these companies participate and other factors such as the continuing deterioration of macroeconomic conditions. We will continue to evaluate the financial status of these investments as well as monitor the status of the investments which are held by any underlying venture capital funds. The balance of our long-term equity investments in privately-held companies which is included in “Other assets” on the Condensed Consolidated Balance Sheet at June 30, 2010, was $1.6 million.
Concentrations of Credit Risk and Other Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. Cash and cash equivalents held with financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation on such deposits.
A majority of our trade receivables is derived from sales to large multinational OEMs, or their electronic manufacturing service providers, who manufacture digital TVs, located throughout the world, with a majority located in Asia. Prior to May 14, 2009, the date of the acquisition of the Micronas business lines, sales to most of our customers were typically made on a prepaid or letter of credit basis while sales to a few customers were made on open accounts. We perform ongoing credit evaluations of its newly acquired customers’ financial condition and generally require no collateral to secure accounts receivable. Historically, a relatively small number of customers have accounted for a significant portion of our revenues. Prior to February 8, 2010, our products were manufactured primarily by two foundries, United Microelectronics Corporation, or UMC, based in Taiwan and Micronas, based in Germany. Effective with the closing of our acquisition of certain assets from NXP on February 8, 2010, we also have products manufactured by TSMC.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our chief executive officer and our chief financial officer, our management conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our chief executive officer and chief financial officer have concluded that, at the level of reasonable assurance, as of the end of such period, our disclosure controls and procedures are effective to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
The internal control over financial reporting of the television systems and set-top box business lines from NXP B.V., a Dutch besloten vennootschap (the “NXP Assets”) was excluded from the evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2010 because it was acquired in a purchase business combination consummated during February 2010. Assets acquired in the NXP acquisition represent approximately 39% of total assets at June 30, 2010. Revenues of the business lines acquired from NXP represent approximately 72% and 66% of total revenue for the three and six months ended June 30, 2010, respectively.

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Changes in Internal Controls
On February 8, 2010, we acquired the NXP Assets. The NXP Assets operated under its own set of systems and internal controls. We have not completed incorporating NXP’s processes into our systems and control environment as of June 30, 2010. In addition, we have not completed incorporating NXP’s processes relating to their enterprise resource planning system into our systems and control environment as of June 30, 2010. We believe that we have taken the necessary steps to monitor and maintain appropriate internal control over financial reporting during this change. There were no other changes in our internal control over financial reporting that occurred during the three and six months ended June 30, 2010, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Intellectual Property Proceedings
In March 2010, Intravisual Inc. filed complaints against Trident and multiple other defendants, including NXP, in the United States District Court for the Eastern District of Texas, No. 2:10-CV-90 TJW alleging that certain Trident products infringe a patent relating generally to compressing and decompressing digital video. The complaint seeks a permanent injunction against us as well as the recovery of unspecified monetary damages and attorneys’ fees. On May 28, 2010, Trident filed its answer, affirmative defenses and counterclaims. No date for trial has been set. We intend to contest this action vigorously. Because this action is in the very early stages, and due to the inherent uncertainty surrounding the litigation process, we are unable to reasonably estimate the ultimate outcome of this litigation at this time.
From time to time, we receive communications from third parties asserting patent or other rights allegedly covering our products and technologies. Based upon our evaluation, we may take no action or we may seek to obtain a license, redesign an accused product or technology, initiate a formal proceeding with the appropriate agency (e.g., the U.S. Patent and Trademark Office) and/or initiate litigation. There can be no assurance in any given case that a license will be available on terms we consider reasonable or that litigation can be avoided if our desire is to do so. If litigation does ensue, the adverse third party will likely seek damages (potentially including treble damages) and may seek an injunction against the sale of our products that incorporate allegedly infringed intellectual property or against the operation of its business as presently conducted, which could result in us having to stop the sale of some of our products or to increase the costs of selling some of its products. Such lawsuits could also damage our reputation. The award of damages, including material royalty payments, or the entry of an injunction against the sale of some or all of our products, could have a material adverse affect on us. Even if we were to initiate litigation, such action could be extremely expensive and time-consuming and could have a material adverse effect on us. We cannot assure you that litigation related to our patent or other rights or the patent or other rights of others can always be avoided or successfully concluded.
Shareholder Derivative Litigation
Trident has been named as a nominal defendant in several shareholder derivative lawsuits concerning the granting of stock options. The federal court cases have been consolidated as In re Trident Microsystems Inc. Derivative Litigation, Master File No. C-06-3440-JF. A case also has been filed in State court, Limke v. Lin et al., No. 1:07-CV-080390. Plaintiffs in all cases allege that certain of our current or former officers and directors caused us to grant options at less than fair market value, contrary to our public statements (including our financial statements), and that this represented a breach of their fiduciary duties to us, and as a result those officers and directors are liable to us. Our Board of Directors has appointed a Special Litigation Committee, or SLC, which has been composed solely of independent directors, to review and manage any claims that we may have relating to the stock option granting practices and related issues investigated by the SLC. The scope of the SLC’s authority includes the claims asserted in the derivative actions. In federal court, Trident moved to stay the case pending the assessment by the SLC that was formed to consider nominal plaintiffs’ claims.
On March 26, 2010, the federal court approved settlements with all defendants other than Frank Lin, our former CEO, and all defendants other than Mr. Lin were dismissed with prejudice from the state and federal actions. In connection with the approved settlements, payments of approximately $1.7 million were made to us, by certain of the defendants, and recorded in other income (expense), net on our Condensed Consolidated Statement of Operations during the three months ended June 30, 2010. The state court derivative action was dismissed following the approval of the settlement in the federal action. No particular amount of damages has been alleged in the federal action, and by the nature of the lawsuit no damages will be alleged against us. On June 8, 2010, Mr. Lin filed a counterclaim against Trident. In that counterclaim, Mr. Lin seeks recovery of payments he claims he was promised during the negotiations surrounding his eventual termination and also losses he claims he has suffered because he was not permitted to exercise his Trident stock options between January 2007 and March 2008. We cannot predict whether the federal action against Mr. Lin and his counterclaims are likely to result in any material recovery by or expense to Trident. In addition, on July 1, 2010, the derivative plaintiffs filed an amended complaint in the federal action stating claims against Mr. Lin relating to his actions in connection with our stock option granting practices. We expect to continue to incur legal fees in responding to this lawsuit, including expenses for the reimbursement of certain legal fees of at least our former CEO under our advancement obligations. The expense of defending such litigation may be significant. The amount of time to resolve this and any additional lawsuits is unpredictable and these actions may divert management’s attention from the day-to-day operations of our business, which could adversely affect our business, results of operations and cash flows.

