10-K 1 f58493e10vk.htm FORM 10-K e10vk
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-K
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Fiscal year Ended December 31, 2010
OR
o
  TRANSITION REPORTING PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 0-20784
 
TRIDENT MICROSYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
     
Delaware   77-0156584
(State or other jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification 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)
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of each class
 
Name of each exchange on which registered
 
Common Stock, $0.001 par value
  NASDAQ Global Select Market
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
 
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 Smaller reporting company o
(Do not check if a smaller reporting company)
 
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
 
As of June 30, 2010, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of shares of registrant’s Common Stock held by non-affiliates of registrant was approximately $101,252,215 (based on the closing sale price of the registrant’s common stock on that date). Shares of registrant’s common stock held by the registrant’s executive officers and directors and by each entity that owns 5% or more of registrant’s outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
 
At February 28, 2011, the number of shares of the Registrant’s common stock outstanding was 178,192,826.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Definitive Proxy Statement for the Company’s 2011 Annual Meeting of Stockholders — Part III of this Form 10-K.
 


 

 
TRIDENT MICROSYSTEMS, INC.
 
TABLE OF CONTENTS
 
             
        Page
 
  Business     3  
  Risk Factors     11  
  Unresolved Staff Comments     25  
  Properties     25  
  Legal Proceedings     26  
 
PART II
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     29  
  Selected Financial Data     31  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     31  
  Quantitative and Qualitative Disclosures About Market Risk     51  
  Financial Statements and Supplementary Data     53  
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     99  
  Controls and Procedures     99  
  Other Information     99  
 
PART III
  Directors, Executive Officers and Corporate Governance     100  
  Executive Compensation     100  
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     100  
  Certain Relationships and Related Transactions, and Director Independence     101  
  Principal Accounting Fees and Services     101  
 
PART IV
  Exhibits, Financial Statement Schedules     101  
    106  
    106  
 EX-10.54
 EX-10.55
 EX-10.56
 EX-10.58
 EX-21.1
 EX-23.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


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FORWARD-LOOKING STATEMENTS
 
This Report on Form 10-K contains “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 which provides a “safe harbor” for statements about future events, products and future financial performance that are based on the beliefs of, estimates made by and information currently available to the management of Trident Microsystems, Inc. (“we,” “our,” “Trident” or “the Company”). The outcome of the events described in these forward-looking statements is subject to risks and uncertainties. Actual results and the outcome or timing of certain events may differ significantly from those projected in these forward-looking statements due to factors including those listed under “Risk Factors,” and from time to time in our other filings with the Securities and Exchange Commission, or SEC. For this purpose, statements concerning industry or market segment outlook; market acceptance of or transition to new products; revenues, earnings growth, other financial results and any statements using the terms “believe,” “expect,” “expectation,” “anticipate,” “can,” “should,” “would,” “could,” “estimate,” “appear,” “based on,” “may,” “intended,” “potential,” “are emerging” and “possible” or similar statements are forward-looking statements that involve risks and uncertainties that could cause our actual results and the outcome and timing of certain events to differ materially from those projected or management’s current expectations. By making forward-looking statements, we have not assumed any obligation to, and you should not expect us to, update or revise those statements because of new information, future events or otherwise, except as required by law.
 
PART I
 
ITEM 1.   BUSINESS
 
Change in Fiscal Year End
 
As previously announced, in 2009, we changed our fiscal year end to December 31 from June 30. We made this change to better align our financial reporting period, as well as our annual planning and budgeting process, with our business cycle. The change became effective at the end of the quarter ended December 31, 2009. All references to “years”, unless otherwise noted, refer to the 12-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.
 
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, 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.


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We operate in one reportable segment: digital media solutions. During the year ended December 31, 2010, six months ended December 31, 2009, and years ended June 30, 2009 and 2008, the digital media solutions segment accounted for all of our revenues, which totaled $557.2 million, $63.0 million, $75.8 million and $257.9 million, respectively.
 
Business Combinations
 
On May 14, 2009, we completed our 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, we issued 7.0 million shares of our common stock and warrants to acquire up to 3.0 million additional shares of our 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 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, to primarily provide sales liaison, marketing and engineering services in Europe. TMEU is located in Freiburg, Germany and TMNM and TMH are located in Nijmegen, The Netherlands.
 
On February 8, 2010, we 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, we 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 accordance with U.S. generally accepted accounting principles, the closing price on February 8, 2010 was used to value our common stock. In addition, we issued to NXP four shares of a newly created Series B Preferred Stock, or the Preferred Shares. The purchase price and fair value of the consideration transferred by us was $140.8 million. In connection with this acquisition, we acquired or established additional subsidiaries in Asia, India and Europe and established a branch office in France of an existing European entity. For details of the acquisition, see Note 13, “Business Combinations,” of Notes to Consolidated Financial Statements.
 
Industry Environment and Our Business Strategy
 
Digital Television:
 
A digital television, or DTV, receives digital content and processes it to display a picture which has far greater resolution and sharper, more clearly defined images than a television based on older analog technology. Standard definition televisions generally contain 480 lines with 720 pixels per line. High definition television, or (HDTV), sets contain 1280 to 1920 pixels per line and up to 1080 lines. The aspect ratio of standard definition sets is 4:3, compared to 16:9 and extending to 21:9 for HDTV. The lines may be displayed using different techniques, often referred to as interlacing or alternatively progressive scan.
 
We have been investing in the DTV market for several years. During that time, the DTV market has continued to grow. We believe that this industry remains in a growth phase. The DTV market has continued to be driven by television picture quality, realism and connectivity in the home although growth in any period or in any particular market segments may be affected by numerous factors, including economic conditions. We believe that consumers not only want a more visually realistic television picture display, but also the ability to integrate their DTV, Internet and entertainment systems into one connected device that works seamlessly throughout the home.
 
To date, we continue to invest in developing strong relationships with top tier OEMs in the TV area such as Samsung, LG, Sony, Sharp, Philips, Vizio and others. The TV original design manufacturers, or ODM, business has become an integrated, important part of the TV OEM business because many TV OEMs use ODMs in Taiwan and China. Accordingly, we believe that it is important to have strong relationships among customers as design and development resources. We have also been investing in integrating key technologies and intellectual property, or IP, into a single system on a chip, or SoC. We believe that the combination of critical DTV technologies and IP, our unique know-how in enhancing digital image quality, and our production experience with top-tier TV manufacturers provides a strategic advantage for Trident in the DTV market.


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Notably, we have developed products that include motion estimation and motion compensation technology, or MEMC, which helps to eliminate motion judder, which is most visible when a camera pans across a wide area. In addition, we have continued to focus on enhancing our highly integrated solution that adds Moving Picture Experts Group or MPEG, decoding to image processing in the form of our high definition digital television, or “HiDTV”®, product lines. We have focused on increasing our capabilities in picture quality by implementing use of halo-free algorithms in our MEMC technology and products and developing internet software called TWIS (Trident Widget Internet Solution) to enable connected TV. TWIS allows a cost-effective Internet TV solution for OEMs and ODMs.
 
Our acquisition of the FRC, DRX and audio decoder product lines from Micronas not only provided us with discrete products and an additional revenue stream, but it also gave us critical intellectual property necessary to further improve Trident’s SoC and discrete product offerings. The acquisition also allowed us to improve the quality of our legacy audio intellectual property, as well as providing new audio products. The DRX product line acquired from Micronas includes DVB-T, ATSC and DTMB. Together with our regionalized software stacks, these products enable customers to implement a worldwide TV solution with a short development cycle.
 
Our acquisition of the televisions systems and set-top box business lines from NXP has also provided us with an additional revenue stream and critical intellectual property necessary to further improve Trident’s product offerings. See Note 13, “Business Combinations,” of Notes to Consolidated Financial Statements.
 
Set-top Box:
 
The capability to receive and process DTV signals can be contained in a set-top box, which then drives a television that is capable of displaying digital content. Digital content is broadcasted via satellite, cable networks or over the air (terrestrial broadcast) in multiple regions throughout the world.
 
Today’s set-top box market is characterized by advanced video services that drive new capabilities such as 3DTV, 3D graphics user interfaces, personalized multi-screen services, rich navigation and improved multimedia and Internet TV experiences. Service providers are competing to deliver these solutions at the highest quality level, the lowest cost and with the highest security protection in order to win new and retain existing subscribers for pay-TV services today. At the same time, this market is also experiencing a rapid transition towards a connected home where semiconductor solutions are making it possible for consumers to access their entertainment and content anywhere and at any time throughout the home.
 
Through our acquisition of NXP’s television and set-top box lines, we are actively participating in this market. Our set-top box products include SoCs and discrete components for worldwide satellite, terrestrial, cable and IPTV networks. We have in our line of set-top box products, a fully integrated 45nm set-top box SoC platform, providing an optimized system that reduces the manufacturer bill-of-materials costs and power consumption, enabling an improved home entertainment experience. Complete reference designs that help manufacturers reduce cost and speed time-to-market are available, and can be bundled with a range of operating systems, middleware, drivers and development tools.
 
By integrating NXP’s set-top box and digital television business lines with our legacy products, we have enhanced our ability to deliver the size and economies of scale necessary to be successful in the digital home entertainment market, with the broad product portfolio, IP expertise and operational infrastructure to support growth. Both the digital TV and set-top box markets share a significant amount of intellectual property. Through this acquisition, we believe that we can further accelerate innovation by leveraging an expanded IP portfolio, SoC design expertise, competitive cost structure and deep relationships throughout the TV and set-top box OEM customer base and ecosystem.
 
Markets and Applications
 
In the year ended December 31, 2010, six months ended December 31, 2009 and years ended June 30, 2009 and 2008, we principally focused our efforts on continuing development of leading edge video, audio and demodulator processing capabilities, which are marketed as discrete components, and the design, development and marketing of our SoC products, which integrate our IP as well as licensed IP from other providers. Our digital media solutions products accounted for all of our total revenues for the year ended December 31, 2010, six months


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ended December 31, 2009 and for the years ended June 30, 2009 and 2008. We plan to continue developing our next generation SoC and discrete products for the worldwide DTV and set-top box markets.
 
The extension of our product portfolio through the acquisition of the FRC, DRX and audio decoder product lines from Micronas allows us to address new markets and develop new technologies for existing markets. There is synergy between the SoC and discrete component business. It is possible that new technology, such as improved picture quality, higher frame rates and higher resolution will first be introduced in discrete products and later migrate as proven solutions into the main SoC for TV applications. A new discrete component is required when a new standard emerges. For example, in certain parts of the European Union market, (United Kingdom and Finland), the reception (demodulation) technology standard changed from DVB-T to DVB-T2, starting in 2010. The DRX products address the TV market either as part of a NIM (Network Interface Module) or on the main processor board. These DRX products are also used in PC TV and STB applications.
 
Our audio intellectual property acquired from Micronas supports the high quality requirements of TV manufacturers through integration of audio features into our SoC products. In addition, our new discrete audio products are suitable for home-audio markets. We are currently offering our discrete audio products for use in sound-projectors, surround sound, sound bars and home theater audio systems.
 
The high level of functional integration and video quality of our TV SoCs and FRCs enables our customers to have flexibility and cost advantages in their advanced TV designs. Our video processor converts both standard and high-definition analog TV signals into a high-quality progressive-scan video signal suitable for today’s advanced digital televisions. The HiDTV® family applies the same concept of functional integration and video quality excellence to standard-definition and high-definition digital broadcast signals, as well as internet content. We expect that the transition to digital broadcasting will continue, and we believe our future success in large part depends on our ability to integrate new technologies and have products that support market volume opportunity on an ongoing basis.
 
We currently are shipping SoCs that have been designed using the 45 nanometer process. It provides significant benefits over the older geometries by enabling lower power consumption, smaller size, higher yields and higher levels of integration.
 
Digital Television Products:
 
We have been developing products for digital media applications since 1999 and have focused our strategy around providing our customers with advanced picture quality independent of signal input, supporting advanced video technologies such as 3D and providing superior connectivity technologies. The DTV market in particular has emerged as a high volume market for our products. Our DTV products are designed to optimize and enhance video quality for various display devices, including LCD, plasma and 3D televisions.
 
System-on-Chip (SoC) Products for TV
 
Our SoC family of products provides high levels of functional integration and video quality, enabling our customers both flexibility and cost advantages in their advanced TV designs. Our rich portfolio of IP enables the integration of all required functions for a given market segment including demodulators, video decoding and picture quality processing as well as frame-rate conversion and audio. Our newest SoC products offer connected TV features that enable TV sets to accept digital media through a storage device, home network, cable and satellite, or the Internet. These products also feature support for a variety of widget engines and applications that enable consumers to easily use a wide range of content from the Internet, including data and streaming video, through their TV.
 
FRC
 
Our family of frame rate converter products provides superior solutions for digital display picture quality, removing disturbing film judder and eliminating motion blur as well as enhancing color and sharpness. It removes motion blur for standard and high-definition content by up-converting the picture frame rate up to 240Hz. It calculates and inserts additional picture frames based on motion vector estimation and compensation. This


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eliminates the unpleasant film judder which appears with film material displayed on a conventional 50Hz or 60Hz Flat Panel TV and provides a lively and vibrant viewing experience. Our FRCs also support LED backlight dimming, a leading panel technology that is important for increasing contrast as well as reducing overall power consumption of the TV.
 
DRX
 
Our DTV demodulator family accommodates most worldwide DTV transmission standards. It covers DVB-C (Europe and China), ATSC (North America and Korea) and DVB-T (Europe). The DRX-J (for North America) and DRX-K (for Europe) devices are a family of pin-to-pin compatible demodulators supporting the broadcast standards in Europe and North America. DRX are unique hybrid demodulators for analog and digital broadcast, both terrestrial and via cable. We continue to develop products for new standards like DVB-T2, ISDB and China Terrestrial.
 
Audio Decoder
 
The MAP-M / MSP-M IC families represent solutions comprised of all required building blocks to address high-quality home-audio and TV-audio applications. The MAP-M combines a powerful digital signal processing, or DSP, for decoding and post processing with digital interfaces such as S/PDIF, asynchronous I2S and Hi-resolution PWM. On-chip analog I/Os include line, phono, and microphone inputs as well as D/A converters for line and amplifier outputs. An integrated HP-amplifier completes the system. The MSP-M has the same building blocks as the MAP-M, but is additionally equipped with a demodulator/stereo decoder for all analog TV-audio standards including NIC AM and FM stereo radio. In addition to the available licensed technologies from BBE, Dolby or SRS and our own sophisticated meloD Audio Processing, MAP-M / MSP-M can be easily extended with customer specific algorithms avoiding the cost for an additional DSP.
 
Set-top Box (STB) Products:
 
Our set-top box line-up now features the world’s first fully integrated 45nm STB SoC platform, providing a family of solutions that deliver advanced performance, industry leading power management and support for on-line VOD services. We offer products targeted for the major markets within set-top box: Satellite, Cable & IPTV and Terrestrial STB as follows:
 
Satellite STB
 
We offer a full range of chip-set solutions for pay-TV operator and Free-to-air STBs including DVB-S/DVB-S2/8-PSK demodulators, highly integrated SoCs and PSTN modem interface ICs. The STB SoC portfolio covers a broad spectrum of customer needs from very low cost SD MPEG-2 SoCs to high performance HD H.264 DVR SoCs. Multiple generations of Trident SoCs have been deployed in leading operator networks worldwide and support the industry leading conditional access security systems and middleware platforms.
 
Cable & IPTV STB
 
We offer a full range of chip-set solutions for cable operator & IPTV STBs’ including highly integrated SoCs. The STB SoC portfolio covers a broad spectrum of customer needs from very low cost SD MPEG-2 SoCs to high performance HD H.264 DVR SoCs. We also offer products for DOCSISR modems. Multiple generations of Trident SoCs have been deployed in leading operator networks worldwide and support the industry leading conditional access security systems and middleware platforms.
 
Terrestrial STB
 
We offer a full range of chip-set solutions for Free-to-air & pay-TV STBs including DVB-T demodulators and highly integrated SoCs. The STB SoC portfolio covers a broad spectrum of customer needs from very low cost SD MPEG-2 SoCs to high performance HD H.264 DVR SoCs. Multiple generations of Trident SoCs have been deployed in terrestrial broadcast networks worldwide and support leading industry middleware platforms.


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Our STB chip-set solutions are supported with complete system hardware reference designs and embedded system software.
 
Manufacturing
 
Wafer Fabrication
 
We have adopted a “fabless” manufacturing strategy whereby we contract-out our wafer fabricating needs to qualified contractors that we believe provide cost, technology or capacity advantages for specific products. As a result, we have generally been able to avoid the significant capital investment required for wafer fabrication facilities and to focus our resources on product design, quality assurance, marketing and customer support. During the year ended December 31, 2010, our manufacturing requirements were principally served by Taiwan Semiconductor Manufacturing Corporation, or TSMC; United Microelectronics Corporation, or UMC, NXP and Micronas. During the year ended December 31, 2009, UMC and Micronas provided all of our foundry requirements.
 
Assembly and Test
 
We purchase product in wafer form from foundries and contract with third-party subcontractors and one related party to provide chip packaging and testing. Our wafer probe testing is conducted principally by independent wafer probe test subcontractors in Taiwan. After the completion of the wafer probe tests, the dies are assembled into packages and tested by our primary subcontractors, Siliconware Precision Industries Co., Ltd., ASE and NXP in Taiwan and Micronas in Germany. The availability of assembly and testing services from these subcontractors could be materially and adversely affected by the financial conditions of the subcontractors given the recent global economic environment. See “Risk Factors” under Item 1A of this Report for a more detailed discussion of the risks associated with our dependence on third party assembly and test subcontractors.
 
Quality Assurance
 
In order to manage the production and back-end operations, we have maintained personnel closer to our manufacturing and test subcontractors. Our goal is to increase the quality assurance of the products while reducing manufacturing cost. To ensure the integrity of our suppliers’ quality assurance procedures, we develop detailed test procedures and test specifications for each product produced and we require the third-party contractors to follow those procedures and meet our specifications before shipping finished products. In general, we have experienced a relatively low amount of product returns from our customers; however, our future return experience may vary because our more advanced, more complex SoC products are more difficult to manufacture and test. In addition, some of our customers may subject our more advanced products to more rigid testing standards than have been applied to our prior products.
 
Research and Development
 
Developing products based on advanced technological concepts is essential to our ability to compete effectively in the digital media market. We maintain a team of product research and development and engineering staff responsible for product design and engineering. We have conducted substantially all of our product development in-house and, as of December 31, 2010, December 31, 2009 and June 30, 2009, our staff of research and development personnel comprised 1,128, 464, and 517 people, respectively. Research and development expenditures totaled approximately $175 million, $59.7 million and $53 million in the year ended December 31, 2010, year ended December 31, 2009 (unaudited) and the year ended June 30, 2009, respectively.
 
We believe that the achievement of higher levels of SoC integration and the timely introduction of new products is essential to our growth. We have previously invested the largest component of our engineering resources in our Shanghai, China facility. Through the acquisitions of the Micronas and NXP product lines, we also have research and development facilities in Freiburg, Germany, Eindhoven and Nijmegen, The Netherlands, and Bangalore and Hyderabad, India. In addition to our facilities discussed above, we have design centers in Austin, Texas and Sunnyvale, California, San Diego, California, Haifa, Israel and Beijing, China.


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Sales, Marketing and Distribution
 
We sell our products primarily to digital television and set-top box OEMs in South Korea, Japan, Europe and Asia Pacific, either directly or through supplier channels. We consider these OEMs to be our customers. Our products are sold through direct sales efforts, distributors and independent sales representatives. Historically, a large portion of our revenues have been generated by sales to a relatively small number of customers. All of our revenues to date have been denominated in U.S. dollars or in 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. Our DTV and STB products are marketed around the world.
 
Our future success depends in large part on the success of our sales to leading DTV and STB manufacturers. Accordingly, the focus of our sales and marketing efforts is to increase sales to the leading DTV and STB manufacturers and OEM channels. Competitive factors of particular importance to success in such markets include platform support, product performance and features, and the integration of functions on a single integrated circuit chip.
 
We service our customers primarily through our offices in the United States, Taiwan, China, Europe, South Korea and Japan. As digital media is rapidly developing in the United States, Europe, Japan, South Korea, China, and elsewhere, we expect that leadership in the digital media industry will also rapidly change. Our goal is to become a leading supplier to a broad range of manufacturers in this marketplace and to manufacturers for other markets as DTV and STB sales increase in those markets.
 
During the year ended December 31, 2010, six months ended December 31, 2009, and years ended June 30, 2009 and 2008, nearly all of our revenues were generated through sales to customers located in Asia and Europe. A small number of customers have historically accounted for a majority of our revenues in any quarter. For the year ended December 31, 2010 and six months ended December 31, 2009, sales to our top three customers represented approximately 40% and 54%, of our total revenues, respectively. For the years ended June 30, 2009 and 2008, sales to our top three customers represented approximately 59% and 76% of our total revenues, respectively. Sales to any particular customer may fluctuate significantly from quarter to quarter and have in fact fluctuated significantly in the past. For additional segment and geographic information, see Note 14, “Geographic Information and Major Customers,” of Notes to Consolidated Financial Statements.
 
Backlog
 
Our sales are primarily made pursuant to standard purchase orders and not pursuant to long term agreements specifying future quantities or delivery dates. Also, we recognize product revenues on sales made to our distributor channel mostly on a deferred revenue basis and this channel represents approximately 27% of our revenues. Backlog comprised of orders from distributors is not directly indicative of our near term revenues. Backlog is influenced by several factors including market demand, pricing and customer order patterns in reaction to product lead times. The semiconductor industry is characterized by short lead time orders and quick delivery schedules. The quantity of products purchased by our customers as well as shipment schedules are subject to revisions that reflect changes in both the customers’ requirements and in manufacturing availability. Backlog quantities and shipment schedules under outstanding purchase orders are frequently revised to reflect changes in customer needs, and agreements calling for the sale of specific quantities are either contractually subject to quantity revisions or, as a matter of industry practice, are sometimes not enforced. Therefore, a significant portion of our order backlog may be cancellable and has in fact been cancelled in the past due to changes in customer needs.
 
For these reasons, in light of industry practice and this experience, we do not believe that backlog as of any particular date is indicative of future results.
 
Seasonality
 
Our products largely serve the consumer electronics market. Typically we experience slower sales of our TV products in the first calendar quarter, and the strongest sales of TV products in the third calendar quarter. There is no


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apparent seasonal pattern in demand for our set-top box products. The impact of seasonality is not of a consistent magnitude year to year, but as a general rule it is directionally consistent.
 
Competition
 
The global digital media market and related industries are highly competitive and characterized by rapid technological change. Our ability to compete depends primarily on our ability to commercialize our technology, continually improve our products and develop new products that meet constantly evolving customer requirements. We expect competition to continue. We believe that the principal factors upon which competitors compete in our markets include, but are not limited to:
 
  •  customer interface and support
 
  •  time-to-market;
 
  •  system cost;
 
  •  product capabilities;
 
  •  price;
 
  •  product quality; and
 
  •  intellectual property.
 
We compete with a number of major domestic and international suppliers of integrated circuits and related applications in the digital media market. In TV, our principal competitors are captive solutions from large TV OEMs as well as merchant solutions from Broadcom Corporation, MediaTek Inc., MStar Semiconductor, NEC Corporation, Novatek, STMicroelectronics and Zoran Corporation. In set-top box, our principal competitors are Broadcom and STMicroelectronics. This competition has resulted and will continue to result in declining average selling prices for a given level of functionality and performance as well as requirements for greater functionality, performance, and integration at various price points. In our target markets, we also may face competition from newly established competitors and suppliers of products based on new or emerging technologies. We also expect to encounter further consolidation in the market in which we compete.
 
Many of our current competitors have greater name recognition, larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do. Consequently, these competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the promotion and sale of their products. In addition, competitors may develop technologies that more effectively address our target market with products that offer enhanced features, lower power requirements or lower costs. Increased competition could result in pricing pressures, decreased gross margins and loss of market share and may materially and adversely affect our business, financial condition and results of operations.
 
Intellectual Property
 
Our success and future revenue growth depend, in part, on our ability to protect our intellectual property. We attempt to protect our trade secrets and other proprietary information primarily through agreements with customers and suppliers, proprietary information agreements with employees and consultants and other security measures. Although we intend to protect our rights vigorously, there can be no assurance that these measures will be successful. As of December 31, 2010, we had over 340 U.S. patents and 1100 patents in foreign jurisdictions, and 750 patent applications pending in different countries, including patent and patent applications acquired in connection with the May 2009 and February 2010 acquisitions of assets and intellectual property from Micronas and NXP, respectively. The patents and applications cover various technologies, such as motion estimation/motion compensation, video decoding, demodulators and conditional access security, as well as advanced 45nm SoC technology. However, there can be no assurance that third parties will not independently develop similar or competing technology or design around any patents that may be issued to us.


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We may from time to time enter into license agreements with third parties permitting them to practice certain of our patents. For example, in December 2010, we entered into a license agreement with MStar Semiconductors, Inc. relating to a part of our motion estimation/motion compensation patent portfolio. The licensed patents are directed to the display of high definition and 3D images for high-quality televisions and other video enabled LCD display devices.
 
The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. From time to time, we have received notices claiming that we or our customers have infringed third-party patents or other intellectual property rights. To date, licenses generally have been available to us where third-party technology was necessary or useful for the development or production of our products. There can be no assurance that third parties will not assert additional claims against us with respect to existing or future products or that licenses will be available on reasonable terms, or at all, with respect to any third-party technology. Any litigation to determine the validity of any third-party claims could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not such litigation is determined in our favor. In the event of an adverse result in any such litigation, we could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology that is the subject of the litigation. There can be no assurance that we will be successful in such development or that any such licenses would be available. Patent disputes in the semiconductor industry have often been settled through cross licensing arrangements. We may not be able to settle any alleged patent infringement claim through a cross-licensing arrangement. In the event any third party made a valid claim against us, or our customers, and a license was not made available to us on commercially reasonable terms, we would be adversely affected. In addition, the laws of certain countries in which our products have been or may be developed, manufactured or sold, including China, Taiwan and South Korea, may not protect our products and intellectual property rights to the same extent as the laws of the U.S.
 
We may in the future initiate claims or proceedings against third parties for infringement of our proprietary rights to determine the scope and validity of our proprietary rights. Any such claims could be time-consuming, result in costly litigation and diversion of technical and management personnel or require us to develop non-infringing technology or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on acceptable terms, if at all. In the event of a successful claim of infringement and our failure or inability to develop non-infringing technology or license the proprietary rights on a timely basis, our business, operating results and financial condition could be materially adversely affected.
 
Employees
 
As of December 31, 2010, we had 1,522 full-time employees, including 1,128 individuals engaged in research and development, 109 engaged in finance, legal, and general administration, 159 engaged in sales and marketing, and 126 engaged in manufacturing operations. Our future success will depend in great part on our ability to continue to attract, retain and motivate highly qualified technical, marketing, engineering and management personnel, and to successfully integrate the new employees who joined us in connection with the NXP Transaction. Outside of Europe, where certain of our employees are represented by employee works councils, our labor relations with employees are generally not subject to collective bargaining agreements. We have never experienced a work stoppage and we believe that our employee relations are good.
 
ITEM 1A.   RISK FACTORS
 
Set forth below and elsewhere in this Report on Form 10-K 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.


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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. The integration process has resulted in the loss of some key employees and other senior management, and could 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;
 
  •  retention of key Trident employees and integration of key employees acquired from NXP or Micronas;
 
  •  failure to successfully integrate and harmonize financial systems required to support our larger operations, including the development and implementation of a global enterprise resource planning system designed to integrate legacy systems from Trident and NXP.
 
  •  retention of customers and strategic partners of products that we have acquired with each acquisition;
 
  •  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;
 
  •  effective anticipation of the market needs and achievement of market acceptance of our products and services utilizing the technology acquired in each acquisition;
 
  •  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;
 
  •  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.


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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.
 
We depend on a small number of large customers for a significant portion of our sales. The loss of a significant design win, loss of a key customer or a significant reduction in or cancellation of sales to a key customer could significantly reduce our revenues and negatively impact our results of operations.
 
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 year ended December 31, 2010, for instance, 40% of our revenues were from sales to three 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. A significant portion of our revenue in any period may also depend on a single product design win with a particular customer. As a result, the loss of any such key design win or any significant delay in the ramp of volume productions of the customer’s products into which our product is designed could materially and adversely affect our financial condition and results of operations. Our results in the fourth quarter of fiscal 2010 were negatively impacted, in part, due to reductions, cancellations or delays in orders from key customers.
 
We may be unable to replace 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.
 
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 Micronas and NXP Transactions and the reorganization of senior management during 2010, we appointed an interim Chief Executive Officer following the January 2011 resignations of our former Chief Executive Officer and former President. Our senior management team, which was reorganized following the NXP Transaction, has only worked together or a short period of time. During 2010 we reorganized our Board of Directors, and now have eight members of the Board of Directors, four of whom joined following completion of the NXP Transaction, and one vacancy. 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.


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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 as we develop and begin to execute our operational and product development strategies. 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 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. During 2010, we experienced, and may continue to experience, difficulty in hiring and retaining qualified engineering personnel in Shanghai, China, Austin, Texas and Taiwan. If we are not successful in attracting, assimilating or retaining qualified personnel to fulfill our current or future needs, our business may be harmed.
 
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 U.S., Europe, Asia, and other locations, which have increased the difficulty of managing our operations. Prior to 2010, we did not have a significant number of employees in Europe, particularly Germany and The Netherlands, and had 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.
 
Our reliance upon a very small number of foundries for the manufacture, assembly and testing of our integrated circuits could make it difficult to maintain product flow and negatively affect our customer relationships, revenues and operating margins.
 
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 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


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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, during 2010 we 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. As a result of these conditions, our foundry subcontractors could experience financial difficulties that would impede their ability to operate effectively. 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 product revenues, cost of product revenues and results of operations would be adversely affected, and we may not have alternative sources of supply to manufacture such components.
 
Constraints or delays in the supply of our products, whether because of capacity constraints, unexpected disruptions at our independent foundries, at NXP or Micronas or at our assembly or testing houses, delays in additional production at existing foundries or in obtaining additional production from existing or new foundries, shortages of raw materials, or other reasons, could result in the loss of customers and other material adverse effects on 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.
 
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, Novatek, 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.
 
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.
 
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


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demand of some of our customers for certain products due to shortages in wafer supply that occurred during 2010. The lack of a readily available second source could cause significant delays in shipping products, or even shortages which could damage our relationships with current and prospective customers and harm our sales and financial results.
 
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.
 
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.
 
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.
 
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 will create an obligation to purchase the inventory in excess of expected demand. If such excess inventory becomes obsolete or we cannot sell or use it, our operating results could be harmed. 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.


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Our success depends upon the digital media market and we must continue to develop new products and to enhance our existing products, including transitioning to smaller geometry process technologies.
 
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 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, using smaller geometry process technologies, in order to permit enhanced systems at the same or lower cost.
 
Our failure to predict market needs accurately or to timely develop new competitively priced products or product enhancements that incorporate new industry standards and technologies, including integrated circuits with increasing levels of integration and new features, using smaller geometry process technologies, 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.
 
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.
 
Our ability to borrow under our credit facility and the financial covenants in the facility may adversely affect our financial position, results of operations and liquidity.
 
Our revolving credit facility agreement with Bank of America contains financial and other covenants that must be met for us to remain in compliance with the agreement, including a covenant which would initially preclude us from accessing funds under the credit facility in excess of our cash and equivalent resources. The agreement also contains customary restrictions, requirements and other limitations, including our ability to incur additional indebtedness, grant liens, make capital expenditures, merge or consolidate, dispose of assets, pay dividends or make distributions, change the method of accounting, make investments and enter into certain transactions with affiliates, in each case subject to materiality and other qualifications, baskets and exceptions customary for a credit facility of this size and type. The agreement also contains a financial covenant that requires us to maintain a specified fixed charge coverage ratio if liquidity or availability under the agreement drops below certain thresholds.
 
We may borrow under the agreement based upon a certain percentage of our eligible accounts receivable outstanding, subject to eligibility requirements, limitations and covenants. As of March 4, 2011 there are no borrowings outstanding under the agreement. However, if we are not in compliance in the future with covenants under the agreement and are therefore unable to borrow under the credit facility or to refinance existing indebtedness, we may be prevented from using the agreement to fund our working capital needs.


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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, which could adversely impact our operating results.
 
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, who build display devices and other products based on specifications provided by branded suppliers. We have a more traditional distributor relationship with our remaining distributors, one that involves 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, production forecasts and sales to their end user customers. Our sales are made on the basis of customer purchase orders rather than long-term purchase commitments. Our distributors and customers may cancel or defer orders at any time, but we must order wafer inventory from our foundries several months in advance. This requires us to manage a more complex supply chain as well as 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 lead to significant charges for obsolete inventory or cause us to forego significant revenue opportunities, lose market share, damage customer relationships and accurately report revenue derived from distributor sales, any of which could adversely impact our operating results.
 
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.
 
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. Further, as a result of the departure of our prior CEO in January 2011, directors appointed by NXP currently constitute four of the eight members on our Board. 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.
 
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 2010 was uncertain, and this uncertainty is expected to continue during 2011. 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 during calendar 2011.
 
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, reducing our workforce and implementing other cost saving initiatives.
 
We recorded restructuring charges of $0.8 million in the quarter ended December 31, 2008, and $1.6 million in the quarter ended September 30, 2009. In connection with the NXP Transaction, we implemented further restructurings or work force reductions that took place during 2010. During the year ended December 31, 2010, we recorded $28.3 million of restructuring expenses related to severance and related employee benefits. Restructuring charges are recorded under “Restructuring charges” in our Consolidated Statement of Operations.
 
Prior to the close of the NXP Transaction, NXP initiated a restructuring plan pursuant to which the employment of some NXP employees was terminated upon the close of the NXP Transaction. 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 $28.3 million for the year ended December 31, 2010. The $3.6 million of severance cost was paid by NXP after the close of the NXP transaction, 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.
 