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Regulatory Actions
As previously disclosed, we were subject to a formal investigation by the Securities and Exchange Commission (“SEC”) in connection with its investigation into our historical stock option granting practices and related issues. On July 16, 2010, we entered into a settlement with the SEC regarding this investigation. We agreed to settle with the SEC without admitting or denying the allegations in the SEC’s complaint. We consented to entry of a permanent injunction against future violations of anti-fraud provisions, reporting provisions and the books and records requirements of the Securities Exchange Act of 1934 and the Securities Act of 1933. On July 19, 2010, the U.S. District Court for the District of Columbia entered a final judgment incorporating the judgment consented to by us. The final judgment did not require us to pay a civil penalty or other money damages. Although the Department of Justice (“DOJ”) commenced an informal investigation relating to the same issues, the DOJ has not requested information from us since February 20, 2009 and we believe that the DOJ has concluded its investigation without taking any action against us. We believe that the settlement with the SEC concluded the government’s investigations into our historical stock option practices.
Special Litigation Committee
Effective at the close of trading on September 25, 2006, we temporarily suspended the ability of optionees to exercise vested options to purchase shares of our common stock, until we became current in the filing of our periodic reports with the SEC and filed a Registration Statement on Form S-8 for the shares issuable under the 2006 Plan, or 2006 Plan S-8. This suspension continued in effect through August 22, 2007, the date of the filing of the 2006 Plan S-8, which followed our filing, on August 21, 2007, of our Quarterly Reports on Form 10-Q for the periods ended September 30, 2006, December 31, 2006 and March 31, 2007. As a result, we extended the exercise period of approximately 550,000 fully vested options held by 10 employees, who were terminated during the suspension period, giving them either 30 days or 90 days after we became current in the filings of our periodic reports with the SEC and filed the 2006 Plan S-8 in order to exercise their vested options. During the quarter ended September 30, 2007, eight of these ten former employees stated above exercised all of their vested options. However, on September 21, 2007, the SLC decided that it was in the best interests of our stockholders not to allow the remaining two former employees, as well as our former CEO and two former non-employee directors, to exercise their vested options during the pendency of the SLC’s proceedings, and extended, until March 31, 2008, the period during which these five former employees could exercise approximately 428,000 of their fully vested options. Moreover, the SLC allowed one former employee to exercise all of his fully vested stock options and another former employee agreed to cancel all of such individual’s fully vested stock options during the quarter ended March 31, 2008.
On January 31, 2008, the SLC extended, until August 31, 2008, the period during which the two former non-employee directors could exercise their unexpired vested options. On March 31, 2008, the SLC entered into an agreement with our former CEO allowing him to exercise all of his fully vested stock options. Under this agreement, he agreed that any shares obtained through these exercises or net proceeds obtained through the sale of such shares would be placed in an identified securities brokerage account and not withdrawn, transferred or otherwise removed without either (i) a court order granting him permission to do so or (ii) our written permission.
On May 29, 2008, the SLC permitted one of our former non-employee directors to exercise his fully vested stock and entered into an agreement with the other former non-employee director on terms similar to the agreement entered into with our former CEO, allowing him to exercise all of his fully vested stock options. Because Trident’s stock price as of June 30, 2008 was lower than the prices at which our former CEO and each of the two former non-employee directors had desired to exercise their options, as indicated in previous written notices to the SLC, we recorded a contingent liability in accordance with applicable accounting guidance, totaling $4.3 million, which was included in “Accrued expenses and other current liabilities” in the Consolidated Balance Sheet as of June 30, 2008 and the related expenses were included in “Selling, general and administrative expenses” in the Consolidated Statement of Operations for the fiscal year then ended. On March 26, 2010, the claims by these two former non-employee directors against us, valued at approximately $1.6 million, were waived as part of a comprehensive settlement with us. Currently, the SLC investigation is still in progress only with respect to our former CEO. In June 2010, he filed a claim against us seeking compensation from us relating to the exercise of his fully vested stock options. As a result, as of June 30, 2010, we maintained a contingent liability totaling $2.8 million in “Accrued expenses and other current liabilities” in the Condensed Consolidated Balance Sheets and the related expenses were included in “Selling, General and Administrative Expenses” in the Consolidated Statement of Operations for the six months ended June 30, 2010. See Note 5, “Shareholder Derivative Litigation” in “Commitment and Contingencies,” of Notes to Condensed Consolidated Financial Statements.
Indemnification Obligations
We indemnify, as permitted under Delaware law and in accordance with our Bylaws, our officers, directors and members of our senior management for certain events or occurrences, subject to certain limits, while they were serving at our request in such capacity. In this regard, we have received, or expect to receive, requests for advancement and indemnification by certain current and former officers, directors and employees in connection with our investigation of our historical stock option granting practices and related issues, and the related governmental inquiries and shareholder derivative litigation. The maximum amount of potential future advancement and

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indemnification is unknown and potentially unlimited; therefore, it cannot be estimated. We have directors’ and officers’ liability insurance policies that may enable us to recover a portion of such future advancement and indemnification claims paid, subject to coverage limitations of the policies, and plan to make claim for reimbursement from our insurers of any potentially covered future indemnification payments. In certain circumstances, we also would have the right to seek to recover sums advanced to an indemnitee.
Commercial Litigation
In June 2010, Exatel Visual Systems, Ltd. filed a complaint against NXP Semiconductors USA, Inc. and Trident, in Superior Court for the State of California, No. 1-10-CV-174333, alleging breach of contract and related tort claims relating generally to an alleged product development project undertaken by Trident’s predecessor, NXP, and its predecessor, Conexant Systems, Inc. Trident has not yet filed an answer and no date for trial has been set. Because this action is in the very early stages, and due to the inherent uncertainty surrounding the litigation process, we are unable to reasonably estimate the ultimate outcome of this litigation at this time.
General
From time to time, we are involved in other legal proceedings arising in the ordinary course of our business. While we cannot be certain about the ultimate outcome of any litigation, management does not believe any pending legal proceeding will result in a judgment or settlement that will have a material adverse effect on our business, financial position, results of operation or cash flows.
ITEM 1A. RISK FACTORS
Set forth below and elsewhere in this Quarterly Report on Form 10-Q are descriptions of the risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained herein. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. If any of the following risks actually occur, our business, operating results, and financial condition and/or liquidity could be materially adversely affected.
We may fail to realize some or all of the anticipated benefits of our acquisition of the television systems and set-top box business lines from NXP, or the frame rate converter, demodulator and audio decoder product lines from Micronas, which may adversely affect the value of our common stock.
On February 8, 2010, we completed the acquisition of the television systems and set-top box business lines from NXP, or NXP Transaction, and on May 14, 2009, we completed the purchase of selected assets of the frame rate converter, demodulator and audio decoder product lines of Micronas, or Micronas Transaction. We continue to integrate these assets, and the operations acquired with these assets, into our existing operations. The integration has required, and will continue to require significant efforts, including the coordination of future product development and sales and marketing efforts. These integration efforts continue to require resources and management’s time and efforts. The success of each of these acquisitions will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining the acquired product lines with our legacy operations. However, to realize these anticipated benefits and cost savings, we must successfully combine the acquired business lines with our legacy operations and integrate our respective operations, technologies and personnel. If we are not able to achieve these objectives within the anticipated time frame, or at all, the anticipated benefits and cost savings of the acquisitions may not be realized fully or at all or may take longer to realize than expected and the value of our common stock may be adversely affected. It is possible that the integration process could result in the loss of key employees and other senior management, result in the disruption of our business or adversely affect our ability to maintain relationships with customers, suppliers, distributors and other third parties, or to otherwise achieve the anticipated benefits of either acquisition.
Specifically, risks in integrating the operations of the business lines acquired from NXP and Micronas into our operations in order to realize the anticipated benefits of each acquisition include, among other things:
  failure to effectively coordinate sales and marketing efforts to communicate our product capabilities and product roadmap of our combined business lines;
 
  failure to compete effectively against companies already serving the broader market opportunities that are now expected to be available to us and our expanded product offerings;