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 year ended June 30, 2006 filed on August 7, 2007, we conducted an investigation into our


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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 the 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 Item 3, “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. Plaintiffs in all cases alleged 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 appointed a Special Litigation Committee, or SLC, 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.
 
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. The details of that partial settlement, which disposed of the federal litigation as to all individual defendants other than Mr. Lin and as to the consolidated state court action in its entirety, were previously disclosed in our Form 8-K filed on February 10, 2010. 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.
 
On February 15, 2011, we entered into a Stipulation of Settlement to resolve the federal litigation in its entirety, or Proposed Settlement, and on February 17, 2011, the federal court preliminarily approved the Proposed Settlement. A hearing for consideration of final approval of the Proposed Settlement has been scheduled for April 15, 2011. Final approval, without appeal, of the Proposed Settlement would satisfy the contingency in the settlement of Mr. Lin’s claims against us. We cannot predict whether the federal court will order the final approval of the Proposed Settlement and, if it does, whether such decision will be successfully appealed. As a result, we cannot predict whether Mr. Lin’s counterclaims against us in the federal litigation 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 and relating to the Proposed Settlement, including expenses for the reimbursement of certain legal fees of at least Mr. Lin 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 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 intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. 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 Consolidated Financial Statements during the period in which any impairment of our 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


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fair value estimates on assumptions believed to be reasonable, but which are inherently uncertain. For example, in the year ended December 31, 2010, we recorded a $2.5 million impairment charge for technology licenses and prepaid royalties. 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 from sales to manufacturers in the consumer electronics industry. Demand from these customers fluctuates significantly by year and by quarter, driven by consumer preferences, the development of new technologies and brand performance. Downturns in this industry can cause abrupt fluctuations in product demand, production over-capacity and accelerated average selling price declines. The success of our products depends on the success of the end customers for these products in the market place. The current global downturn makes it difficult for our customers, our suppliers and us to accurately forecast and plan future business activities. Our 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.
 
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


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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 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.
 
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 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 video decoding 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


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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 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.
 
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, changes in our senior management, unfavorable conditions in the digital media market, failure to obtain design wins, industry consolidation, wafer supply constraints, and any litigation or regulatory actions arising in connection with these matters, 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 publicly traded securities, particularly those of high-technology companies, could cause the price of our stock to fluctuate from time to time.
 
Our operating results may be adversely affected by the European financial restructuring and related global economic conditions.
 
The current 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 U.S. or other key


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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 U.S.
 
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 U.S.; and
 
  •  unexpected changes in regulatory requirements.
 
Our international sales for the year ended December 31, 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.
 
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.
 
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.


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ITEM 1B.   UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2.   PROPERTIES
 
Information regarding our principal properties as of December 31, 2010 is set forth below:
 
                             
            Square
       
Location
 
Type
 
Principal Use
 
Footage
 
Ownership
 
Expiration
 
Sunnyvale, CA (Headquarters)
  Office   Principal Executive Offices, Research, Engineering, Marketing, and Sales and General Administration     57,642     Lease     3/31/2015  
Austin, TX
  Office   General and Administrative, Research & Engineering     71,003     Lease     Various1  
Chicago, IL
  Office   Sales and administration     6,126     Lease     8/31/2011  
Taipei, Taiwan
  Office   General and Administration, Operation,     20,436     Lease     8/31/2011  
        Sales Administration, Research, and                    
        Engineering                    
Kaohsiung, Taiwan
  Office   Operations     10,600     Lease     5/31/2013  
Tokyo, Japan
  Office   Sales Administration     4,852     Lease     5/31/2013  
Seoul, Korea
  Office   Sales Administration     5,226     Lease     1/31/2012  
Beijing, China
  Office   Research and Engineering     5,371     Lease     6/15/2013  
Hong Kong, China
  Office and warehouse   General and Administration, Sales Administration, and Warehouse     5,216     Lease     3/31/2012  
Shanghai, China
  Office   General and Administration, Research, Engineering, and Sales Administration     107,639     Owned      
Haifa, Israel
  Office   Research and Engineering     17,222     Lease     6/30/2012  
Hyderabad, India
  Office   Research and Engineering     24,700     Lease     1/31/2014  


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            Square
       
Location
 
Type
 
Principal Use
 
Footage
 
Ownership
 
Expiration
 
Belfast, Ireland
  Office   Research and Engineering     5,270     Lease     8/31/2015  
Freiburg, Germany
  Office   Research and Engineering     17,812     Lease     8/31/2019  
Eindhoven, The Netherlands
  Office   Sales, Research and Engineering     22,550     Lease     3/31/2014  
Nijmegen, The Netherlands
  Office   Research and Engineering     10,370     Lease     12/31/2014  
 
 
(1) We have leases for a 35,252 and 35,751 square foot office space that expire October 31, 2012 and June 30, 2016, respectively.
 
As of December 31, 2010, we owned or leased a total of approximately 445,243 square feet of space worldwide including the locations listed above and office space for smaller sales and service offices in several locations throughout the world. Our operating leases expire at various times through August 31, 2019. Additional information regarding these leases is incorporated herein by reference from Note 6, “Commitments and Contingencies” of the Notes to Consolidated Financial Statements. We believe our properties are adequately maintained and suitable for our intended use.
 
ITEM 3.   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 video decoding products infringe a patent relating generally to compressing and decompressing digital video. The complaint seeks a permanent injunction against Trident 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.
 
Shareholder Derivative Litigation
 
Trident has been named as a nominal defendant in several purported 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. Plaintiffs in all cases alleged 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 its financial statements); and that as a result those officers and directors are liable to us. No particular amount of damages has been alleged, and by the nature of the lawsuit no damages will be alleged against us. Our Board of Directors appointed a Special Litigation Committee (“SLC”) composed solely of independent directors to review and manage any claims that we may have relating to the stock option grant practices investigated by the Special Committee. The scope of the SLC’s authority includes the claims asserted in the derivative actions.
 
On March 26, 2010, the federal court approved settlements with all defendants other than Frank Lin, our former CEO. The details of that partial settlement, which disposed of the federal litigation as to all individual defendants other than Mr. Lin and as to the consolidated state court action in its entirety, were previously disclosed in our Form 8-K filed on February 10, 2010.
 
On June 8, 2010, Mr. Lin filed a counterclaim against Trident. In that counterclaim, Mr. Lin sought recovery of payments he claimed he was promised during the negotiations surrounding his eventual termination and also losses he claimed he has suffered because he was not permitted to exercise his Trident stock options between January 2007 and March 2008. On February 11, 2011, we entered into a settlement agreement with Mr. Lin regarding his counterclaims, contingent on the settlement of the derivative litigation pursuant to certain terms.

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On February 15, 2011, we entered into a Stipulation of Settlement to resolve the federal litigation in its entirety, or Proposed Settlement, and on February 17, 2011, the federal court preliminarily approved the Proposed Settlement. A hearing for consideration of final approval of the Proposed Settlement has been scheduled for April 15, 2011 at 9:00 a.m. in Courtroom 3 of the United States District Court in San Jose, California. Final approval, without appeal, of the Proposed Settlement would satisfy the contingency in the settlement of Mr. Lin’s counterclaims against us. We cannot predict whether the federal court will order the final approval of the Proposed Settlement and, if it does, whether such decision will be appealed. As a result, we cannot predict whether Mr. Lin’s counterclaims against us in the federal litigation 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 and related to the Proposed Settlement, including expenses for the reimbursement of certain legal fees of at least Mr. Lin 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. . Pursuant to the same judgment, we received a payment of $817,509 from Mr. Lin, representing $650,772 in disgorged profits gained as a result of conduct alleged by the SEC in its civil complaint against him, together with prejudgment interest thereon of $166,737. 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 2006 Plan S-8 in order to exercise their vested options. During the three months 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 three months 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


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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) the written permission of us.
 
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 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 year then ended. Following the March 2010 partial settlement of the derivative litigation, which included a release of claims by our two former non-employee directors, we reduced the contingent liability by $1.5 million. However, because the derivative litigation is still pending with respect to Mr. Lin, who may seek compensation from us relating to the exercise of his fully vested stock options in the event that the Proposed Settlement entered into during February 2011 is either not finally approved by the federal court or successfully appealed thereafter; a $2.8 million contingent liability remained in “Accrued expenses and other current liabilities” in the Consolidated Balance Sheet as of December 31, 2010.
 
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 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 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 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.
 
Commercial Litigation
 
In June 2010, Exatel Visual Systems, Ltd (“Exatel”) filed a complaint against Trident and NXP Semiconductors USA, Inc. (“NXP”), in Superior Court for the State of California, No. 1-10-CV-174333, alleging the following five counts: (1) breach of contract, (2) breach of implied covenant of good faith and fair dealing, (3) fraud by misrepresentation and concealment, (4) negligent misrepresentation, and (5) breach of fiduciary duty. The complaint arises from a series of alleged transactions between Exatel and NXP’s predecessor, Conexant Systems, Inc. pertaining to a joint product development project they undertook commencing in 2007. Trident and NXP have each tendered an indemnity claim to the other for damages and fees arising out of the lawsuit pursuant to a contractual indemnity agreement between them. Both have refused. We have filed a demurrer seeking to dismiss the lawsuit primarily on the grounds that we are not a party to any contract with Exatel. Prior to the hearing on demurrer, Exatel dismissed NXP without prejudice from the lawsuit and agreed to arbitration after NXP filed a motion to compel arbitration for the claims against it pursuant to contractual arbitration provisions within the relevant contracts. On December 7, 2010, the court sustained our demurrer as to all causes of action, with leave to amend. Exatel has filed an amended complaint. We will demur again, with the hearing set for June 23, 2011. 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.
 
PART II
 
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information and Holders
 
Our common stock has been traded on the NASDAQ Global Select Market since our initial public offering on December 16, 1992 under the symbol “TRID.” The following table sets forth, for the periods indicated, the quarterly high and low sales prices for our common stock as reported by NASDAQ:
 
                 
    High   Low
 
For the year ended December 31, 2010
               
First Quarter
  $ 2.27     $ 1.41  
Second Quarter
  $ 2.03     $ 1.35  
Third Quarter
  $ 1.85     $ 1.27  
Fourth Quarter
  $ 2.56     $ 1.63  
Six Months Ended December 31, 2009
  $ 3.10     $ 1.60  
Three Months Ended September 30, 2009
  $ 3.10     $ 1.60  
Three Months Ended December 31, 2009
  $ 3.09     $ 1.70  
For the year ended June 30, 2009
               
First Quarter
  $ 4.31     $ 2.26  
Second Quarter
  $ 2.34     $ 1.30  
Third Quarter
  $ 2.24     $ 1.24  
Fourth Quarter
  $ 2.11     $ 1.34  
For the year ended June 30, 2008
               
First Quarter
  $ 19.49     $ 13.52  
Second Quarter
  $ 17.05     $ 5.35  
Third Quarter
  $ 6.57     $ 4.62  
Fourth Quarter
  $ 5.37     $ 3.63  
 
Approximate Number of Stockholders
 
As of December 31, 2010 and December 31, 2009, there were 70 and 166 registered holders of record of our common stock, respectively. The number of beneficial stockholders of our shares is greater than the number of stockholders of record.
 
Dividends
 
Our present policy is to retain earnings, if any, to finance future growth. We have never paid cash dividends and have no present intention to pay cash dividends.
 
Issuer Repurchases of Equity Securities
 
We did not repurchase any of our equity securities during the year ended December 31, 2010. However, from time to time we evaluate whether to repurchase our equity securities.


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Stock Performance Graphs and Cumulative Total Return
 
The following graph compares the cumulative 5 year total return attained by shareholders of our common stock relative to the cumulative total returns of the NASDAQ Composite Index and the Philadelphia Semiconductor Index for the year ended December 31, 2010 and each of the last five years, assuming an investment of $100 at the beginning of such period and the reinvestment of any dividends. The comparisons in the graphs below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock.
 
COMPARISON OF 5 YEARS CUMULATIVE RETURN
Among Trident Microsystems, Inc., The NASDAQ Composite Index and
The Philadelphia Semiconductor Sector Index
 
(PERFORMANCE GRAPH)
 
  •  Assumes $100 invested on December 31, 2005 in stock or index-including reinvestment of dividends.
 
                                                 
    12/05   12/06   12/07   12/08   12/09   12/10
TRID
    100.00       101.00       36.44       10.50       10.33       9.89  
Philadelphia Semiconductor Sector Index
    100.00       97.40       85.10       44.25       75.06       85.89  
NASDAQ Composite Index
    100.00       109.52       120.27       71.51       102.89       120.29  


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ITEM 6.   SELECTED FINANCIAL DATA
 
Change in Fiscal Year End
 
The following selected financial data should be read in conjunction with our financial statements and the notes thereto, and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The consolidated statements of operations data and consolidated balance sheet data have been derived from and should be read in conjunction with our audited consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. As previously announced, in 2009, we changed our fiscal year end to December 31 from June 30. We made this change to better align our financial reporting period, as well as our annual planning and budgeting process, with our business cycle. The change became effective at the end of the quarter ended December 31, 2009. All references to “years”, unless otherwise noted, refer to the 12-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.
 
The following tables include selected consolidated summary financial data for the year ended December 31, 2010 and each of the last five years.
 
TRIDENT MICROSYSTEMS, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
 
                                                 
        Six Months
   
        Ended
   
    Year Ended December 31,   December 31,   Years Ended June 30,
    2010(1)   2009   2009(2)   2008   2007   2006
    (In millions, except per share amounts)
 
Summary of Operations :
                                               
Net revenues
  $ 557.2     $ 63.0     $ 75.8     $ 257.9     $ 270.8     $ 171.4  
Income (loss) from operations
    (172.7 )     (38.3 )     (62.2 )     18.8       40.1       28.4  
Net income (loss)
    (128.9 )     (40.5 )     (70.2 )     10.2       30.1       26.2  
Net income (loss) per share — Basic
    (0.79 )     (0.58 )     (1.12 )     0.17       0.52       0.48  
Net income (loss) per share — Diluted
    (0.79 )     (0.58 )     (1.12 )     0.16       0.48       0.42  
Financial Position at Period End:
                                               
Cash, cash equivalents and short-term investments
  $ 93.2     $ 148.0     $ 187.9     $ 240.0     $ 199.3     $ 152.7  
Working capital
    109.1       124.4       164.9       215.9       158.3       125.3  
Total assets
    370.9       228.5       263.3       309.3       283.9       207.2  
Stockholders’ equity
    224.3       156.1       192.9       237.3       201.8       153.7  
 
 
(1) On February 8, 2010, we completed the acquisition of the television systems and set-top box business lines from NXP.
 
(2) On May 14, 2009, we completed the acquisition of selected assets of the FRC, DRX and audio decoder product lines of the Consumer Division of Micronas.
 
ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-Looking Statements
 
This section and other parts of this Report on Form 10-K 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


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statements. Factors that might cause such differences include, but are not limited to, those discussed in “Item 1A — Risk Factors” above. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of this report. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
 
The following discussion and analysis should be read in conjunction with the consolidated financial statements and the notes to consolidated financial statements included elsewhere in this Form 10-K. This Report on Form 10-K contains forward — looking statements that involve risks and uncertainties. See the disclosure regarding “Forward-Looking Statements” on page 3 of this Form 10-K. All references to “years”, unless otherwise noted, refer to the 12-month calendar year. For example a reference to “2010” or “fiscal year 2010” means the 12-month period that ended on December 31, 2010.
 
Change in Fiscal Year End
 
As previously announced, on November 16, 2009, we changed our fiscal year end to December 31 from June 30. We made this change to better align our financial reporting period, as well as our annual planning and budgeting process, with our business cycle. This Form 10-K reports our financial results for the year ended December 31, 2010. Our financial results for the comparable year ended December 31, 2009 have not been audited. All references to “years”, unless otherwise noted, refer to the 12-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.
 
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 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 managing digital content from multiple sources and 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, 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 any time throughout the home.
 
Although our revenues grew substantially in 2010, revenues in the fourth quarter ended December 31, 2010 declined 33 percent from the prior sequential quarter. Our TV-related revenues typically decline sequentially due to seasonal factors in the calendar fourth and first quarters of every year. However our revenue decline in the fourth quarter exceeded the normal seasonal pattern. We believe that capacity constraints at our foundry partners generally led to over-ordering earlier in 2010 as our customers had high expectations for consumer demand for higher-end TVs, including TVs featuring 3-D technology. When this consumer demand did not materialize as expected, our FRC and SOC business turned down dramatically in Q4. In addition, we lost market share with our largest customer as a result of the capacity constraints in 2010, which led to lower revenues from this customer in the fourth quarter of 2010 and will result in significantly reduced revenues from this customer in 2011. Finally, in the fourth quarter of 2010, we experienced weak sales of our standard definition set-top box products that are sold in the non-cable and non-satellite operator channels. We expect these factors as well as slower than expected program ramp-up and a weaker retail segment for our set-top box products to negatively impact our financial results in the first quarter ending March 31, 2011 and in general we believe that the first half of calendar 2011 will be challenging.
 
We ended the year ended December 31, 2010 with cash and cash equivalents of $93.2 million, consisting of cash and money market funds invested in U.S. treasuries. Our primary source of liquidity is our current cash balance and we expect a significant decline in our cash balance during the first half of calendar 2011. On February 9, 2011, we entered into a $40 million revolving line of credit agreement with Bank of America, N.A., to finance working capital. The new credit facility matures in February 2014. However, this credit facility has restrictive financial


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covenants which would initially preclude us from accessing funds under the credit facility in excess of our cash and equivalent resources. Our current cash balance together with our new revolving credit facility, should provide us with adequate resources to fund our anticipated ongoing cash requirements.
 
We have and may continue to access external financing from time to time depending on our cash requirements, assessments of current and anticipated market conditions and after-tax cost of capital. Our access to capital markets can be impacted by factors outside our control, including economic conditions and there are no guarantees that funds will be available at terms that will be acceptable to us.
 
We expect to ramp new products and customer programs in the second half of 2011 and will see the benefit of ongoing cost reduction activities, with the goal of positioning us for cash flow positive operations in the second half of calendar 2011.
 
Recent Acquisitions
 
On May 14, 2009, we completed our 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, we issued 7.0 million shares of our common stock and warrants to acquire up to 3.0 million additional shares of our 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, 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, to primarily provide sales liaison, marketing and engineering services in Europe. TMEU is located in Freiburg, Germany and TMNM and TMH are located in Nijmegen, The Netherlands.
 
On February 8, 2010, we and our 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, we issued 104,204,348 shares of Trident common stock to NXP, equal to 60% of our 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 accordance with U.S. generally accepted accounting principles, the closing price on February 8, 2010 was used to value Trident common stock issued which is traded in an active market and considered a level 1 input. In addition, we issued to NXP four shares of a newly created Series B Preferred Stock or the Preferred Shares.
 
The purchase price and fair value of the consideration transferred by Trident was $140.8 million. For details of the acquisition, see Note 13, “Business Combinations,” of Notes to Consolidated Financial Statements.
 
Critical Accounting Estimates
 
The preparation of our financial statements and related disclosures in conformity with US 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 Form 10-K 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 Consolidated Financial Statements included in this Report on Form 10-K, we consider the critical accounting policies described below to be affected by critical accounting estimates. Our critical accounting policies that are affected by accounting estimates include revenue recognition, stock-based compensation expense, goodwill and acquired intangible assets, long-lived assets, 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 consolidated financial statements, and actual results could differ materially from these estimates. For a discussion of how these estimates and other factors may affect our business, also see “Risk Factors” In Item 1A.


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Revenue Recognition
 
We recognize revenues in accordance with GAAP when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured.
 
A portion of our sales are made through distributors under agreements allowing for rights of return. We defer recognition of product revenue and costs from sales to significant distributors which contain such rights of return until the products are resold by the distributor to the end user customers. Our revenue reporting is highly dependent on receiving pertinent and accurate data from such distributors in a timely fashion. Distributors provide us with periodic data regarding the product, price, quantity, and end customer when products are resold as well as the quantities of our products they still have in stock. At times, we must use estimates and apply judgments to reconcile distributors’ reported inventories to their activities. Any error in our judgment could lead to inaccurate reporting of our revenues, deferred income and allowances on sales to distributors, and net income.
 
We record estimated reductions to revenue for customer incentive offerings and sales returns allowance in the same period that the related revenue is recognized. Our customer incentive offerings primarily involve volume rebates for our products in various target markets. If market conditions were to decline, we may take actions to increase customer incentive offerings, possibly resulting in an incremental reduction of revenue at the time the incentive is offered. Our sales returns allowance for estimated product returns is based primarily on historical sales returns, analysis of credit memo data and other known factors at that time. If product returns for a particular year exceed historical return rates, we may determine that additional sales returns allowance are required to properly reflect our estimated exposure for product returns.
 
Stock-based Compensation Expense
 
We account for share-based payments, including grants of stock options and awards to employees and directors, in accordance with GAAP, which requires that share-based payments be recognized in our consolidated statements of operations based on their fair values and the estimated number of shares we ultimately expect will vest. In addition, we recognize stock-based compensation expense on a straight-line basis over the service period of all stock options and awards other than the performance-based awards with market conditions that are expensed using the accelerated method.
 
We value our stock-based compensation awards using the Black-Scholes option pricing model, except for performance-based options with market conditions, for which we use a Monte Carlo simulation to value the award. 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. Trident’s stock options have characteristics significantly different from those of traded options. Changes in the assumptions used in Black-Scholes model can materially affect the fair value estimates. 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. We use historical volatility in deriving our expected volatility assumption as allowed under GAAP because we believe that future volatility over the expected term of the stock options is not likely to differ materially from the past. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of our stock options. The expected dividend assumption is based on our history and expectation of not paying dividends in the foreseeable future.
 
Goodwill and Acquired Intangible Assets
 
We record goodwill when the consideration paid for an acquisition exceeds the fair value of net tangible and intangible assets acquired. We record gains on acquisitions when the fair value of net tangible and intangible assets acquired exceeds the consideration paid for an acquisition. We amortize acquisition-related identified intangibles on a straight-line basis, reflecting the pattern in which the economic benefits of the intangible asset is consumed, over their estimated economic lives of 4 to 5 years for core and developed technology, 2 to 3 years for customer relationships, 1 year for backlog, 4 to 5 years for patents and the contractual term for service agreements.


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Goodwill is not amortized. However, we measure and test goodwill on an annual basis during the quarter ended June 30 or more frequently if we believe indicators of impairment exist. The performance of the test involves a two-step process. Each step requires us to make judgments and involves the use of significant estimates and assumptions, we believe to be reasonable but that are unpredictable and inherently uncertain.
 
The first step requires comparing the fair value of the reporting unit to its net book value, including goodwill. We operate under two reporting units, television systems and set top boxes. To determine the fair values of the reporting units used in the first step, we use a discounted cash flow approach. A potential impairment exists if the fair value of the reporting unit is lower than its net book value. The television systems reporting unit failed step one of the annual goodwill impairment test at June 30, 2010. We perform the second step of the process, and it involved determining the difference between the fair value of the reporting unit’s net assets other than goodwill to the fair value of the reporting unit and the difference was less than the net book value of goodwill. Consequently, we recorded an impairment of Goodwill.
 
We have acquired in-process research and development, or IPR&D, projects as the result of our business combinations. The fair values of the acquired IPR&D projects were determined through estimates and valuation techniques based on the terms and details of the related acquisitions. The amounts allocated to IPR&D projects are not expensed until technological feasibility is reached for each project. Upon completion of development for each project, the acquired IPR&D will be amortized over its useful life.
 
Long-lived Assets.
 
We account for long-lived assets, including other purchased finite-lived intangible assets, in accordance with current authoritative guidance, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment, such as reductions in demand or significant economic slowdowns in the semiconductor industry, are present. Reviews are performed to determine whether the carrying value of an asset is impaired, based on comparisons to undiscounted expected future cash flows. If this comparison indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using: (1) quoted market prices or (2) discounted expected future cash flows. Impairment is based on the excess of the carrying amount over the fair value of those assets. Our estimates regarding future anticipated net revenue and cash flows, the remaining economic life of the products and technologies, or both, may differ from those used to assess the recoverability of assets. In that event, impairment charges or shortened useful lives of certain long-lived assets may be required, resulting in a reduction in net income or an increase to net loss in the period when such determinations are made.
 
Inventories
 
Inventories are computed using the lower of cost or market, which approximates actual cost on a first-in-first-out basis. Inventory components are work-in-process and finished goods. Finished goods are reported as inventories until the point of title transfer to the customer. We write down our inventory value for excess and for estimated obsolescence for the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. These factors are impacted by market and economic conditions, technology changes, new product introductions and changes in strategic direction and require estimates that may include uncertain elements. Actual demand may differ from forecasted demand, and such differences may have a material effect on recorded inventory values. At December 31, 2010, we had an inventory reserve balance of $4.6 million. In addition, we recorded a $2.8 million liability for ordered product with no expected demand from customers for the year ended December 31, 2010.
 
Income Taxes
 
We account for income taxes in accordance with applicable accounting guidance, which requires that deferred tax assets and liabilities be recognized by using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities.
 
We also have to assess the likelihood that we will be able to realize our deferred tax assets. If realization is not more likely than not, we are required to record a valuation allowance against the deferred tax assets that we estimate


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we will not ultimately realize. We believe that we will not ultimately realize a substantial amount of the deferred tax assets recorded on our consolidated balance sheets. However, should there be a change in our ability to realize our deferred tax assets, our valuation allowance will be released, resulting in a corresponding reduction in income tax expense in the period in which we determined that the realization is more likely than not.
 
Under GAAP, we are required to make certain estimates and judgments in determining income tax expense for financial statement purposes. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on the two-step process prescribed within the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Because we are required to determine the probability of various possible outcomes, such estimates are inherently difficult and subjective. We reevaluate these uncertain tax positions on a quarterly basis based on factors including, but not limited to, changes in facts or circumstances and changes in tax law. A change in recognition or measurement would result either in the recognition of a tax benefit or in an additional charge to the tax provision for the period.
 
Business Combinations
 
We estimate the fair value of assets acquired and liabilities assumed in a business combination. Our assessment of the estimated fair value of each of these might have a significant effect on our reported results as intangible assets are amortized over various lives. Furthermore, a change in the estimated fair value of an asset or liability often has a direct impact on the amount to recognize as goodwill, which is an asset that is not amortized. Often determining the fair value of these assets and liabilities assumed requires an assessment of expected use of the asset, the expected cost to extinguish the liability or our expectations related to the timing and the successful completion of development of an acquired in-process technology. Such estimates are inherently difficult and subjective and can have a material impact on our financial statements.
 
Results of Operations
 
Our results of operations for the year ended December 31, 2010, year ended December 31, 2009 (unaudited) and the years ended June 30, 2009 and 2008, respectively, were as follows:
 
                                 
    Year Ended December 31,   Year Ended December 31,   Year Ended June 30,
(In thousands)
  2010   2009 (unaudited)   2009   2008
 
Net revenue
  $ 557,198     $ 84,775     $ 75,761     $ 257,938  
Gross profit
  $ 117,563     $ 20,829     $ 23,328     $ 120,026  
Operating income (loss)
  $ (172,711 )   $ (73,682 )   $ (62,244 )   $ 18,820  
Net income (loss)
  $ (128,889 )   $ (78,206 )   $ (70,232 )   $ 10,152  
 
The scale of our business has expanded significantly as a result of the acquisition of the NXP TV and Set Top Box product lines in February 2010 and, to a lesser extent, the Micronas Frame Rate Converter, Demodulator, and Audio Decoder product lines in May 2009. This is reflected in prior-year comparisons of most operating metrics for the years ended December 31, 2010 and 2009 (unaudited).
 
Revenues for the year ended December 31, 2010 increased to $557.2 million compared to $84.8 million (unaudited) in the year ended December 31, 2009 and $75.8 million in the year ended June 30, 2009. Revenues in the year ended December 31, 2010 increased over the year ended December 31, 2009 primarily as a result of revenue contributions from the acquired NXP products. In addition, we realized significant revenue in 2010 from its Pro SA-1 product, which was new in 2010 and was based on existing Trident technology as well as acquired Micronas audio and demod technology. We also benefited from a full year of revenue contribution from the Micronas products acquired in May 2009.
 
Net loss for the year ended December 31, 2010 was $128.9 million compared to a net loss of $78.2 million (unaudited) for the year ended December 31, 2009 and a net loss of $70.2 million for the year ended June 30, 2009.


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The increased loss in 2010 compared with 2009 is primarily the result of increased amortization of intangible assets acquired in the NXP transaction of $55.7 million, restructuring costs of $28.3 million, goodwill impairment of $7.9 million and significantly higher operating expenses related to the acquired NXP product lines, particularly labor costs related to the addition of former NXP employees and transitional support services from NXP. The increase was partially offset by a gain on acquisition of the NXP product lines of $43.4 million.
 
Financial Data for the Year Ended December 31, 2010 and 2009 (unaudited).
 
Net Revenues
 
Digital media product solutions revenues represented all of our revenues for the year ended December 31, 2010 and year ended December 31, 2009 (unaudited). Our digital media solutions products include integrated circuit chips used in digital television and liquid crystal display television, or LCD TV, as well as set-top boxes. 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 year ended December 31, 2010 and 2009 (unaudited):
 
Net revenues comparison by dollars
 
                                 
    Year Ended December 31,  
                Dollar
    Percent
 
Revenues by region(1)
  2010     2009     Variance     Variance  
          (Unaudited)              
          (Dollars in thousands)        
 
South Korea
  $ 188,365     $ 33,698     $ 154,667       459 %
Europe
    138,309       21,239       117,070       551 %
Asia Pacific(2)
    120,659       16,360       104,299       638 %
Japan
    69,941       12,553       57,388       457 %
Americas
    39,924       925       38,999       4,216 %
                                 
Total net revenues
  $ 557,198     $ 84,775     $ 472,423       557 %
                                 
 
Net revenues comparison by percentage of total net revenues
 
                 
    Year Ended December 31,  
Revenues by region(1)
  2010     2009  
          (Unaudited)  
 
South Korea
    33.8 %     39.7 %
Europe
    24.8 %     25.1 %
Asia Pacific(2)
    21.7 %     19.3 %
Japan
    12.6 %     14.8 %
Americas
    7.1 %     1.1 %
                 
Total net revenues
    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.
 
During the year ended December 31, 2010 compared to the year ended December 31, 2009, net revenues increased in all regions. The increase in all regions is primarily attributable to revenues resulting from the acquisition of the NXP product lines in February of 2010 and the Trident Micronas SA1 new product revenue.


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Our commitments to and from customers are typically of very limited duration and customer actions can be unpredictable, making impracticable reliable evaluations of trends likely to have a material adverse effect on our financial condition or results of operations.
 
Gross Profit
 
                         
    Year Ended December 31,
    2010   2009   % Change
        (Unaudited)    
    (Dollars in thousands)
 
Gross profit
  $ 117,563     $ 20,829       464.4 %
Gross profit%
    21.1 %     24.6 %        
 
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.
 
Our gross profit margin can vary significantly based on product mix and, to a lesser extent, absorption of our fixed manufacturing support costs.
 
Gross profit dollars increased 464% for the year ended December 31, 2010 compared to the year ended December 31, 2009, principally as a result of the additional revenues from the acquired NXP products. Gross profit margin percentage decreased for the year ended December 31, 2010 compared to the year ended December 31, 2009 primarily as a result of the amortization of intangible assets acquired from NXP.
 
Gross profit dollars were impacted by intangible asset amortization expense of $48.2 million or 8.7% of net revenues for the year ended December 31, 2010.
 
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:
 
                 
    Year Ended December 31,  
    2010     2009  
          (Unaudited)  
    (Dollars in thousands)  
 
Additions to inventory reserves
  $ 1,346     $ 2,372  
Accrual for ordered product with no demand
    2,192       2,750  
Lower of cost or market adjustment
    135       1,300  
Sales of previously reserved product
    (2,897 )     (5,887 )
                 
Net decrease in gross profit
  $ 776     $ 535  
                 
 
In the year ended December 31, 2010 and 2009 (unaudited), as shown in the table above, inventory write-downs and reserves and sales of previously reserved product represents 0.1% and 0.6% (unaudited) 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.


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Research and Development
 
                         
    Year Ended December 31,
    2010   2009   % Change
        (Unaudited)    
    (Dollars in thousands)
 
Research and development
  $ 175,001     $ 59,748       192.9 %
As a percentage of net revenues
    31.4 %     70.5 %        
 
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 and depreciation of property and equipment. 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 year ended December 31, 2010, compared to the year ended December 31, 2009, primarily due to significant increases in headcount resulting from the acquisition from NXP. As a result of these activities, we incurred $57.8 million of additional headcount related costs for the year ended December 31, 2010 that was not incurred in the year ended December 31, 2009. In addition, during the year ended December 31, 2010, we incurred $21.5 million of additional depreciation and amortization expense compared with the year ended December 31, 2009. Research and development expenses also included $17.6 million of transition service costs related to the acquisition of NXP assets during the year ended December 31, 2010. These transition service costs consisted principally of personnel and facilities provided by NXP. Research and development expenses also included $5.7 million of additional mask tooling costs for the year ended December 31, 2010 that were not incurred during the year ended December 31, 2009.
 
Selling, General and Administrative
 
                                 
    Year Ended December 31,
    2010   2009   % Change
    (Unaudited)
    (Dollars in thousands)
 
Selling, general and administrative
  $ 79,161     $ 31,027               155.1 %
As a percentage of net revenues
    14.2 %     36.6 %                
 
Selling, general and administrative expenses consist primarily of personnel related expenses including stock-based compensation, commissions paid to sales representatives and distributors and professional fees.
 