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  failure to successfully integrate and harmonize financial reporting and information technology systems required to support our larger operations following completion of each acquisition;
 
  retention of customers and strategic partners of products that we have acquired with each acquisition;
 
  retention of key Trident employees integration of key employees acquired from NXP or Micronas;
 
  coordination of research and development activities to enhance the introduction of new products and technologies utilizing technology acquired from NXP or Micronas, especially in light of rapidly evolving markets for those products and technologies;
 
  effective coordination of the diversion of management’s attention from business matters to integration issues;
 
  effective combination of the business lines acquired from NXP and Micronas into our legacy product offerings, including the acquired technology and intellectual property rights effectively and quickly;
 
  the transition to a common information technology environment at all facilities acquired in each acquisition;
 
  combination of our business culture with the business culture previously operated by NXP or Micronas;
 
  effective anticipation of the market needs and achievement of market acceptance of our products and services utilizing the technology acquired in each acquisition;
 
  compliance with local laws as we take steps to integrate and rationalize operations in diverse geographic locations; and
 
  difficulties in creating uniform standards, controls (including internal control over financial reporting), procedures, policies and information systems.
Integration efforts will also divert management attention and resources. An inability to realize the anticipated benefits of the acquisitions, as well as any delays encountered in the integration process, could have an adverse effect on our business and results of operations.
In addition, as we complete the integration process, we may incur additional and unforeseen expenses, and the anticipated benefits of each acquisition may not be realized. Actual cost synergies may be lower than we expect and may take longer to achieve than anticipated. If we are not able to adequately address these challenges, we may be unable to realize the anticipated benefits of either the NXP Transaction or the Micronas Transaction.
NXP owns approximately 60% of our outstanding shares of common stock, which could cause NXP to be able to exercise significant influence over the outcome of various corporate matters and could discourage third parties from proposing transactions resulting in a change in our control.
As a result of the NXP Transaction, NXP owns approximately 60% of our issued and outstanding shares of common stock and has elected four of the nine members of our board of directors. Although the Stockholders Agreement between us and NXP imposes limits on NXP’s ability to take specified actions related to the acquisition of additional shares of our common stock and the voting of its shares of our common stock, among other restrictions, NXP is still able to exert significant influence over the outcome of a range of corporate matters, including significant corporate transactions requiring a stockholder vote, such as a merger or a sale of our company or our assets. NXP’s ownership could affect the liquidity in the market for our common stock.
Furthermore, the ownership position of NXP could discourage a third party from proposing a change of control or other strategic transaction concerning Trident. As a result, our common stock could trade at prices that do not reflect a “control premium” to the same extent as do the stocks of similarly situated companies that do not have a stockholder with an ownership interest as large as NXP’s ownership interest.
In addition, we issued 7 million shares of our common stock to Micronas and warrants to purchase an additional 3 million shares of our common stock to Micronas. The issuance of these shares to Micronas caused a reduction in the relative percentage interests of Trident stockholders in earnings, voting power, liquidation value and book and market value, and a further reduction will occur if Micronas exercises the warrants in the future.

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Sales by NXP of the shares of our common stock acquired in the NXP Transaction following the two year lock up period could cause our stock price to decrease.
The sale of shares of common stock that NXP received in the NXP Transaction are restricted and not freely tradeable, but NXP may begin to sell these shares under certain circumstances, including pursuant to a registered underwritten public offering under the Securities Act of 1933, as amended, or in accordance with Rule 144 under the Securities Act, following February 8, 2012. We have entered into a Stockholders Agreement with NXP, which includes registration rights and which gives NXP the right to require us to register all or a portion of its shares of our common stock at any time following this two year period, subject to certain limitations. The sale of a substantial number of shares of our common stock by NXP within a short period of time could cause our stock price to decrease, and make it more difficult for us to raise funds through future offerings of common stock.
We have incurred significant transaction and transaction-related costs in connection with the NXP Transaction and the Micronas Transaction.
We have incurred a number of non-recurring costs associated with the NXP Transaction and the Micronas Transaction, and expect to continue to incur costs of integrating the operations of the acquired business lines with our existing business. The substantial majority of non-recurring expenses resulting from these two transactions has been and is expected to continue to be comprised of transaction costs related to each transaction, facilities and systems consolidation costs and employment-related costs, including severance and other employee separation costs. Additional unanticipated costs may be incurred as we continue integrating the acquired businesses. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, should allow us to offset incremental transaction-related costs over time, this net benefit may not be achieved in the near term, or at all. If the benefits of each transaction do not exceed the costs such transaction, our financial results may be adversely affected.
We must continue to retain, motivate and recruit executives and other key employees following integration of the NXP Transaction and the Micronas Transaction, and failure to do so could negatively affect our operations.
We must retain key employees acquired from Micronas and NXP. Experienced executives are in high demand and competition for their talents can be intense. To be successful, we must also retain and motivate our existing executives and other key employees. Our employees may experience uncertainty about their future role with us until, or even after, strategies with regard to our operations and product development following completion of each transaction is announced and executed. These potential distractions may adversely affect our ability to attract, motivate and retain executives and other key employees and keep them focused on applicable strategies and goals. A failure to retain and motivate executives and other key employees during the period after the completion of the Transactions could have a material and adverse impact on our business.
Our success depends to a significant degree upon the continued contributions of the principal members of our technical sales, marketing and engineering teams, many of whom perform important management functions and would be difficult to replace. During the past year, we hired several members of our current executive management team. We have reorganized our sales, marketing and engineering teams and continue to make changes. We depend upon the continued services of key management personnel at our overseas subsidiaries, especially in China, Taiwan and Europe. Our officers and key employees are not bound by employment agreements for any specific term, and may terminate their employment at any time. In order to continue to expand our product offerings both in the U.S. and abroad, we must hire and retain 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 continues to be increasingly intense, particularly in the areas where we principally operate, specifically in China, Taiwan, Northern California and Texas. If we are not successful in attracting, assimilating or retaining qualified personnel to fulfill our current or future needs, our business may be harmed.
The operation of our business could be adversely affected by the transition of key personnel as we rebuild our executive leadership team and make additional organizational changes.
In addition to the uncertainties created among personnel as a result of the acquisitions, many of our senior management are relatively new, and our senior management has been reorganized following the NXP Transaction, including the appointment of a former NXP executive to the position of President. We recently hired a new Chief Technology Officer, Vice President of Human Resources, and Senior Vice President of our Set-top Box Business Unit, and promoted another executive to serve as Senior Vice President of our TV

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Business Unit. We have also reorganized our Board of Directors, and now have nine members of the Board of Directors, four of whom joined following completion of the NXP Transaction. Two of our former board members resigned as a result of the NXP Transaction. It is important to our success that our Chief Executive Officer continues building an effective management team and global organization. It may take some time for each of the new members of our management team to become fully integrated into our business. Our failure to manage these transitions, or to find and retain experienced management personnel, could adversely affect our ability to compete effectively and could adversely affect our operating results.
As a result of the NXP Transaction and the Micronas Transaction, we are a larger and more geographically diverse organization, and if we are unable to manage this larger organization efficiently, our operating results will suffer.
As a result of the acquisitions of assets from NXP and Micronas, we have a larger number of employees in widely dispersed operations in the United States, Europe, Asia Pacific, and other locations, which have increased the difficulty of managing our operations. Previously, we have not had a significant number of employees in Europe, particularly Germany and The Netherlands, and none in India. As a result, we now face challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs. The inability to manage successfully this geographically more diverse and substantially larger organization could have a material adverse effect on our operating results and, as a result, on the market price of our common stock.
Product supply and demand in the semiconductor industry is subject to cyclical variations.
The semiconductor industry is subject to cyclical variations in product supply and demand. Downturns in the industry often occur in connection with, or in anticipation of, maturing product cycles for both semiconductor companies and their customers and declines in general economic conditions. These downturns have been characterized by abrupt fluctuations in product demand and production capacity and accelerated decline of average selling prices. The emergence of a number of negative economic factors, including heightened fears of a prolonged recession, could lead to such a downturn. We cannot predict whether we will achieve timely, cost- effective access to that capacity when needed, or what capacity patterns may emerge in the future. A downturn in the semiconductor industry could harm our sales and revenues if demand for our products drops, or cause our gross margins to suffer if average selling prices decline.
Our reliance upon a very small number of foundries could make it difficult to maintain product flow and affect our sales.
If the demand for our products grows or decreases by material amounts, we will need to adjust the levels of our material purchases, contract manufacturing capacity and internal test and quality functions. Any disruptions in product flow could limit our ability to meet orders, impact our revenue and our ability to consummate sales, adversely affect our competitive position and reputation and result in additional costs or cancellation of orders.
We do not own or operate fabrication facilities and do not manufacture our products internally. Prior to the NXP Transaction, we have relied principally upon one independent foundry to manufacture substantially all of our SoC products and non-audio discrete products in wafer form and other contract manufacturers for assembly and testing of our products and we rely upon Micronas for the manufacture of our discrete audio products on a turnkey basis pursuant to a services agreement. Following the NXP Transaction, we have begun to manufacture some of our products in wafer form at a second independent foundry. Generally, we place orders by purchase order, and the foundries are not obligated to manufacture our products on a long-term fixed-price basis, so they are not obligated to supply us with products for any specific period of time, in any specific quantity or at any specific price, except as may be provided in a particular purchase order. Our foundry and contract manufacturers could re-allocate capacity to other customers, even during periods of high demand for our products. In fact, we have recently experienced wafer supply constraints and expect to face such constraints in the future. We have limited control over delivery schedules, quality assurance, manufacturing yields, potential errors in manufacturing and production costs. We could experience an interruption in our access to certain process technologies necessary for the manufacture of our products. From time to time, there are manufacturing capacity shortages in the semiconductor industry and current global economic conditions make it more likely those disruptions in supply chain cycles could occur. If we encounter shortages and delays in obtaining components, our ability to meet customer orders would be materially adversely affected. In addition, during periods of increased demand, putting pressure on the foundries to meet orders, we may have reduced control over pricing and timely delivery of components, and if the foundries increase the cost of components or subassemblies, our margins will be adversely affected, and we may not have alternative sources of supply to manufacture such components.
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obtaining additional production from existing or new foundries, shortages of raw materials, or other reasons, could result in the loss of customers and other material adverse effects on our operating results, including effects that may result should we be forced to purchase products from higher cost foundries or pay expediting charges to obtain additional supplies. In addition, to the extent we elect to use multiple sources for certain products, our customers may be required to qualify multiple sources, which could adversely affect their desire to design-in our products and reduce our revenues.
We do not have long-term commitments from our customers, and we plan purchases based upon our estimates of customer demand, which may require us to contract for the manufacturing of our products based on inaccurate estimates.
Our sales are made on the basis of purchase orders rather than long-term purchase commitments. Our customers may cancel or defer purchases at any time. This requires us to forecast demand based upon assumptions that may not be correct. If we or our customers overestimate demand, we may create inventory that we may not be able to sell or use, resulting in excess inventory, which could become obsolete or negatively affect our operating results. Conversely, if we or our customers underestimate demand, or if sufficient manufacturing capacity is not available, we may lose revenue opportunities, damage customer relationships and we may not achieve expected revenue.
We depend on a small number of large customers for a significant portion of our sales. The loss of, a significant reduction in or cancellation of sales to any key customer would significantly reduce our revenues.
We are and will continue to be dependent on a limited number of distributors and customers for a substantial amount of our revenue. For the three and six months ended June 30, 2010, approximately 38% and 39%, respectively, of our revenues were derived from sales to two major customers. Our revenues to date have been denominated in U.S. dollars and Euros. Sales to our largest customers have fluctuated significantly from period to period primarily due to the timing and number of design wins with each customer and will likely continue to fluctuate significantly in the future.
Accordingly, a reduction in purchases of our products by any of these customers could cause our revenues to decline during the period and have a material adverse impact on our financial results. We may be unable to replace any such lost revenues by sales to any new customers or increased sales to existing customers. Our operating results in the foreseeable future will continue to depend on sales to a relatively small number of customers, as well as the ability of these customers to sell products that incorporate our products. In the future, these customers may decide not to purchase our products at all, purchase fewer products than they did in the past, or alter their purchasing patterns in some other way, particularly because:
  substantially all of our sales are made on a purchase order basis, which permits our customers to cancel, change or delay product purchase commitments with little or no notice to us and without penalty;
 
  our customers may purchase integrated circuits from our competitors;
 
  our customers may develop and manufacture their own solutions; or
 
  our customers may discontinue sales or lose market share in the markets for which they purchase our products.
If we engage in further cost-cutting or workforce reductions, we may be unable to successfully implement new products or enhancements or upgrades to our products.
We expect to continue to introduce new and enhanced products, and our future financial performance will depend on customer acceptance of our new products and any upgrades or enhancements that we may make to our products. However, if our efforts to streamline operations and reduce costs and our workforce following our recent acquisitions are insufficient to bring our structure in line with current and projected near-term demand for our products, we may be forced to make additional workforce reductions or implement further cost saving initiatives. Workforce reductions we have already initiated and possible future reductions could impact our research and development and engineering activities, which may slow our development of new or enhanced products. We may be unable to successfully introduce new or enhanced products, and may not succeed in obtaining or maintaining customer satisfaction, which could negatively impact our reputation, future sales of our products and our future revenues.