Selling, general and administrative expenses increased for the year ended December 31, 2010, compared to the same period last year, primarily due to significant increases in headcount from the acquisition of the NXP business lines, as well as subsequent restructuring, attrition, and hiring activity. As a result of these activities, we incurred $21.4 million of additional headcount related costs for the year ended December 31, 2010 that were not incurred in the comparable periods last year. We also incurred $11.5 million of additional professional fees, temporary labor and transition support services-related costs during 2010, not incurred during 2009 principally related the integration of the NXP product line acquisition.
 
Goodwill Impairment
 
                         
    Year Ended December 31,
    2010   2009   % Change
        (Unaudited)    
    (Dollars in thousands)
 
Goodwill impairment
  $ 7,851     $ 1,432       448.3 %
                         
As a percentage of net revenues
    1.4 %     1.7 %        
 
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 year ended December 31,


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2010, due to the excess of the carrying value over the estimated market value for the television systems operating segment. During the three 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 (unaudited) for the year ended December 31, 2009.
 
In Process Research and Development
 
                         
    Year Ended December 31  
    2010     2009     % Change  
          (Unaudited)        
    (Dollars in thousands)  
 
In process research and development
  $     $ 697       (100 )%
                         
As a percentage of net revenues
    0.0 %     0.8 %        
 
We acquired in-process research and development of $18.0 million in 2010 in connection with the acquisition of the NXP products, which has been capitalized in accordance with the updated business combination guidance, whereas under prior authoritative guidance the amount would have been expensed immediately. During the year ended December 31, 2009, in-process research and development was expensed in connection with the acquisition of certain product lines of Micronas.
 
Restructuring Charges
 
                         
    Year Ended December 31,
    2010   2009   % Change
        (Unaudited)    
    (Dollars in thousands)
 
Restructuring charges
  $ 28,261     $ 1,607       1,659 %
As a percentage of net revenues
    5.1 %     1.9 %        
 
During 2010, we implemented restructuring related to integration of the NXP product lines acquisition. The intent of the integration is to retain technical expertise in those geographic locations where we develop unique technology and to transition the majority of our software and SoC development and certain customer support activities to lower cost regions in Asia. As a result of these activities, during 2010 we substantially reduced our headcount in multiple European and U.S. locations and closed facilities in Munich, Germany and Chicago, Illinois. We also moved our corporate headquarters in California to consolidate our local workforce into one facility and restructured the lease of the property we vacated. As a result of these activities, we recorded $28.3 million of restructuring expenses for severance, related employee benefits and costs related to closure of certain facilities.
 
We anticipate conducting additional restructuring in 2011 to further integrate our operations. Restructuring charges are recorded under “Restructuring charges” in our Consolidated Statement of Operations.
 
Prior to the close of our 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. 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 by us as an expense on the acquisition date and is included in total restructuring charges of $28.3 million for the year ended December 31, 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 13, “Business Combinations,” of Notes to Consolidated Financial Statements.


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Interest Income
 
                         
    Year Ended December 31,
    2010   2009   % Change
        (Unaudited)    
    (Dollars in thousands)
 
Interest income
  $ 868     $ 694       25.1 %
As a percentage of net revenues
    0.2 %     0.8 %        
 
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.
 
Other Income (Expense), Net
 
                         
    Year Ended December 31,
    2010   2009   % Change
        (Unaudited)    
    (Dollars in thousands)
 
Other income (expense), net
  $ 951     $ (1,326 )     (171.7 )%
As a percentage of net revenues
    0.2 %     (1.6 )%        
 
The increase in other income, net for year ended December 31, 2010, compared to the year ended December 31, 2009 (unaudited), was primarily attributable to (i) a $2.5 million legal settlement of the shareholder derivative lawsuit, as described in Note 6 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements, (ii) a $0.4 million increase in gains from the sale of available-for-sale securities, and partially offset by (iii) a $1.9 million foreign currency remeasurement loss related to income taxes payable in foreign jurisdictions, which resulted from the relative weakening of the U.S. dollar in year ended December 31 2010 compared to a $1.5 million foreign currency remeasurement loss in year ended December 31, 2009 (unaudited).
 
Provision for Income Taxes
 
                         
    Year Ended December 31,
    2010   2009   % Change
        (Unaudited)    
    (Dollars in thousands)
 
Income Tax Provision
    1,096       3,911       (72.0 )%
Effective tax rate
    (0.9 )%     (5.3 )%        
 
A provision for income taxes of $1.1 million and $3.9 million was recorded for the years ended December 31, 2010 and 2009 (unaudited), respectively. The change in our effective tax rate from year ended December 31, 2009 was primarily due to the recognition of the tax benefit resulting from net operating losses in foreign jurisdictions, 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.
 
Financial Data for the Years Ended June 30, 2009 and 2008
 
Net Revenues
 
Digital media product revenues represented all of our total revenues in years ended June 30, 2009 and 2008. Our digital media products include integrated circuit chips used in digital television and liquid crystal display television, or LCD TV. 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 years ended June 30, 2009 and 2008.


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Net revenues comparison by dollars
 
                                 
    Years Ended June 30,  
                Dollar
    Percent
 
Revenues by Region(1)
  2009     2008     Variance     Variance  
    (Dollars in thousands)  
 
Japan
  $ 41,615     $ 91,306     $ (49,691 )     (54 )%
Europe
    13,841       53,801       (39,960 )     (74 )%
Asia Pacific(2)
    14,061       32,618       (18,557 )     (57 )%
South Korea
    5,819       79,608       (73,789 )     (93 )%
Americas
    425       605       (180 )     (30 )%
                                 
Total net revenues
  $ 75,761     $ 257,938     $ (182,177 )     (71 )%
                                 
 
Net revenues comparison by percentage of total net revenues
 
                 
    Years Ended June 30,  
Revenues by Region(1)
  2009     2008  
 
Japan
    54.9 %     35.4 %
Europe
    18.2 %     20.9 %
Asia Pacific(2)
    18.6 %     12.6 %
South Korea
    7.7 %     30.9 %
Americas
    0.6 %     0.2 %
                 
Total net revenues
    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.
 
Digital media product revenues decreased by $182.2 million in the year ended June 30, 2009 compared to the year ended June 30, 2008. In year ended June 30, 2009, total SVP revenues decreased by $188.6 million, while SoC revenues decreased by $1.5 million. These decreases were partially offset by increased revenues of $7.9 million resulting from the sale of FRC, demodulator and audio decoder products that were acquired from Micronas following the acquisition which closed on May 14, 2009. Our unit sales volume of digital media products decreased by 58% in the year ended June 30, 2009 compared to the year ended June 30, 2008 and the year-over-year average selling prices of these products decreased by approximately 29%.
 
During the year ended June 30, 2009, net revenues decreased in all regions. Revenues in South Korea decreased significantly primarily due to a major South Korean customer shifting its strategy to design and produce portions of its silicon products internally rather than outsourcing the design to a third-party vendor. Revenues in Japan and Europe decreased primarily due to the absence of major design wins for our SoC products at tier one customers and lower revenues generated from our existing products that are going to be phased out of production. Revenues in Asia Pacific decreased primarily due to the continued decrease in sales of SVP products and intense price competition in the market where we sell discrete image process controllers. Overall, the revenue decline in the year ended June 30, 2009 was primarily due to decreased sales of our legacy SVP products, the loss of design win opportunities relating to our new SoC products, and to a lesser extent, due to the global economic downturn.
 
Gross Margin
 
                         
    Years Ended June 30,
    2009   2008   % Change
    (Dollars in thousands)
 
Gross profit
  $ 23,328     $ 120,026       (81 )%
                         
Gross margin
    30.8 %     46.5 %        


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Cost of revenues includes the cost of purchasing wafers manufactured by an independent foundry, costs associated with our purchase of assembly, test and quality assurance services, royalties, product warranty costs, provisions for excess and obsolete 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 margin is calculated as net revenues less cost of revenues as a percentage of net revenue. Gross margin has continued to be impacted by our product mix and volume of product sales, including sales to high volume customers, royalties, competitive pricing programs, product warranty costs, provisions for excess and obsolete inventories, and cost associated with operational support.
 
Gross margin decreased 15.7 percentage points in the year ended June 30, 2009 compared to the year ended June 30, 2008, principally as a result of (i) significantly lower revenues that did not offer the economies of scale needed to cover fixed manufacturing support costs, (ii) a weaker product mix of SVP and SoC products, (iii) write down of acquisition-related intangible assets, and (iv) an increase in intangible assets amortization as a percentage of decreasing revenues.
 
The net impact on gross profit of the increases in inventory write-downs and sales of previously reserved products is as follow:
 
                 
    Years Ended June 30,  
    2009     2008  
    (Dollars in thousands)  
 
Additions to inventory reserves
  $ 3,148     $ 2,747  
Sales of previously reserved products
    (5,082 )     (4,676 )
                 
Net increase in gross profit
  $ (1,934 )   $ (1,929 )
                 
 
In the year ended June 30, 2009, as shown in the table above, revenues from the sale of previously reserved products were $5.1 million or 6.7% of total net revenues. Due to the previously recorded reserves, there was no cost of revenues reflected with respect to these product sales, which in effect, provided a benefit to the current income statement to the extent of the selling price. Concurrently, we recorded additional inventory reserves for year ended June 30, 2009 in the amount of approximately $3.1 million.
 
Sales of previously reserved inventory largely depend on the timing of transitions to newer generations of similar products. When we introduce new products that are designed to enhance or replace our older products, we typically provide inventory reserves on our older products based on the expected timing and volume of customer purchases of the new product. The timing and volume of the new product introductions can be significantly affected by events out of our control, including changes in customer product introduction schedules. Accordingly, we may end up selling more of our older fully reserved product until the customer is able to execute on its changeover plan.
 
Research and Development
 
                         
    Years Ended June 30,
    2009   2008   % Change
    (Dollars in thousands)
 
Research and development
  $ 53,016     $ 52,608       1 %
                         
As a percentage of net revenues
    70 %     20 %        
 
Research and development expenses as a percentage of net revenues increased significantly from the year ended June 30, 2008 to the year ended June 30, 2009 due primarily to the significant decrease in revenues in the year ended June 30, 2009. The increase in research and development expenses for the year ended June 30, 2009 compared to the year ended June 30, 2008 was primarily due to (i) a $4.5 million increase in third-party IP licenses, (ii) a $2.8 million increase in employee-related expenses associated with increased employee headcount in connection with the acquisition in May 2009 and (iii) $1.7 million third-party IP impairment write-off due to a change in business strategy and a change in business use of assets associated with the acquisition, offset by (iv) a


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$4.1 million decrease in stock-based compensation expense principally due to certain option modifications and contingent liabilities associated with vested options of certain terminated employees that occurred only during the year ended June 30, 2008, (v) a $2.6 million decrease in new product development expenditures was attributable to a $1.4 million reversal of software license fee adjustment for prior software usage during the year ended June 30, 2009, and (vi) a $1.9 million decrease from lower mask tooling fees due to decrease in production.
 
Selling, General and Administrative
 
                         
    Years Ended June 30,
    2009   2008   % Change
    (Dollars in thousands)
 
Selling, general and administrative
  $ 29,617     $ 48,598       (39 )%
                         
As a percentage of net revenues
    39 %     19.0 %        
 
Selling, general and administrative expenses as a percentage of net revenues increased significantly from the year ended June 30, 2008 to the year ended June 30, 2009 due primarily to the significant decrease in revenues in the year ended June 30, 2009. The decrease in selling, general and administrative expenses for year ended June 30, 2009 compared to year ended June 30, 2008, resulted primarily from (i) a $10.9 million decrease in stock-based compensation expense primarily related to the extension of the option exercise period and contingent liabilities associated with vested options of certain terminated employees that occurred only in year ended June 30, 2008, (ii) a $5.7 million decrease in sales commission paid to distributors’ representatives due to the decreased product sales in year ended June 30, 2009 compared to year ended June 30, 2008, (iii) a $5.3 million decrease in legal and professional fees due to the completion of our investigation into our stock option granting process in September 2007, partially offset by (iv) a $1.5 million increase in salary and payroll-related expense associated with increased employee headcount in the year ended June 30, 2009 compared to the year ended June 30, 2008 and (v) a $1.3 million increase in consulting fees.
 
During the year ended June 30, 2009, we capitalized approximately $4.1 million of legal and professional fees related to due diligence in connection with the acquisition of Micronas.
 
Goodwill Impairment
 
                         
    Years Ended June 30,
    2009   2008   % Change
    (Dollars in thousands)
 
Goodwill impairment
  $ 1,423     $       100 %
                         
As a percentage of net revenues
    2 %     0 %        
 
During the year ended June 30, 2009, an impairment test was conducted resulting from redeploying our engineering resources in TMBJ and by canceling our STB efforts to better support our focus on SoC development. This factor was considered an indicator of potential impairment, and as a result, we performed an interim impairment analysis of our goodwill. Based on the results of this goodwill impairment analysis, we determined that there would be no remaining implied value attributable to goodwill at TMBJ, and accordingly, we wrote off the entire goodwill balance at TMBJ and recognized goodwill impairment charges of $1.4 million under “Goodwill impairment” in the Consolidated Statement of Operations for year ended June 30, 2009.
 
In-Process Research and Development
 
                         
    Years Ended June 30,
    2009   2008   % Change
    (Dollars in thousands)
 
In process research and development
  $ 697     $       100 %
                         
As a percentage of net revenues
    1 %     0 %        
 
The in-process research and development (“IPR&D”) expense was incurred in connection with the acquisition of certain product lines of Micronas in year ended June 30, 2009. The IPR&D relates to masks and tools that were


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completed after the announcement date but prior to the closing date of the acquisition and that have no alternative future use.
 
Restructuring Charges
 
                         
    Years Ended June 30,
    2009   2008   % Change
    (Dollars in thousands)
 
Restructuring charges
  $ 810     $       100 %
                         
As a percentage of net revenues
    1 %     0 %        
 
During year ended June 30, 2009, we implemented a global cost reduction plan that reduced the number of our employees by approximately 100 employees worldwide. The reduction plan consisted primarily of involuntary employee termination and benefit costs. We recorded a restructuring charge of $0.8 million for the year ended June 30, 2009, in connection with the restructuring.
 
Loss on Sale of Short-term Investments
 
                         
    Years Ended June 30,
    2009   2008   % Change
    (Dollars in thousands)
 
Loss on sale of short-term investments
  $ (8,940 )   $       100 %
                         
As a percentage of net revenues
    (12 )%     0 %        
 
During the year ended June 30, 2009, we sold all of our 52.5 million shares of UMC common stock for net proceeds of $17.2 million and recorded a loss on sale of approximately $9.0 million under “Loss on sale of short-term investments” in our Consolidated Statement of Operations.
 
Impairment Loss on UMC Investment
 
                         
    Years Ended June 30,
    2009   2008   % Change
    (Dollars in thousands)
 
Impairment loss on UMC investment
  $ (556 )   $ (6,480 )     (91 )%
                         
As a percentage of net revenues
    (1 )%     (3 )%        
 
Impairment loss on UMC investment represents the impairment charge when the decline in the fair value of our investment below our cost basis is determined to be other-than-temporary. For the years ended June 30, 2009 and 2008, we recorded impairment charges of $0.6 million and $6.5 million, respectively, to reflect the decrease in carrying value of the UMC securities we held. We have determined whether an impairment charge is other-than-temporary in nature in accordance with accounting guidance.
 
Interest Income, Net
 
                         
    Years Ended June 30,
    2009   2008   % Change
    (Dollars in thousands)
 
Interest income, net
  $ 2,968     $ 6,166       (52 )%
                         
As a percentage of net revenues
    4 %     2 %        
 
We invest our cash and cash equivalents in interest-bearing accounts consisting primarily of certificates of deposits and U.S. Treasuries. The average interest rates earned during the years ended June 30, 2009 and 2008 were 1.6% and 2.9%, respectively. The decrease in the average interest income for the year ended June 30, 2009 was primarily due to (i) the reduction of federal funds rate from 2.0% to 0.21% by the Federal Reserve Bank and (ii) a larger percentage of our investment portfolio having been shifted from money market funds to lower yielding U.S. Treasuries during the year ended June 30, 2009.


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Other Income, Net
 
                         
    Years Ended June 30,
    2009   2008   % Change
    (Dollars in thousands)
 
Other income, net
  $ 4,053     $ 445       811 %
                         
As a percentage of net revenues
    5 %     0 %        
 
Other income, net primarily represents dividend income received from our investments and the foreign currency remeasurement gain or loss. The increase in other income, net for year ended June 30, 2009, compared to the year ended June 30, 2008, was primarily attributable to (i) a $2.6 million foreign currency remeasurement gain related to income taxes payable in foreign jurisdictions, which resulted from the relative strengthening of the U.S. dollar in year ended June 30 2009 compared to a $2.7 million foreign currency remeasurement loss related to income taxes payable in foreign jurisdictions, which resulted from the relative weakness of the U.S. dollar in year ended June 30, 2008, partially offset by (ii) a $1.0 million decrease in gains from the sale of available-for-sale investments and (iii) a $0.6 million decrease in dividend income from the UMC investment compared to the year ended June 30, 2008.
 