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A decline in revenues may have a disproportionate impact on operating results and require further reductions in our operating expense levels.
Because expense levels are relatively fixed in the near term for a given quarter and are based in part on expectations of our future revenues, any decline in our revenues to a level that is below our expectations would have a disproportionately adverse impact on our operating results for that quarter. If revenues further decline, we may be required to incur additional material restructuring charges in connection with efforts to contain and reduce costs.
The impact of changes in global economic conditions on our current and potential customers may adversely affect our revenues and results of operations.
Our operating results have been adversely affected over the past quarters by reduced levels of consumer spending and by the overall weak economic conditions affecting our current and potential customers. The economic environment that we faced in fiscal year 2009 was uncertain, and that uncertainty continued through the three and six months ended quarter June 30, 2010, and is expected to continue into the year ending December 31, 2010. If our end customers continue to refrain from making purchases of products from us until general economic conditions improve, this could continue to adversely affect our business and operating results for additional quarters during the year ending December 31, 2010.
As a result of our investigation into our historical stock option granting practices and the restatement of our previously filed financial statements, we are subject to civil litigation claims that could have a material adverse effect on our business, customer relationships, results of operations and financial condition.
As previously described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 3, “Restatement of Consolidated Financial Statements and Special Committee and Company Findings” of Notes to Consolidated Financial Statements, included in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2006 filed on August 7, 2007, we conducted an investigation into our historical stock option practices and related accounting. Based upon the findings of the investigation, we restated our financial statements for each of the years ended June 30, 1993 through June 30, 2005, and restated our financial statements for the interim first three quarters of fiscal year ended June 30, 2006 as well.
Our past stock option granting practices and the restatement of our prior financial statements have exposed and may continue to expose us to greater risks associated with litigation as described in Part II, Item 1, “Legal Proceedings.” This litigation could impact our relationships with customers and our ability to generate revenues.
We have been named as a party to derivative action lawsuits, and we may be named in additional litigation, all of which will require significant management time and attention and result in significant legal expenses and may result in an unfavorable outcome which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Trident has been named as a nominal defendant in several shareholder derivative lawsuits concerning the granting of stock options. The federal court cases have been consolidated as In re Trident Microsystems Inc. Derivative Litigation, Master File No. C-06-3440-JF. A case also has been filed in State court, Limke v. Lin et al., No. 1:07-CV-080390. Plaintiffs in all cases allege that certain of our current or former officers and directors caused us to grant options at less than fair market value, contrary to our public statements (including our financial statements), and that this represented a breach of their fiduciary duties to us, and as a result those officers and directors are liable to us. Our Board of Directors has appointed a Special Litigation Committee, or SLC, which has been composed solely of independent directors, to review and manage any claims that we may have relating to the stock option granting practices and related issues investigated by the SLC. The scope of the SLC’s authority includes the claims asserted in the derivative actions. In federal court, Trident moved to stay the case pending the assessment by the SLC that was formed to consider nominal plaintiffs’ claims.
On March 26, 2010, the federal court approved settlements with all defendants other than Frank Lin, our former CEO, and all defendants other than Mr. Lin were dismissed with prejudice from the state and federal actions. In connection with the approved settlements, payments of approximately $1.7 million were made to us, by certain of the defendants, during the three months ended June 30, 2010. The state court derivative action was dismissed following the approval of the settlement in the federal action. No particular amount of damages has been alleged in the federal action, and by the nature of the lawsuit no damages will be alleged against us. On July 1, 2010, the derivative plaintiffs filed an amended complaint in the federal action stating claims against Mr. Lin relating to his actions in connection with our stock option granting practices. On June 8, 2010, Mr. Lin filed a counterclaim against Trident. In that counterclaim, Mr. Lin seeks recovery of payments he claims he was promised during the negotiations surrounding his eventual termination and also losses he claims he has suffered because he was not permitted to exercise his Trident stock options between January 2007 and March 2008. We cannot predict whether the federal action against Mr. Lin and his counterclaims are likely to result in any material recovery by or expense to Trident. We expect to continue to incur legal fees in responding to this lawsuit,

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including expenses for the reimbursement of certain legal fees of at least our former CEO under our advancement obligations. The expense of defending such litigation may be significant. The amount of time to resolve this and any additional lawsuits is unpredictable and these actions may divert management’s attention from the day-to-day operations of our business, which could adversely affect our business, results of operations and cash flows.
We are subject to the risks of additional lawsuits in connection with our historical stock option grant practices and related issues, the resulting restatements, and the remedial measures we have taken.
In addition to the possibilities that there may be additional shareholder lawsuits against us, we may be sued or taken to arbitration by former employees in connection with their stock options, employment terminations and other matters. These lawsuits may be time consuming and expensive, and cause further distraction from the operation of our business. The adverse resolution of any specific lawsuit could have a material adverse effect on our business, financial condition and results of operations.
Intense competition exists in the market for digital media products.
The digital media market in which we compete is intensely competitive and characterized by rapid technological change and declining average unit selling prices. Competition typically occurs at the design stage, when customers evaluate alternative design approaches requiring integrated circuits. Because of short product life cycles, there are frequent design win competitions for next-generation systems.
We believe the digital media market will remain competitive, and will require us to incur substantial research and development, technical support, sales and other expenditures to stay competitive in this market. In the digital media market, our principal competitors are captive solutions from large TV OEMs as well as merchant solutions from Broadcom Corporation, MediaTek Inc., MStar Semiconductor, NEC Corporation, STMicroelectronics, and Zoran Corporation. Industry consolidation has been occurring recently as, in addition to our acquisition of certain assets from NXP and Micronas, some of our competitors have acquired or are considering acquiring other competitors or divisions of companies that provide them with the opportunity to compete against us. Many of our current competitors and many potential competitors have significantly greater technical, manufacturing, financial and marketing resources. Some of them may also have broader product lines and longer standing relationships with key customers and suppliers than we have, which makes competing more difficult. Therefore, we expect to devote significant resources to the digital TV and set-top box markets even though some of our competitors are substantially more experienced than we are in these markets.
The level and intensity of competition have increased over the past year. Competitive pricing pressures have resulted in continued reductions in average selling prices of our existing products, and continued or increased competition could require us to further reduce the prices of our products, affect our ability to recover costs or result in reduced gross margins. If we are unable to timely and cost-effectively integrate more functionality onto single chip designs to help our customers reduce costs, we may lose market share, our revenues may decline and our gross margins may decrease significantly.
Our success depends upon the digital media market and we must continue to develop new products and to enhance our existing products.
The digital media industry is characterized by rapidly changing technology, frequent new product introductions, and changes in customer requirements. 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. The long-term success in the digital media business will depend on the introduction of successive generations of products in time to meet the design cycles as well as the specifications of original equipment manufacturers of televisions. The digital media industry is characterized by an increasing level of integration and incorporation of greater numbers of features on a single chip, in order to permit enhanced systems at the same or lower cost. Our failure to predict market needs accurately or to timely develop new products or product enhancements, including integrated circuits with increasing levels of integration and new features, at competitive prices may 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 could decrease. Even if we are able to develop and commercially introduce these new products, the new products may not achieve the widespread market acceptance necessary to provide an adequate return on our investment.