Provision for Income Taxes
 
                         
    Years Ended June 30,
    2009   2008   % Change
    (Dollars in thousands)
 
Income tax provision
  $ 5,513     $ 8,799       (37 )%
                         
Effective tax rate
    (9 )%     46 %     (55 )%
 
A provision for income taxes of $5.5 million and $8.8 million was recorded for years ended June 30, 2009 and 2008, respectively. The decrease in our effective tax rate from the year ended June 30, 2008 to the year ended June 30, 2009 was primarily due to a decrease in $4.4 million of amortization of foreign taxes associated with intercompany profit on assets remaining within Trident’s consolidated group. The amortization of foreign taxes associated with intercompany profit on assets remaining within Trident’s consolidated group was completed in year ended June 30, 2009.
 
Liquidity and Capital Resources
 
Our principal uses of cash include funding operating activities, the creation of new products, acquisitions of intangible assets, ongoing investments in our businesses, capital expenditures, commitments to equity affiliates and acquisitions of businesses. We manage our use of cash with a goal of maintaining adequate cash resources to fund our future operations.
 
Sources and Uses of Cash
 
Cash and cash equivalents at December 31, 2010 and 2009 were as follows:
 
                 
    December 31,
  December 31,
    2010   2009
    (Dollars in thousands)
 
Cash and cash equivalents
  $ 93,224     $ 147,995  


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Our primary cash inflows and outflows for the year ended December 31, 2010 and 2009 (unaudited) were as follows:
 
                 
    Year Ended December 31,  
    2010     2009  
          (Unaudited)  
    (Dollars in thousands)  
 
Net cash flow provided by (used in):
               
Operating activities
  $ (79,055 )   $ (50,844 )
Investing activities
    24,095       (13,594 )
Financing activities
    189       239  
                 
Net decrease in cash and cash equivalents
  $ (54,771 )   $ (64,199 )
                 
 
Operating Activities
 
Cash used in operating activities is net loss adjusted for certain non-cash items and changes in current assets and current liabilities. For the year ended December 31, 2010, cash used in operating activities was $79.0 million compared to $50.8 million (unaudited) cash used in operating activities for year ended December 31, 2009. The increase was primarily due to a net loss of $128.9 million in the year ended December 31, 2010 versus a net loss of $78.2 million (unaudited) in year ended December 31, 2009 which resulted from a significant increase in operating expenses related to the NXP acquisition.
 
On our consolidated balance sheet as of December 31, 2010, accounts receivable increased compared to December 31, 2009, primarily due to our granting credit terms to the new customers which were acquired as a result of the NXP acquisition. Inventories increased primarily due to sales demand from the acquired NXP product lines. Accounts payable decreased due to decreased manufacturing activities and inventory purchases as well as the general timing of payments.
 
Investing Activities
 
Cash used in investing activities consists primarily of cash used in business combinations, capital expenditures and purchases of intellectual property. For the year ended December 31, 2010, cash provided by investing activities was $24.1 million compared to a $13.6 million (unaudited) cash used in investing activities for year ended December 31, 2009. The increase in net cash provided by investing activities was primarily attributable to the NXP acquisition, partially offset by the purchase of technologies licenses and the purchase of fixed assets.
 
Financing Activities
 
Cash provided by financing activities consists primarily of cash proceeds from the issuance of common stock to employees upon exercise of stock options. Cash provided by financing activities for the year ended December 31, 2010 was $0.2 million.
 
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. The majority of our cash and cash equivalents are held outside the United States, and, therefore, might be subjected to uncertainties in foreign countries. We believe our current resources are sufficient to meet our needs for at least the next 12 months.
 
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 $44.0 million. Our liquidity may also be affected if we fail to realize some or all of the anticipated benefits of our acquisitions of business lines of NXP and Micronas. See Note 13, “Business Combinations,” Notes to Consolidated Financial Statements of Notes to Consolidated Financial Statements.


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On February 9, 2011, Trident, TMFE and Trident Microsystems (HK) Ltd., or TMHK, entered into a $40 million revolving line of credit agreement with Bank of America, N.A., to finance working capital. Borrowings under the agreement will bear interest at the base rate, as defined in the agreement, plus a margin ranging from 1.50% to 3.00% per annum, or at our option, rates based on LIBOR plus a margin ranging from 2.25% to 3.75% per annum. Under the credit agreement, we may access credit based upon a certain percentage of our eligible accounts receivable outstanding, subject to eligibility requirements, limitations and covenants. The credit agreement contains both affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, incur indebtedness, grant liens, make capital expenditures, merge or consolidate, dispose of assets, pay dividends or make distributions, change the method of accounting, make investments and enter into certain transactions with affiliates, in each case subject to materiality and other qualifications, baskets and exceptions customary for a credit agreement of this size and type. The credit agreement also contains a financial covenant that requires us to maintain a specified fixed charge coverage ratio if either our liquidity or availability under the credit agreement drops below certain thresholds.
 
Contractual Obligations
 
The following summarizes our contractual obligations as of December 31, 2010:
 
                                                         
    Fiscal 2011     Fiscal 2012     Fiscal 2013     Fiscal 2014     Fiscal 2015     Thereafter     Total  
Contractual Obligations
                                                       
Operating Leases(1)
  $ 5.1     $ 4.6     $ 3.5     $ 2.6     $ 1.5     $ 1.3     $ 18.6  
Purchase Obligations(2)
    21.2       1.0                               22.2  
                                                         
Total
  $ 26.3     $ 5.6     $ 3.5     $ 2.6     $ 1.5     $ 1.3     $ 40.8  
                                                         
 
 
(1) At December 31, 2010, we leased office space and have 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 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 having a $3.6 million total future lease obligation.
 
(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. As of December 31, 2010, we had purchase commitments in the amount of $13.0 million that were not included in the consolidated balance sheet at that date. Of this amount, $1.2 million represents purchase commitments by us to UMC for intellectual properties, software licensing purchases and other commitments. In addition, we entered into an engineering software license and maintenance agreement with NXP on March 5, 2010 having a future net cash obligation of $9.2 million. NXP is obligated under the engineering software license and maintenance agreement to reimburse the Company for $9.2 million.
 
Rental expense for the year ended December 31, 2010, six months ended December 31, 2009 and the years ended June 30, 2009 and 2008, was $5.9 million, $1.4 million, $1.5 million, and $1.5 million, respectively.
 
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 $0.6 million as of December 31, 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


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the agreement ends on the readiness of our enterprise resource planning system which is planned to occur in fiscal 2012. The terms of the agreements allow cancellation of either or both the Transition Services Agreement and the Manufacturing Services Agreement with minimum notice periods.
 
Contingencies
 
Shareholder Derivative Litigation
 
Trident has been named as a nominal defendant in several purported 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. Plaintiffs in all cases alleged 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 its financial statements); and that as a result those officers and directors are liable to the Company. No particular amount of damages has been alleged, and by the nature of the lawsuit no damages will be alleged against the Company. Our Board of Directors appointed a Special Litigation Committee (“SLC”) composed solely of independent directors to review and manage any claims that we may have relating to the stock option grant practices investigated by the Special Committee. The scope of the SLC’s authority includes the claims asserted in the derivative actions.
 
On March 26, 2010, the federal court approved settlements with all defendants other than Frank Lin, our former CEO. The details of that partial settlement, which disposed of the federal litigation as to all individual defendants other than Mr. Lin and as to the consolidated state court action in its entirety, were previously disclosed in our Form 8-K filed on February 10, 2010.
 
On June 8, 2010, Mr. Lin filed a counterclaim against Trident. In that counterclaim, Mr. Lin sought recovery of payments he claimed he was promised during the negotiations surrounding his eventual termination and also losses he claimed he has suffered because he was not permitted to exercise his Trident stock options between January 2007 and March 2008. On February 11, 2011, we entered into a settlement agreement with Mr. Lin regarding his counterclaims, contingent on the settlement of the derivative litigation pursuant to certain terms.
 
On February 15, 2011, we entered into a Stipulation of Settlement to resolve the federal litigation in its entirety, or Proposed Settlement, and on February 17, 2011, the federal court preliminarily approved the Proposed Settlement. A hearing for consideration of final approval of the Proposed Settlement has been scheduled for April 15, 2011 at 9:00 a.m. in Courtroom 3 of the United States District Court in San Jose, California. Final approval, without appeal, of the Proposed Settlement would satisfy the contingency in the settlement of Mr. Lin’s counterclaims against us. We cannot predict whether the federal court will order the final approval of the Proposed Settlement and, if it does, whether such decision will be appealed. As a result, we cannot predict whether Mr. Lin’s counterclaims against us in the federal litigation 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 and related to the Proposed Settlement, including expenses for the reimbursement of certain legal fees of at least Mr. Lin 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.


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Pursuant to the same judgment, we received a payment of $817,509 from Mr. Lin, representing $650,772 in disgorged profits gained as a result of conduct alleged by the SEC in its civil complaint against him, together with prejudgment interest thereon of $166,737. 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 2006 Plan S-8 in order to exercise their vested options. During the three months 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 three months 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 seeking compensation from us relating to the exercise of his fully vested stock options. As a result, as of December 31, 2010, we maintained a contingent liability totaling $2.7 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 year ended December 31, 2010. See Note 5, “Shareholder Derivative Litigation” in “Commitment and Contingencies,” of Notes to Condensed Consolidated Financial Statements.


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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 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 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 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.
 
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.
 
Recent Accounting Pronouncements
 
See “Recent Accounting Pronouncements” in Note 2, “Significant Accounting Policies,” of Notes to Consolidated Financial Statements in Item 8, of this Report, which is incorporated herein by reference.
 
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to two primary types of market risks: foreign currency exchange rate risk and interest rate risk.
 
Foreign currency exchange rate risk
 
As of December 31, 2010, we had operations in the United States, Taiwan, China, Hong Kong, India, Germany, The Netherlands, Japan, Singapore and South Korea. The functional currency of all of these operations is the U.S. dollar. Approximately $66.7 million, or 71.5% of our cash and cash equivalents, were held outside the United States as of December 31, 2010, 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. Although personnel and facilities-related expenses are primarily incurred in local currencies due to the location of our subsidiaries outside the United States, substantially all of our other expenses are incurred in U.S. dollars. Since we acquired certain product lines from Micronas in May 2009, we have also incurred manufacturing and related expenses in Euros, and expect to incur additional expenses in Euros in the future as a result of the NXP Transaction.
 
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.


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Interest rate risk
 
We currently maintain our cash equivalents primarily in certificates of deposit, 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 December 31, 2010, we have approximately $93.2 million in cash and cash equivalents, of which $62.2 million is cash and $31.0 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 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.
 
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 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 requires no collateral to secure accounts receivable. Historically, a relatively small number of customers have accounted for a significant portion of our revenues. Our products have been manufactured primarily by two foundries, United Microelectronics Corporation, or (UMC), based in Taiwan and Micronas, based in Germany. Effective with the February 8, 2010 closing of our acquisition of certain assets from NXP B.V., we also have products manufactured by Taiwan Semiconductor Manufacturing Company, or TSMC.


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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
TRIDENT MICROSYSTEMS, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
                                 
          Six Months
             
    Year Ended
    Ended
             
    December 31,
    December 31,
    Years Ended June 30,  
    2010     2009     2009     2008  
    (In thousands, except per share data)  
 
Net revenues
  $ 557,198     $ 63,011     $ 75,761     $ 257,938  
Cost of revenues
    439,635       47,265       52,433       137,912  
                                 
Gross profit
    117,563       15,746       23,328       120,026  
Operating expenses:
                               
Research and development
    175,001       32,512       53,016       52,608  
Selling, general and administrative
    79,161       19,980       29,617       48,598  
Goodwill impairment
    7,851             1,432        
In-process research and development
                697        
Restructuring charges
    28,261       1,558       810        
                                 
Total operating expenses
    290,274       54,050       85,572       101,206  
                                 
Income (loss) from operations
    (172,711 )     (38,304 )     (62,244 )     18,820  
Loss on sale of short-term investments
    (303 )           (8,940 )      
Impairment loss on short-term investments
                (556 )     (6,480 )
Gain on acquisition
    43,402                    
Interest income
    868       118       2,968       6,166  
Other income (expense), net
    951       (1,212 )     4,053       445  
                                 
Income (loss) before provision for income taxes
    (127,793 )     (39,398 )     (64,719 )     18,951  
Provision for income taxes
    1,096       1,129       5,513       8,799  
                                 
Net income (loss)
  $ (128,889 )   $ (40,527 )   $ (70,232 )   $ 10,152  
                                 
Net income (loss) per share — Basic
  $ (0.79 )   $ (0.58 )   $ (1.12 )   $ 0.17  
                                 
Net income (loss) per share — Diluted
  $ (0.79 )   $ (0.58 )   $ (1.12 )   $ 0.16  
                                 
Shares used in computing net income (loss) per share — Basic
    163,438       69,372       62,535       59,367  
                                 
Shares used in computing net income (loss) per share — Diluted
    163,438       69,372       62,535       62,751  
                                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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TRIDENT MICROSYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
 
                         
    As of December 31,        
    2010     2009        
    (In thousands, except
       
    par values)        
 
ASSETS
Current assets:
                       
Cash and cash equivalents
  $ 93,224     $ 147,995          
Accounts receivable, net
    62,328       4,582          
Accounts receivable from related parties
    7,337                
Inventories
    23,025       14,536          
Notes receivable from related parties
    20,884                
Prepaid expenses and other current assets
    18,330       7,357          
                         
Total current assets
    225,128       174,470          
Property and equipment, net
    31,566       26,168          
Goodwill
          7,851          
Intangible assets, net
    82,921       5,635          
Long-term receivable from related parties
    1,500                
Other assets
    29,826       14,369          
                         
Total assets
  $ 370,941     $ 228,493          
                         
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
                       
Accounts payable
  $ 7,828     $ 18,883          
Accounts payable to related parties
    26,818       2,401          
Accrued expenses and other current liabilities
    70,401       26,739          
Deferred margin
    8,904       329          
Income taxes payable
    2,077       1,696          
                         
Total current liabilities
    116,028       50,048          
Long-term income taxes payable
    25,476       22,262          
Deferred income tax liabilities
    200       94          
Other long-term liabilities
    4,933                
                         
Total liabilities
    146,637       72,404          
                         
Commitments and contingencies (Note 6)
                       
Stockholders’ equity:
                       
Preferred stock, $0.001 par value: 500 shares authorized; none issued and outstanding
                   
Common stock, $0.001 par value; 250,000 shares and 95,000 shares authorized; 177,046 and 70,586 shares issued and outstanding at December 31, 2010 and 2009, respectively
    177       71          
Additional paid-in capital
    434,825       237,827          
Retained earnings (accumulated deficit)
    (210,698 )     (81,809 )        
                         
Total stockholders’ equity
    224,304       156,089          
                         
Total liabilities and stockholders’ equity
  $ 370,941     $ 228,493          
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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TRIDENT MICROSYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                                 
    Year Ended
    Six Months Ended
             
    December 31,
    December 31,
    Years Ended June 30,  
    2010     2009     2009     2008  
    (In thousands)  
 
Cash flows from operating activities:
                               
Net income (loss)
  $ (128,889 )   $ (40,527 )   $ (70,232 )   $ 10,152  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                               
Stock-based compensation expense
    6,903       3,455       12,673       24,270  
Depreciation and amortization
    27,829       6,745       9,544       5,354  
Excess tax benefit from stock-based compensation
                (96 )     (561 )
In-process research and development
                697        
Amortization of acquisition-related intangible assets
    55,714       2,048       3,985       5,725  
Impairment of goodwill
    7,851             1,432        
Impairment of intangible assets
                2,689        
Impairment of technology licenses and prepaid royalties
    2,516                    
Impairment loss on short-term investments
          200       556       6,480  
Gain on acquisition
    (43,402 )                  
Loss (gain) on sales of investments
    303       (125 )     8,966       (969 )
Loss on disposal of property and equipment
    377       96       83       52  
Deferred income taxes
    (2,989 )     306       63       (722 )
Changes in operating assets and liabilities, net of effect of acquisitions:
                               
Accounts receivable
    (57,746 )     (496 )     612       4,665  
Accounts receivable from related party
    3,987       4,954       (5,289 )      
Inventories
    (8,489 )     (7,708 )     1,852       7,583  
Notes receivable from related parties
    19,016                    
Prepaid expenses and other current assets
    (7,850 )     (2,484 )     5,885       6,088  
Accounts payable
    (11,252 )     8,009       (577 )     (8,902 )
Accounts payable to related party
    24,417       (3,112 )     5,512        
Accrued expenses and other liabilities
    20,479       7,522       (7,309 )     (3,574 )
Deferred margin
    8,575                    
Income taxes payable
    3,595       (10,807 )     (2,897 )     2,273  
                                 
Net cash provided by (used in) operating activities
    (79,055 )     (31,924 )     (31,850 )     57,914  
                                 
Cash flows from investing activities:
                               
Purchases of property and equipment
    (9,237 )     (1,134 )     (3,189 )     (6,246 )
Proceeds from sale of property, plant and equipment
          18       294       48  
Acquisition of businesses, net of cash acquired
    46,380       (140 )     (2,531 )     (1,960 )
Proceeds from the capital reduction of UMC investment
                      7,829  
Proceeds from sale of investments
          223       17,234       6,079  
Proceeds from sale of investments in private companies
                      1,056  
Purchases of technology licenses
    (13,048 )     (7,223 )     (6,471 )     (5,070 )
                                 