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If we do not achieve additional design wins in the future, our ability to sell additional products could be adversely affected.
Our future success depends on manufacturers of consumer televisions, set-top boxes and other digital media products designing our products into their products. To achieve design wins with OEM customers and ODMs, we must define and deliver cost-effective, innovative and high performance integrated circuits on a timely basis, before our competitors do so. In addition, some OEM customers have begun to utilize digital video processor components produced by their own internal affiliates, which decreases our opportunity to achieve design wins. Thus, even if we achieve a design win with an ODM, their OEM customer may subsequently elect to purchase an integrated digital media solution from the ODM that does not incorporate our products. Once a supplier’s products have been designed into a system, a manufacturer may be reluctant to change components due to costs associated with qualifying a new supplier and determining performance capabilities of the component. Customers can choose at any time to discontinue using our products in their designs or product development efforts. Accordingly, we may face narrow windows of opportunity to be selected as the supplier of component parts by significant new customers. It may be difficult for us to sell to a particular customer for a significant period of time once that customer selects a competitor’s product, and we may not be successful in obtaining broader acceptance of our products. If we are unable to achieve broader market acceptance of our products, we may be unable to maintain and grow our business and our operating results and financial condition will be adversely affected.
The average selling prices of our products may decline over relatively short periods.
Average selling prices for our products may decline over relatively short time periods. This annual pace of price decline for products or technology is generally expected in the consumer electronics industry. It is also possible for the pace of average selling price declines to accelerate beyond these levels for certain products in a commoditizing market. Price declines can be exacerbated by competitive pressures at specific customers and for specific products. When our average selling prices decline, our gross profits decline unless we are able to sell more products at higher gross margin or reduce the cost to manufacture our products. We generally attempt to combat average selling price declines by designing new products for reduced costs, innovating to integrate additional functions or features and working with our manufacturing partners to reduce the costs of manufacturing existing products. We have in the past experienced and may in the future experience declining sales prices, which could negatively impact our revenues, gross profits and financial results. We therefore need to sell our higher margin products in increasing volumes to offset any decline in the average selling prices of our products, and introduce new higher margin products for sale in the future, which we may not be able to do on a timely basis.
We may be required to record future charges to earnings if our intangible assets become impaired.
We are required under generally accepted accounting principles in the United States of America to review our goodwill and intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our intangible assets may not be recoverable include a decline in stock price and market capitalization, slower growth rates, and changes in our financial results and outlook. We may be required to incur additional charges in our Condensed Consolidated Financial Statements during the period in which any impairment of our goodwill or intangible assets is determined. In determining the fair value of intangible assets in connection with our impairment analysis, we consider various factors including Trident’s estimates of future market growth and trends, forecasted revenue and costs, discount rates, expected periods over which our assets will be utilized and other variables. Our assumptions are based on historical data and internal estimates developed as part of our long-term planning process. We base our fair value estimates on assumptions believed to be reasonable, but which are inherently uncertain. If future conditions are different from management’s estimates at the time of an acquisition or market conditions change subsequently, we may incur future charges for impairment of our goodwill or intangible assets, which could adversely impact our results of operations.
The demand for our products depends to a significant degree on the demand for the end products of customers of the acquired business lines into which they are incorporated.
The vast majority of our revenues are derived from sales to manufacturers in the consumer electronics industry. Demand from these customers fluctuates significantly, driven by consumer preferences, the development of new technologies and brand performance. The success of the acquired business lines depends on the success of its customers in the market place. Such customers may vary order levels significantly from period to period, request postponements to scheduled delivery dates, modify their orders or reduce lead times, any of which could have a material adverse effect on our business, financial condition or results of operations.

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Our dependence on sales to distributors increases the risks of managing our supply chain and may result in excess inventory or inventory shortages.
Prior to the NXP Transaction, the majority of our sales through distributors were made by companies that function as purchasing conduits for each of two large Japanese OEM customers. Generally, these distributors take certain inventory positions and resell to their respective OEM customers. We have a more traditional distributor relationship with our remaining distributors that involve the distributor taking inventory positions and reselling to multiple customers. In our significant distributor relationships, we have recognized revenue when the distributors sell the product through to their end user customers. These distributor relationships have reduced our ability to forecast sales and increased risks to our business. Since our distributors act as intermediaries between us and the end user customers, we must rely on our distributors to accurately report inventory levels and production forecasts. This requires us to manage a more complex supply chain and monitor the financial condition and credit worthiness of our distributors and the end user customers. Our failure to manage one or more of these risks could result in excess inventory or shortages that could adversely impact our operating results and financial condition.
We have had fluctuations in quarterly results in the past and may continue to experience such fluctuations in the future.
Our quarterly revenue and operating results have varied in the past and may fluctuate in the future due to a number of factors including:
  our ability to obtain the anticipated benefits of each of the NXP Transaction and the Micronas Transaction our ability to develop, introduce, ship and support new products and product enhancements, especially our newer SoC products, and to manage product transitions;
 
  new product introductions by our competitors;
 
  delayed new product introductions;
 
  uncertain demand in the digital media markets in which we have limited experience;
 
  our ability to achieve required product cost reductions;
 
  the mix of products sold and the mix of distribution channels through which they are sold;
 
  fluctuations in demand for our products, including seasonality;
 
  unexpected product returns or the cancellation or rescheduling of significant orders;
 
  our ability to attain and maintain production volumes and quality levels for our products;
 
  unfavorable responses to new products;
 
  adverse economic conditions, particularly in the United States and Asia; and
 
  unexpected costs associated with our investigation of our historical stock option grant practices and related issues, and any related litigation or regulatory actions.
These factors are often difficult or impossible to forecast or predict, and these or other factors could cause our revenue and expenses to fluctuate over interim periods, increase our operating expenses, or adversely affect our results of operations or business condition.
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 solution. Although we have experienced such errors in the past, significant errors have generally been detected relatively early in a product’s life cycle and therefore the costs associated with such errors have been immaterial. We cannot ensure that such errors will not be found from time to time in new or enhanced products after commencement

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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. Defects or other performance problems in our products could result in financial or other damages to our customers or could damage market acceptance of our products. Our customers could seek damages from us for their losses as a result of problems with our products or order less of our products, which would harm our financial results.
As a result of the difficult global macroeconomic and industry conditions, we have implemented restructuring and workforce reductions, and may be required to make additional such reductions, which may adversely affect the morale and performance of our personnel and our ability to hire new personnel.
In connection with our efforts to streamline operations, reduce costs and better align our staffing and structure with current demand for our products, we implemented a restructuring of our Company during the quarter ended December 31, 2008 and the quarter ended September 30, 2009, reducing our workforce and implementing other cost saving initiatives. We recorded restructuring charges of $0.8 million in the quarter ended December 31, 2008, amd $1.6 million in the quarter ended September 30, 2009. In connection with the NXP Transaction, we have begun to implement further restructurings or work force reductions that are taking place during calendar year 2010. We recorded for the three and six months ended June 30, 2010, $4.5 million and $12.9 million, respectively, of restructuring expenses related to severance and related employee benefits. The restructuring is expected to be completed by the end of the calendar year. Restructuring charges are recorded under “Restructuring charges” in our Condensed Consolidated Statement of Operations.
Prior to the close of the Company’s acquisition from NXP of selected assets and liabilities of NXP’s television systems and set-top box business lines, NXP initiated a restructuring plan pursuant to which the employment of some NXP employees was terminated upon the close of the merger. We have determined that the restructuring plan was a separate plan from the business combination because the plan to terminate the employment of certain employees was made in contemplation of the acquisition. Therefore, a severance cost of $3.6 million was recognized as an expense on the acquisition date and is included in the total restructuring charge of $12.9 million for the six months ended June 30, 2010. The $3.6 million of severance cost was paid by NXP after the close of the acquisition, effectively reducing the purchase consideration transferred.
Our restructuring may yield unanticipated consequences, such as attrition beyond our planned reduction in workforce and loss of employee morale and decreased performance. In addition, the recent trading levels of our stock have decreased the value of our stock options granted to employees under our stock option plans. As a result of these factors, our remaining personnel may seek employment with companies that they perceive as having less volatile stock prices. Continuity of personnel can be a very important factor in the sales and implementation of our products and completion of our research and development efforts.
If we have to qualify new contract manufacturers or foundries for any of our products, we may experience delays that result in lost revenues and damaged customer relationships.
We rely on a limited number of principal suppliers to manufacture our products in wafer form. The lead time required to establish a relationship with a new foundry is long, and it takes time to adapt a product’s design and technological requirements to a particular manufacturer’s processes. Accordingly, there is no readily available alternative source of supply for any specific product. We have already experienced an inability to meet the unconstrained demand of some of our customers for certain products due to shortages in wafer supply that occurred during 2010. This lack of a readily available second source could cause significant delays in shipping products, or even shortages, if we have to change our source of supply and manufacture quickly, which could damage our relationships with current and prospective customers and harm our sales and financial results.
Our success depends in part on our ability to protect our intellectual property rights, which may be difficult.
The digital media market is a highly competitive industry in which we, and most other participants, rely on a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures and licensing arrangements to establish and protect proprietary rights. The competitive nature of our industry, rapidly changing technology, frequent new product introductions, changes in customer requirements and evolving industry standards heighten the importance of protecting proprietary technology rights. Since patent applications with the United States Patent and Trademark Office may be kept confidential, 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. The laws of certain foreign countries in which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility

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of piracy of our technology and products more likely in these countries. 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 in the past, and may file in the future, 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 or resulting counterclaims, 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.
The television systems and set-top box business lines that we acquired from NXP depend on patents and other intellectual property rights to protect against misappropriation by competitors or others. The patents we have acquired as part of the acquired business lines may be insufficient to provide meaningful protection. We may not be able to obtain patent protection or secure other intellectual property rights in all the countries in which the acquired business lines operate, and, under the laws of such countries, patents and other intellectual property rights may be unavailable or limited in scope. Any inability to adequately protect the intellectual property rights of the acquired business lines may have an adverse effect on our results.
We have been involved in intellectual property infringement claims, and may be involved in other claims 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. Historically we have been involved in such disputes. For example, in March 2010, Intravisual Inc. filed complaints against us and multiple other defendants, including NXP, in the United States District Court for the Eastern District of Texas, No. 2:10-CV-90 TJW alleging that certain Trident products infringe a patent relating generally to compressing and decompressing digital video. The complaint seeks a permanent injunction against us as well as the recovery of monetary damages and attorneys’ fees. We filed an answer on May 28, 2010, however, no date for trial has been set. The pending proceeding involves complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources to defend. In addition, we have and 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. Litigation or other disputes or negotiations arising from claims asserting that our products infringe or may infringe the proprietary rights of third parties, whether with or without merit, has been and may in the future be, time-consuming, resulting in significant expenses and diverting the efforts of our technical and management personnel. We do not have insurance against any alleged infringement of intellectual property of others. Any such claims that may be filed against us in the future, if resolved adversely to us, could cause us to stop sales of 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 and reasonable basis, our business could be harmed.
Certain intellectual property used in the television systems and set-top box business lines acquired from NXP was transferred or licensed to NXP from Philips and may not be sufficient to protect the position of the acquired business lines in the industry.
Some of the intellectual property that we acquired from NXP was originally acquired by NXP in connection with its separation from Koninklijke Philips Electronics N.V., or Philips. In connection with the separation of NXP from Philips, Philips transferred a set of patent families to NXP subject to certain limitations. These limitations give Philips the right to sublicense to third parties in certain circumstances. The strength and value of this intellectual property may be diluted if Philips licenses or otherwise transfers such intellectual property or such rights to third parties, especially if such third parties compete with the acquired business lines.
If necessary licenses of third-party technology are not available to us or are very expensive, our products could become obsolete.
From time to time, we may be required to license technology from third parties to develop new products or enhance current products. Third-party licenses may not be available on commercially reasonable terms, if at all. If we are unable to obtain any third-party license required to develop new products and enhance current products, or if our licensor’s technology is no longer available to us because it

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is determined to infringe another third-party’s intellectual property rights, we may have to obtain substitute technology of lower quality or performance standards or at greater cost, either of which could seriously harm the competitiveness of our products.
Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.
Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in tax laws or the interpretation of tax laws, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, or by changes in the valuation of our deferred tax assets and liabilities. We are also subject to the interpretations of foreign regulatory bodies in connection with reviews conducted of our subsidiaries and their operations. While we believe our tax reserves adequately provide for any tax contingencies, the ultimate outcomes of any current or future tax audits are uncertain, and we can give no assurance as to whether an adverse result from one or more of them will have a material effect on our financial position, results of operation or cash flows.
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, unfavorable conditions in the digital media market, failure to obtain design wins, as well as the results of our investigation of our historical stock option grant practices and related issues, and any litigation or regulatory actions arising as a result, 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, and stocks in high-technology companies in particular, could cause the price of our stock to fluctuate from time to time.
Our operating results may be adversely affected by the current sovereign debt crisis in Europe and related global economic conditions.
The current Greek debt crisis and related European financial restructuring efforts may cause the value of the Euro to further deteriorate, thus reducing the purchasing power of European customers. In addition, this European crisis is contributing to instability in global credit markets. The world has recently experienced a global macroeconomic downturn, and if global economic and market conditions, or economic conditions in Europe, the United States or other key markets, remain uncertain, persist, or deteriorate further, we may experience material impacts on our business, operating results, and financial condition.
We currently rely on certain international customers for a substantial portion of our revenue and are subject to risks inherent in conducting business outside of the United States.
As a result of our focus on digital media products, we expect to be primarily dependent on international sales and operations, particularly in Japan, South Korea, Europe, and Asia Pacific. Our revenues may continue to be highly concentrated in a small number of geographic regions in the future. There are a number of risks arising from our international business, which could adversely affect future results, including:
  exchange rate variations, tariffs, import/export restrictions and other trade barriers;
 
  potential adverse tax consequences;
 
  challenges in effectively managing distributors or representatives to maximize sales;
 
  difficulties in collecting accounts receivable;
 
  political and economic instability, civil unrest, war or terrorist activities that impact international commerce;
 
  difficulties in protecting intellectual property rights, particularly in countries where the laws and practices do not protect proprietary rights to as great an extent as do the laws and practices of the United States; and
 
  unexpected changes in regulatory requirements.