Net cash provided by (used in) investing activities
    24,095       (8,256 )     5,337       1,736  
                                 
Cash flows from financing activities:
                               
Proceeds from issuance of common stock to employees
    189       238       1,058       5,523  
Excess tax benefit from stock-based compensation
                96       561  
                                 
Net cash provided by financing activities
    189       238       1,154       6,084  
                                 
Net (decrease) increase in cash and cash equivalents
    (54,771 )     (39,942 )     (25,359 )     65,734  
Cash and cash equivalents at beginning of year
    147,995       187,937       213,296       147,562  
                                 
Cash and cash equivalents at end of year
  $ 93,224     $ 147,995     $ 187,937     $ 213,296  
                                 
Supplemental disclosure of cash flow information:
                               
Cash paid for income taxes
  $ 1,817     $ 12,296     $ 1,588     $ 1,219  
                                 
Supplemental schedule of non-cash investing and financing activities:
                               
Common stock, preferred shares, and warrants issued in connection with acquisitions of businesses
  $ 188,610     $     $ 12,087     $  
                                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
 
                                                 
                            Accumulated
       
                      Retained
    Other
       
                Additional
    Earnings
    Comprehensive
    Total
 
    Common Stock     Paid-in
    (Accumulated
    Income
    Stockholders’
 
    Shares     Amount     Capital     Deficit)     (Loss)     Equity  
    (In thousands)  
 
Balance at June 30, 2007
    57,748       58       179,390       18,798       3,602       201,848  
Net income
                      10,152             10,152  
Unrealized losses on investments, net of tax
                            (3,6544 )     (3,654 )
                                                 
Comprehensive income
                                            6,498  
                                                 
Shares issued pursuant to stock awards, net
    3,490       3       5,520                   5,523  
Stock-based compensation expense
                24,270                   24,270  
Net cash settlement of stock options
                (1,274 )                 (1,274 )
Tax benefit from stock-based compensation
                393                   393  
                                                 
Balance at June 30, 2008
    61,238       61       208,299       28,950       (52 )     237,258  
Net loss
                      (70,232 )           (70,232 )
Unrealized gain on short-term investment
                            52       52  
                                                 
Comprehensive loss
                                            (70,180 )
                                                 
Shares issued pursuant to stock awards, net
    1,682       2       1,056                   1,058  
Shares and warrant issued in connection with the acquisition of Micronas assets
    7,000       7       12,080                   12,087  
Stock-based compensation expense
                12,673                   12,673  
Net cash settlement for TMT’s stock options
                26                   26  
                                                 
Balance at June 30, 2009
    69,920       70       234,134       (41,282 )           192,922  
Net loss
                      (40,527 )           (40,527 )
                                                 
Comprehensive loss
                                            (40,527 )
                                                 
Shares issued pursuant to stock awards, net
    666       1       238                   239  
Stock-based compensation expense
                3,455                   3,455  
                                                 
Balance at December 31, 2009
    70,586       71       237,827       (81,809 )           156,089  
Net loss
                      (128,889 )           (128,889 )
                                                 
Comprehensive loss
                                            (128,889 )
                                                 
Shares issued in connection with the acquisition of NXP assets
    104,204       104       188,506                   188,610  
Shares issued pursuant to stock awards, net
    2,256       2       16                   16  
Stock-based compensation expense
                8,476                   8,476  
                                                 
Balance at December 31, 2010
    177,046     $ 177     $ 434,825     $ (210,698 )   $     $ 224,304  
                                                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.   DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
 
Business and Business Combinations
 
Business
 
Trident Microsystems, Inc. (including our subsidiaries, referred to collectively in this Report as “Trident” or the “Company”) 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.
 
Business Combinations
 
On May 14, 2009, we completed our 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, we issued 7.0 million shares of our common stock and warrants to acquire up to 3.0 million additional shares of our 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 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, to primarily provide sales liaison, marketing and engineering services in Europe. TMEU is located in Freiburg, Germany and TMNM and TMH are located in Nijmegen, The Netherlands.
 
On February 8, 2010, we 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, we 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 accordance with U.S. generally accepted accounting principles, the closing price on February 8, 2010 was used to value our common stock. In addition, we issued to NXP four shares of a newly created Series B Preferred Stock, or the Preferred Shares. The purchase price and fair value of the consideration transferred by us was $140.8 million. In connection with this acquisition, we acquired or established additional subsidiaries in Asia, India and Europe and established a branch office in France of an existing European entity. For details of the acquisition, see Note 13, “Business Combinations,” of Notes to Consolidated Financial Statements.
 
Basis of Consolidation and Presentation
 
The accompanying Consolidated Financial Statements include the accounts and operations of the Company. All intercompany accounts and transactions have been eliminated. The U.S. dollar is the functional currency for Trident and its subsidiaries; therefore, the Company does not have a translation adjustment recorded through accumulated other comprehensive income (loss). Certain reclassifications have been made to prior period amounts to conform to the current period presentation, as follows: (i) part of the accounts receivable from related party has been reclassified as accounts receivable; (ii) technology licenses classified as prepaid expenses and other current assets have been reclassified as other assets; (iii) deferred margin previously classified as accrual expenses and other


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
liabilities has been separately classified. Such reclassifications did not have a significant impact on the Company’s gross profit, net loss of net cash (used in) provided by operating activities.
 
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 quarter ended December 31, 2009. All references to “years”, unless otherwise noted, refer to the 12-month fiscal year, which prior to July 1, 2009, ended on June 30, and beginning with January 1, 2010, ends on December 31, of each year. In addition, the Company presents the Consolidated Statement of Operations and Consolidated Statement of Cash Flows for the transition six month period ended December 31, 2009.
 
2.   SIGNIFICANT ACCOUNTING POLICIES
 
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.
 
Foreign Currency Remeasurement
 
The Company uses the U.S. dollar as the functional currency for all of its foreign subsidiaries. Sales and purchase transactions are generally denominated in U.S. dollars. The Company has not engaged in hedging transactions to reduce its foreign currency exposure to such fluctuations; however, it may take action in the future to reduce its foreign exchange risk. Gains and losses from foreign currency remeasurements are included in “Other income (expense), net” in the Consolidated Statements of Operations. The Company recorded foreign currency remeasurement losses of $3.1 million during the year ended December 31, 2010, $0.6 million for the six months ended December 31, 2009 and $2.4 million for the year ended June 30, 2008, respectively. The Company recorded a foreign currency remeasurement gain of $1.8 million during the year ended June 30, 2009.
 
Cash and Cash Equivalents
 
Cash equivalents consist of highly liquid investments in money market funds invested in Treasuries and certificates of deposits purchased with an original maturity of ninety days or less from the date of purchase.
 
Fair Value of Financial Instruments
 
Currently, the Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, notes receivable and accounts payable. The Company believes that the recorded values of all of its other financial instruments approximate their recorded values because of their nature and respective maturity dates or durations.
 
Concentrations of Credit Risk and Other Risk
 
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, notes receivable 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 the Company’s trade receivables is derived from sales to large multinational OEMs 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 the Company’s customers were typically


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
made on a prepaid or letter of credit basis while sales to a few customers were made on open accounts. The Company performs ongoing credit evaluations of its newly acquired customers’ financial condition and generally requires no collateral to secure accounts receivable. Historically, a relatively small number of customers have accounted for a significant portion of its revenues. The Company’s products have been manufactured primarily by two foundries, United Microelectronics Corporation, or UMC, based in Taiwan and Micronas, based in Germany. Effective with the February 8, 2010 closing of the Company’s acquisition of certain assets from NXP B.V., the Company also has products manufactured by Taiwan Semiconductor Manufacturing Company, or TSMC.
 
Foreign currency exchange rate risk
 
As of December 31, 2010, the Company had operations in the United States, United Kingdom, India, Taiwan, China, Hong Kong, Germany, The Netherlands, Japan, Singapore and South Korea. The functional currency of all of these operations is the U.S. dollar. Approximately $66.7 million, or 71.5% of the Company’s cash and cash equivalents, were held by entities outside the United States as of December 31, 2010, 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. Although personnel and facilities-related expenses are primarily incurred in local currencies due to the location of the Company’s subsidiaries outside the United States, substantially all of the Company’s other expenses are incurred in U.S. dollars. Since the Company acquired certain product lines from Micronas in May 2009, the Company has also incurred manufacturing and related expenses in Euros, and expects to incur additional expenses in Euros in the future as a result of the NXP Transaction.
 
While the Company expects international revenues to continue to be denominated primarily in U.S. dollars, an increasing portion of the Company’s international revenues may be denominated in foreign currencies, such as Euros. In addition, the Company’s 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. The Company analyzes its 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 the Company’s financial results in the future. Following the NXP Transaction, the Company now has many foreign locations, and a large percentage of the Company’s 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 the Company’s operating costs in the future.
 
Fluctuations in foreign exchange rates may have an adverse effect on the Company’s 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
 
The Company currently maintains its cash equivalents primarily in certificates of deposit, U.S. Treasuries, and other highly liquid investments. The Company does not have any derivative financial instruments. The Company places cash investments in instruments that meet high credit quality standards, as specified in the Company’s investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument.
 
The Company’s cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of December 31, 2010, the Company has approximately $93.2 million in cash and cash equivalents, of which $62.2 million is cash and $31.0 million is money market funds invested in U.S. Treasuries. The Company currently intends to continue investing a significant portion of its existing cash equivalents in interest bearing, investment grade securities, with maturities of less than three months. The Company does not believe that investments, in the aggregate, have significant exposure to interest rate risk. However, the Company will continue to monitor the health of the financial institutions with which these investments and deposits have been made due to the global financial environment.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Inventories
 
Inventories are computed using the lower of cost or market, which approximates actual cost on a first-in-first-out basis. Inventory components are work-in-process and finished goods. Finished goods are reported as inventories until the point of title transfer to the customer. The Company writes down its inventory value for excess and for estimated obsolescence for the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. These factors are impacted by market and economic conditions, technology changes, new product introductions and changes in strategic direction and require estimates that may include uncertain elements. Actual demand may differ from forecasted demand, and such differences may have a material effect on recorded inventory values. At December 31, 2010, the Company had an inventory reserve balance of $4.6 million. In addition, the Company recorded a $2.8 million liability for ordered product with no expected demand from customers for the year ended December 31, 2010.
 
Long-lived Assets
 
Property and Equipment
 
Property and equipment are stated at cost, less accumulated depreciation and amortization. Major improvements are capitalized, while repairs and maintenance are expensed as incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Furniture and fixtures are depreciated over five years. Machinery, equipment and software are depreciated over three years. Leasehold improvements are depreciated over the shorter of the estimated useful lives of the assets or the lease terms. The Company’s Shanghai office building is depreciated over a twenty year life and the office building land is subject to a customary local property right certificate. Construction in progress is not subject to depreciation until the asset is placed in service. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed from the accounts. Gains or losses resulting from retirements or disposals are included in “Other income (expense), net” in the Consolidated Statements of Operations. Depreciation expense was $14.5 million for the year ended December 31, 2010, $2.4 million for the six months ended December 31, 2009, and $3.5 million and $2.5 million for the years ended June 30, 2009 and 2008, respectively.
 
Amortizable Intangible Assets
 
The Company has two types of intangible assets:  acquisition-related intangible assets and purchased intangible assets from third-party vendors. Intangible assets are carried at cost, net of accumulated amortization. The Company amortizes acquisition-related identified intangibles on a straight-line basis, reflecting the pattern in which the economic benefits of the intangible asset is consumed, over their estimated economic lives of 4 to 5 years for core and developed technology, 2 to 3 years for customer relationships, 1 year for backlog, 4 to 5 years for patents and the contractual term for service agreements.
 
Management evaluates the recoverability of its identifiable intangible assets and long-lived assets in accordance with applicable accounting guidance, which requires the assessment of these assets for recoverability when events or circumstances indicate a potential impairment exists. Certain events and circumstances the Company considered in determining whether the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include, but are not limited to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; a significant decline in its stock price for a sustained period of time; and changes in its business strategy. In determining if an impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If an impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
 
During the year ended December 31, 2010, the Company wrote off $2.5 million of technology licenses and prepaid royalties under “Cost of revenues” in the Consolidated Statement of Operations. During the year ended June 30, 2009, the Company recognized a $1.0 million impairment loss on acquisition-related intangible assets. In


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
addition, the Company wrote off $1.7 million of third-party purchased IP under “Research and development” in the Consolidated Statement of Operations for the year ended June 30, 2009. There was no impairment loss recorded during the six month period ended December 31, 2009.
 
Goodwill
 
The Company accounts for goodwill in accordance with applicable accounting guidance. Goodwill is recorded when the purchase price of an acquisition exceeds the fair value of the net purchased tangible and intangible assets acquired and is carried at cost. Goodwill is not amortized, but is subject to an impairment test annually. The Company will continue to perform its annual goodwill impairment analysis in the quarter ended June 30 of each year or more frequently if the Company believes indicators of impairment exist. Factors that the Company considers important which could trigger an impairment review include the following:
 
  •  significant underperformance relative to historical or projected future operating results;
 
  •  significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition;
 
  •  significant negative industry or economic trends; and
 
  •  significant decline in the Company’s market capitalization.
 
The performance of the test involves a two-step process. The first step requires a comparison of the fair value of the reporting unit to its net book value, including goodwill. The fair value of the reporting unit is determined based on the present value of estimated future cash flows of the reporting unit. A potential impairment exists if the fair value of the reporting unit is lower than its net book value. The second step of the process is only performed if a potential impairment exists, and it involves determining the difference between the fair values of the reporting unit’s net assets, other than goodwill, and the fair value of the reporting unit, and, if the difference is less than the net book value of goodwill, an impairment charge is recorded. In the event that the Company determines that the value of goodwill has become impaired, the Company will record a charge for the amount of impairment during the quarter in which the determination is made. The Company performed its annual goodwill impairment analysis in the quarter ended June 30, 2010 and recorded an impairment charge of $7.9 million, 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.
 
Revenue Recognition
 
The Company recognizes revenues upon shipment directly to end customers provided that persuasive evidence of an arrangement exists, delivery has occurred, title has transferred, the price is fixed or determinable, there are no customer acceptance requirements, there are no remaining significant obligations and collectability of the resulting receivable is reasonably assured.
 
The Company records estimated reductions to revenue for customer incentive offerings, including rebates and sales returns allowance in the same period that the related revenue is recognized. The Company’s customer incentive offerings primarily involve volume rebates for its products in various target markets and the Company accrues for 100% of the potential rebates when it is likely that the relevant criteria will be met. A sales returns allowance, which is presented as a reduction to accounts receivable on the Company’s Consolidated Balance Sheet, is established based primarily on historical sales returns, analysis of credit memo data and other known factors at that time.
 
A significant amount of the Company’s revenue is generated through distributors that may benefit from pricing protection and/or rights of return. The Company defers recognition of product revenue and costs from sales to such distributors until the products are resold by the distributor to the end user customers and records deferred revenue less cost of deferred revenues as a net liability on the Company’s Consolidated Balance Sheet. At the time of shipment to such distributors, the Company records a trade receivable at the selling price since there is a legally enforceable obligation from the distributor to pay the Company currently for product delivered and relieve


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inventory for the carrying value of goods shipped since legal title has passed to the distributor. During the year ended December 31, 2010, the Company recognized $131.2 million of product revenue from products that were sold by distributors to the end user customers.
 
The Company presents any taxes assessed by a governmental authority that are both imposed on and concurrent with our sales on a net basis, excluded from revenues.
 
Stock-based Compensation
 
The Company accounts for share-based payments, including grants of stock options and awards to employees and directors, in accordance with applicable accounting guidance, which requires that share-based payments be recognized in its Consolidated Statements of Operations based on their fair values and the estimated number of shares the Company ultimately expects to vest. The Company recognizes stock-based compensation expense on a straight-line basis over the service period of all stock options and awards other than performance-based restricted stock awards with market conditions.
 
Shipping and Handling Costs
 
Shipping and handling costs are included as a component of cost of revenues.
 
Research and Development Costs
 
Research and development costs are expensed as incurred. These costs primarily include employees’ compensation, consulting fees, software licensing fees and tape-out expenses.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses consist primarily of personnel related expenses including stock-based compensation, commissions paid to sales representatives and distributors and professional fees.
 
Income Taxes
 
The Company accounts for income taxes in accordance with applicable accounting guidance, which requires that deferred tax assets and liabilities be recognized by using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities.
 
The Company also has to assess the likelihood that it will be able to realize its deferred tax assets. If realization is not more likely than not, the Company is required to record a valuation allowance against deferred tax assets that the Company estimates it will not ultimately realize. The Company believes that it will not ultimately realize a substantial amount of the deferred tax assets recorded on its consolidated balance sheets. However, should there be a change in the ability to realize deferred tax assets; the valuation allowance against deferred tax assets would be released, resulting in a corresponding reduction in the Company’s tax provision.
 