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Our international sales for the three and six months ended June 30, 2010, are principally 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. We cannot be sure that those of our international customers who currently place orders in U.S. dollars will continue to be willing to do so. If they do not, our revenues would become subject to foreign exchange fluctuations.
Our operations are vulnerable to interruption or loss due to natural disasters, power loss, strikes and other events beyond our control, which would adversely affect our business.
We conduct a significant portion of our activities including manufacturing, administration and data processing at facilities located in the State of California, Taiwan and other seismically active areas that have experienced major earthquakes in the past, as well as other natural disasters. The insurance coverage may not be adequate or continue to be available at commercially reasonable rates and terms. A major earthquake or other disaster affecting our suppliers’ facilities and our administrative offices could significantly disrupt our operations, and delay or prevent product manufacture and shipment during the time required to repair, rebuild or replace our suppliers’ manufacturing facilities and our administrative offices; these delays could be lengthy and result in significant expenses. In addition, our administrative offices in the State of California may be subject to a shortage of available electrical power and other energy supplies. Any shortages may increase our costs for power and energy supplies or could result in blackouts, which could disrupt the operations of our affected facilities and harm our business. In addition, our products are typically shipped from a limited number of ports, and any natural disaster, strike or other event blocking shipment from these ports could delay or prevent shipments and harm our business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. (RESERVED)
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
     
Exhibit   Description
2.1
  Purchase Agreement dated March 31, 2009 among Micronas Semiconductor Holding AG, Trident Microsystems, Inc. and Trident Microsystems (Far East) Ltd.(1)
 
   
2.2
  Share Exchange Agreement dated October 4, 2009 among Trident Microsystems, Inc., Trident Microsystems (Far East) Ltd., and NXP B.V.(2)
 
   
3.1
  Restated Certificate of Incorporation.(3)
 
   
3.3
  Amended and Restated Bylaws.(4)
 
   
3.4
  Amendment to Article VIII of the Bylaws.(5)
 
   
3.5
  Amendments to Article I, Section 2 and Article I, Section 7 of the bylaws.(6)
 
   
3.6
  Certificate of Amendment of Restated Certificate of Incorporation of Trident Microsystems, Inc. filed on January 27, 2010.(7)
 
   
3.7
  Amended and Restated Certificate of Designation of Series B Preferred Stock (par value $0.001) of Trident Microsystems, Inc., as filed with the Delaware Secretary of State on February 5, 2010.(8)

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Exhibit   Description
4.1
  Reference is made to Exhibits 3.1, 3.3, 3.4, 3.5 and 3.6.
 
   
4.2
  Specimen Common Stock Certificate.(9)
 
   
4.3
  Amended and Restated Rights Agreement between the Company and Mellon Investor Services, LLC, as Rights Agent dated as of July 23, 2008 (including as Exhibit A the Form of Certificate of Amendment of Certificate 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).(10)
 
   
4.4
  First Amendment to Amended and Restated Rights Agreement, dated May 14, 2009.(11)
 
   
4.5
  Second Amendment to Amended and Restated Rights Agreement, dated December 11, 2009.(12)
 
   
31.1
  Rule 13a – 14(a) Certification of Chief Executive Officer. (13)
 
   
31.2
  Rule 13a – 14(a) Certification of Chief Financial Officer. (13)
 
   
32.1
  Section 1350 Certification of Chief Executive Officer. (13)
 
   
32.2
  Section 1350 Certification of Chief Financial Officer. (13)
 
(1)   Incorporated by reference to exhibit of the same number to the Company’s Current Report on Form 8-K filed on April 1, 2009.
 
(2)   Incorporated by reference to exhibit of the same number to the Company’s Current Report on Form 8-K filed on October 5, 2009.
 
(3)   Incorporated by reference to exhibit of the same number to the Company’s Annual Report on Form 10-K for the year ended June 30, 1993.
 
(4)   Incorporated by reference to Exhibit 3.2 to the Company’s Form 10-Q dated December 31, 2003, and as further amended by Exhibit 3.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 6, 2009, incorporated by reference hereto..
 
(5)   Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 30, 2007.
 
(6)   Incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed on March 6, 2009.
 
(7)   Incorporated by reference to exhibit of the same number to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 27, 2010.
 
(8)   Incorporated by reference to Exhibit 3.6 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 8, 2010.
 
(9)   Incorporated by reference to exhibit of the same number to the Company’s Registration Statement on Form S-1 (File No. 33-53768).
 
(10)   Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 28, 2008.
 
(11)   Incorporated by reference to exhibit of the same number to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 15, 2009.
 
(12)   Incorporated by reference to exhibit of the same number to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 8, 2010.
 
(13)   Filed herewith.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Trident Microsystems, Inc. has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  TRIDENT MICROSYSTEMS, INC.
                (Registrant)
 
 
Dated: August 6, 2010  By:   /s/ PETE J. MANGAN    
    Pete J. Mangan   
    Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) 
 
 

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Index to Exhibits
     
Exhibit   Description
2.1
  Purchase Agreement dated March 31, 2009 among Micronas Semiconductor Holding AG, Trident Microsystems, Inc. and Trident Microsystems (Far East) Ltd.(1)
 
   
2.2
  Share Exchange Agreement dated October 4, 2009 among Trident Microsystems, Inc., Trident Microsystems (Far East) Ltd., and NXP B.V.(2)
 
   
3.1
  Restated Certificate of Incorporation.(3)
 
   
3.3
  Amended and Restated Bylaws.(4)
 
   
3.4
  Amendment to Article VIII of the Bylaws.(5)
 
   
3.5
  Amendments to Article I, Section 2 and Article I, Section 7 of the bylaws.(6)
 
   
3.6
  Certificate of Amendment of Restated Certificate of Incorporation of Trident Microsystems, Inc. filed on January 27, 2010.(7)
 
   
3.7
  Amended and Restated Certificate of Designation of Series B Preferred Stock (par value $0.001) of Trident Microsystems, Inc., as filed with the Delaware Secretary of State on February 5, 2010.(8)
 
   
4.1
  Reference is made to Exhibits 3.1, 3.3, 3.4, 3.5 and 3.6.
 
   
4.2
  Specimen Common Stock Certificate.(9)
 
   
4.3
  Amended and Restated Rights Agreement between the Company and Mellon Investor Services, LLC, as Rights Agent dated as of July 23, 2008 (including as Exhibit A the Form of Certificate of Amendment of Certificate 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).(10)
 
   
4.4
  First Amendment to Amended and Restated Rights Agreement, dated May 14, 2009.(11)
 
   
4.5
  Second Amendment to Amended and Restated Rights Agreement, dated December 11, 2009.(12)
 
   
31.1
  Rule 13a – 14(a) Certification of Chief Executive Officer. (13)
 
   
31.2
  Rule 13a – 14(a) Certification of Chief Financial Officer. (13)
 
   
32.1
  Section 1350 Certification of Chief Executive Officer. (13)
 
   
32.2
  Section 1350 Certification of Chief Financial Officer. (13)
 
(1)   Incorporated by reference to exhibit of the same number to the Company’s Current Report on Form 8-K filed on April 1, 2009.
 
(2)   Incorporated by reference to exhibit of the same number to the Company’s Current Report on Form 8-K filed on October 5, 2009.
 
(3)   Incorporated by reference to exhibit of the same number to the Company’s Annual Report on Form 10-K for the year ended June 30, 1993.
 
(4)   Incorporated by reference to Exhibit 3.2 to the Company’s Form 10-Q dated December 31, 2003, and as further amended by Exhibit 3.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 6, 2009, incorporated by reference hereto..
 
(5)   Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 30, 2007.
 
(6)   Incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed on March 6, 2009.

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(7)   Incorporated by reference to exhibit of the same number to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 27, 2010.
 
(8)   Incorporated by reference to Exhibit 3.6 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 8, 2010.
 
(9)   Incorporated by reference to exhibit of the same number to the Company’s Registration Statement on Form S-1 (File No. 33-53768).
 
(10)   Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 28, 2008.
 
(11)   Incorporated by reference to exhibit of the same number to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 15, 2009.
 
(12)   Incorporated by reference to exhibit of the same number to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 8, 2010.
 
(13)   Filed herewith.

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