The Company is required to make certain estimates and judgments in determining income tax expense for financial statement purposes. The Company recognizes liabilities for uncertain tax positions based on the two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Because the Company is required to determine the probability of various possible outcomes, such estimates are inherently difficult and subjective. The Company reevaluates these uncertain tax positions on a quarterly basis. This reevaluation is based on factors including, but not limited to, changes in facts or circumstances and changes in tax law. A change in recognition or measurement would result either in the recognition of a tax benefit or in an additional charge to the tax provision for the period.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Net Income (loss) per Share
 
The Company computes net income (loss) per share in accordance with applicable accounting guidance. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the reporting period. Diluted net income (loss) per share is computed by dividing net income by the combination of dilutive common share equivalents, comprised of shares issuable under the Company’s stock-based compensation plans and the weighted average number of shares of common stock outstanding during the reporting period. Dilutive common share equivalents include the dilutive effect of in-the-money options and warrants to purchase shares, which is calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of an option, the amount of compensation cost, if any, for future service that the Company has not yet recognized, and the amount of estimated tax benefits that would be recorded in paid-in capital, if any, when the option is exercised are assumed to be used to repurchase shares in the current period.
 
Comprehensive Income (Loss)
 
Comprehensive income (loss) is defined as the change in the equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. Unrealized gains and losses on investments are comprehensive income (loss) items applicable to the Company and are reported as a separate component of equity as “Accumulated other comprehensive income (loss).”
 
Product Warranty
 
The Company’s products are generally subject to warranty, which provides for the estimated future costs of repair, replacement or customer accommodation upon revenue recognition in the accompanying statements of operations. The Company warrants its products against material defects for a period of time usually between 90 days and one year.
 
Advertising Expense
 
Advertising costs are expensed when incurred.
 
Recent Accounting Pronouncements
 
Effective July 1, 2009, the Company adopted the FASB’s updated guidance related to business combinations. The updated guidance establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The updated standard also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Under the updated guidance, the Company is expensing the transaction and employee termination costs associated with the NXP product lines acquisitions, while under the prior accounting standards such costs would have been capitalized. In addition, the Company acquired in-process research and development of $18.0 million in 2010, which has been capitalized in accordance with the updated guidance, whereas under prior authoritative guidance the amount would have been expensed immediately. Therefore, the Company believes the updated guidance had a material impact on its future consolidated financial statements.
 
Effective January 1, 2010, the Company adopted the FASB’s updated guidance related to fair value measurements and disclosures, which requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than one net number). The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques


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and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. Therefore, the Company has not yet adopted the guidance with respect to the roll forward activity in Level 3 fair value measurements. The Company has updated its disclosures to comply with the updated guidance; however, adoption of the updated guidance did not have an impact on the Company’s consolidated results of operations or financial condition.
 
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. The adoption of this guidance did not significantly impact the Company’s Consolidated financial statements. This guidance was incorporated into the Company’s recognition of revenue.
 
In December 2010, the FASB updated its guidance related to when to perform step two of the goodwill impairment test for reporting units with zero or negative carrying amounts. The updated guidance requires that for any reporting unit with a zero or negative carrying amount, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The updated guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The Company does not expect adoption to have a material impact on its consolidated results of operations or financial condition.
 
In December 2010, the FASB updated its guidance related to disclosure of supplementary pro forma information for business combinations. The updated guidance requires that if comparative financial statements are presented, the pro forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period only. The updated guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, with early adoption permitted. The Company has not yet adopted the updated guidance and the Company does not expect adoption to have an impact on its consolidated results of operations or financial condition as the updated guidance only affects disclosures related to future business combinations.


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3.   BALANCE SHEET COMPONENTS
 
                 
    December 31,
    December 31,
 
    2010     2009  
    (Dollars in thousands)  
 
Cash and cash equivalents:
               
Cash
  $ 62,226     $ 86,382  
Money market funds invested in U.S. Treasuries
    30,998       61,613  
                 
Total cash and cash equivalents
  $ 93,224     $ 147,995  
                 
Accounts receivable:
               
Accounts receivable, gross
  $ 62,962     $ 4,902  
Allowance for sales returns and doubtful accounts
    (634 )     (320 )
                 
Total accounts receivable
  $ 62,328     $ 4,582  
                 
Inventories:
               
Work in process
  $ 4,751     $ 12,539  
Finished goods
    18,274       1,997  
                 
Total inventories
  $ 23,025     $ 14,536  
                 
Prepaid expenses and other current assets:
               
VAT receivable
    9,488       3,886  
Prepaid and deferred taxes
    658        
Prepaid insurance
    524        
Other
    7,660       3,471  
                 
Total prepaid expenses and other current assets:
  $ 18,330     $ 7,357  
                 
Property and equipment, net:
               
Building and leasehold improvements
  $ 21,068     $ 19,522  
Machinery and equipment
    29,889       15,427  
Software
    4,816       4,096  
Furniture and fixtures
    3,411       2,296  
                 
      59,184       41,341  
Accumulated depreciation
    (27,618 )     (15,173 )
                 
Total property and equipment, net
  $ 31,566     $ 26,168  
                 
Accrued expenses and other current liabilities:
               
Compensation and benefits
  $ 22,098     $ 4,482  
Price rebates
    6,414       5,913  
Wafer and substrate fees
    4,203       2,227  
VAT Tax payable
    4,203       1,256  
Royalties
    2,579       939  
Contingent liabilities
    2,758       4,336  
Professional fees
    2,133       2,912  
Restructuring accrual
    4,518        
Warranty accrual
    1,596        
Software licenses
    5,989        
Other
    13,910       4,674  
                 
Total accrued expenses and other current liabilities
  $ 70,401     $ 26,739  
                 
Deferred margin:
               
Deferred revenue on shipments to distributors
  $ 18,841     $ 709  
Deferred cost of sales on shipments to distributors
    (9,937 )     (380 )
                 
Total deferred margin
  $ 8,904     $ 329  
                 


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4.   GOODWILL AND INTANGIBLE ASSETS
 
Goodwill and impairment
 
The following table presents goodwill balances:
 
         
    (In thousands)  
 
Balance as of June 30, 2008
  $ 1,432  
         
Goodwill acquired
    7,708  
Impairment charge
    (1,432 )
         
Balance as of June 30, 2009
    7,708  
Goodwill acquired
     
Impairment charge/other
    143  
         
Balance as of December 31, 2009
    7,851  
Goodwill acquired
     
Impairment charge
    (7,851 )
         
Balance as of December 31, 2010
  $  
         
 
The Company performed a goodwill impairment analysis in the quarter ended March 31, 2009 and determined TMBJ’s net book value exceeded the estimated fair value since there will be no future revenues for the products developed by TMBJ, and the Company decided to reallocate its resources to the SOC market and the acquisition of the Micronas product lines. Accordingly, the Company wrote off the entire goodwill balance at TMBJ and recognized a goodwill impairment charge of $1.4 million.
 
The Company performed an annual goodwill impairment analysis in the quarter ended June 30, 2010 and recorded an impairment charge of $7.9 million, 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:
 
                                                 
    As of December 31, 2010     As of December 31, 2009  
    Gross
    Accumulated
          Gross
    Accumulated
    Net
 
    Carrying
    Amortization
    Net Carrying
    Carrying
    Amortization
    Carrying
 
    Amount     and Impairment     Amount     Amount     and Impairment     Amount  
    (In thousands)  
 
Intangible assets:
                                               
Core & developed
  $ 84,607     $ (40,716 )   $ 43,891     $ 27,751     $ (22,366 )   $ 5,385  
Customer relationships
    25,120       (11,795 )     13,325       2,120       (1,944 )     176  
Backlog
    15,166       (15,166 )           166       (92 )     74  
Patents
    13,000       (2,588 )     10,412                    
In-process R&D
    9,144             9,144                    
Service agreements
    16,000       (9,851 )     6,149                    
                                                 
Total
  $ 163,037     $ (80,116 )   $ 82,921     $ 30,037     $ (24,402 )   $ 5,635  
                                                 
 
As of December 31, 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


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technology reaches technical feasibility. As of December 31, 2010, approximately $8.9 million of the in-process research and development has reached technological feasibility and the unamortized portion is included in the estimated future amortization expense of intangible assets. See Note 13, “Business Combinations,” of Notes to Consolidated Financial Statements for a further description of the Company’s in-process research and development.
 
The following table presents details of the amortization of intangible assets included in net revenues, cost of revenues, research and development and selling, general and administrative expense categories for the periods presented:
 
                                 
          Six Months
       
    Year Ended
    Ended
       
    December 31,     December 31,     Years Ended June 30,  
    2010     2009     2009     2008  
    (In thousands)  
 
Cost of revenues
  $ 48,206     $ 1,949     $ 3,567     $  
Operating expenses:
                               
Research and development
    2,818                    
Selling, general and administrative
    4,690       102       398        
                                 
    $ 55,714     $ 2,051     $ 3,965     $  
                                 
 
As of December 31, 2010, the estimated future amortization expense of intangible assets in the table above is as follows, excluding in-process research and development intangible asset that has not reached technological feasibility:
 
         
    Estimated
 
Year Ending
  Amortization  
    (In thousands)  
 
2011
  $ 38,310  
2012
    26,706  
2013
    7,015  
2014
    1,746  
2015 and thereafter
     
         
Total
  $ 73,777  
         
 
5.   WARRANTY PROVISION
 
The Company replaces defective products that are expected to be returned by its customers under its warranty program and includes such estimated product returns in its “Allowance for sales returns” analysis. The following table reflects the changes in the Company’s accrued product warranty for expected customer claims related to known product warranty issues for the year ended December 31, 2010, six months ended December 31, 2009 and years ended June 30, 2009 and 2008:
 
                                         
          Six Months
             
    Year Ended
    Ended
             
    December 31,     December 31,     Years Ended June 30,        
    2010     2009     2009     2008        
    (Dollars in thousands)  
 
Accrued product warranty, beginning of period
  $     $     $ 256     $ 800          
Charged to (reversal of) cost of revenues
    1,666             (256 )     (372 )        
Actual product warranty expenses
    (70 )                 (172 )        
                                         
Accrued product warranty, end of period
  $ 1,596     $     $     $ 256          
                                         


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6.   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 $0.6 million as of December 31, 2010.
 
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 15, “Related Party Transactions,” of Notes to Consolidated Financial Statements.
 
Contractual Obligations
 
The following summarizes our contractual obligations as of December 31, 2010:
 
                                                         
    Fiscal 2011     Fiscal 2012     Fiscal 2013     Fiscal 2014     Fiscal 2015     Thereafter     Total  
Contractual Obligations
                                                       
Operating Leases(1)
  $ 5.1     $ 4.6     $ 3.5     $ 2.6     $ 1.5     $ 1.3     $ 18.6  
Purchase Obligations(2)
    21.2       1.0                               22.2  
                                                         
Total
  $ 26.3     $ 5.6     $ 3.5     $ 2.6     $ 1.5     $ 1.3     $ 40.8  
                                                         
 
 
(1) At December 31, 2010, the Company leased office space and has 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 and includes lease commitments resulting from the acquisition of selected assets and liabilities of NXP on February 8, 2010 and its corporate headquarters lease that commenced on April 1, 2010 having a $3.6 million total future lease obligation.
 
(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. As of December 31, 2010, the Company had purchase commitments in the amount of $13.0 million that were not included in the consolidated balance sheet at that date. Of this amount, $1.2 million represents purchase commitments by the Company to UMC for intellectual properties, software licensing purchases and other commitments. In addition, the Company entered into an engineering software license and maintenance agreement with NXP on March 5, 2010 having a future net cash obligation of $9.2 million. NXP is obligated under the engineering software license and maintenance agreement to reimburse the Company for $9.2 million.
 
Rental expense for the year ended December 31, 2010, six months ended December 31, 2009 and the years ended June 30, 2009 and 2008, was $5.9 million, $1.4 million, $1.5 million, and $1.5 million, respectively.
 
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 video decoding products infringe a patent relating generally to compressing and decompressing digital


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video. The complaint seeks a permanent injunction against Trident 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.
 
Shareholder Derivative Litigation
 
Trident has been named as a nominal defendant in several purported 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. Plaintiffs in all cases alleged 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 its financial statements); and that as a result those officers and directors are liable to the Company. No particular amount of damages has been alleged, and by the nature of the lawsuit no damages will be alleged against the Company. Our Board of Directors appointed a Special Litigation Committee (“SLC”) composed solely of independent directors to review and manage any claims that we may have relating to the stock option grant practices investigated by the Special Committee. The scope of the SLC’s authority includes the claims asserted in the derivative actions.
 
On March 26, 2010, the federal court approved settlements with all defendants other than Frank Lin, our former CEO. The details of that partial settlement, which disposed of the federal litigation as to all individual defendants other than Mr. Lin and as to the consolidated state court action in its entirety, were previously disclosed in our Form 8-K filed on February 10, 2010.
 
On June 8, 2010, Mr. Lin filed a counterclaim against Trident. In that counterclaim, Mr. Lin sought recovery of payments he claimed he was promised during the negotiations surrounding his eventual termination and also losses he claimed he has suffered because he was not permitted to exercise his Trident stock options between January 2007 and March 2008. On February 11, 2011, we entered into a settlement agreement with Mr. Lin regarding his counterclaims, contingent on the settlement of the derivative litigation pursuant to certain terms.
 
On February 15, 2011, we entered into a Stipulation of Settlement to resolve the federal litigation in its entirety, or Proposed Settlement, and on February 17, 2011, the federal court preliminarily approved the Proposed Settlement. A hearing for consideration of final approval of the Proposed Settlement has been scheduled for April 15, 2011 at 9:00 a.m. in Courtroom 3 of the United States District Court in San Jose, California. Final approval, without appeal, of the Proposed Settlement would satisfy the contingency in the settlement of Mr. Lin’s counterclaims against us. We cannot predict whether the federal court will order the final approval of the Proposed Settlement and, if it does, whether such decision will be appealed. As a result, we cannot predict whether Mr. Lin’s counterclaims against us in the federal litigation 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 and related to the Proposed Settlement, including expenses for the reimbursement of certain legal fees of at least Mr. Lin 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


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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. Pursuant to the same judgment, we received a payment of $817,509 from Mr. Lin, representing $650,772 in disgorged profits gained as a result of conduct alleged by the SEC in its civil complaint against him, together with prejudgment interest thereon of $166,737. 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 2006 Plan S-8 in order to exercise their vested options. During the three months 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 three months 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) the written permission of us.
 
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 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 year then ended. Following the March 2010 partial settlement of the derivative litigation, which included a release of claims by our two former non-employee directors, we reduced the contingent liability by $1.6 million. However, because the derivative litigation is still pending with respect to Mr. Lin, who may seek compensation from us relating to the exercise of his fully vested stock options in the event that the Proposed Settlement entered into during February 2011 is either not finally approved by the federal court or successfully appealed thereafter; a $2.8 million contingent liability remained in “Accrued expenses and other current liabilities” in the Consolidated Balance Sheet as of December 31, 2010.


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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 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 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 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.
 
Commercial Litigation
 
In June 2010, Exatel Visual Systems, Ltd (“Exatel”) filed a complaint against Trident and NXP Semiconductors USA, Inc. (“NXP”), in Superior Court for the State of California, No. 1-10-CV-174333, alleging the following five counts: (1) breach of contract, (2) breach of implied covenant of good faith and fair dealing, (3) fraud by misrepresentation and concealment, (4) negligent misrepresentation, and (5) breach of fiduciary duty. The complaint arises from a series of alleged transactions between Exatel and NXP’s predecessor, Conexant Systems, Inc. pertaining to a joint product development project they undertook commencing in 2007. Trident and NXP have each tendered an indemnity claim to the other for damages and fees arising out of the lawsuit pursuant to a contractual indemnity agreement between them. Both have refused. We have filed a demurrer seeking to dismiss the lawsuit primarily on the grounds that we are not a party to any contract with Exatel. Prior to the hearing on demurrer, Exatel dismissed NXP without prejudice from the lawsuit and agreed to arbitration after NXP filed a motion to compel arbitration for the claims against it pursuant to contractual arbitration provisions within the relevant contracts. On December 7, 2010, the court sustained our demurrer as to all causes of action, with leave to amend. Exatel has filed an amended complaint. We will demur again, with the hearing set for June 23, 2011. 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, the Company is involved in other legal proceedings arising in the ordinary course of our 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 its business, financial position, results of operation or cash flows.
 
7.   STOCKHOLDERS’ EQUITY
 
Common Stock Warrants
 
In connection with the Micronas acquisition, the Company issued warrants to acquire up to 3.0 million additional shares of its common stock. The warrants were valued using the Black-Scholes option pricing model with the following inputs: volatility factor 68%, contractual terms of 5 years, risk-free interest rate of 1.98%, and a market value for Trident stock of $1.43 per share at the acquisition date, May 14, 2009. Warrants to purchase one million shares will vest on each of the second, third and fourth anniversaries of the closing of the transaction, with exercise prices of $4.00 per share, $4.25 per share and $4.50 per share, respectively. The warrants provide for customary anti-dilution adjustments, including for stock splits, dividends, distributions, rights issuances and certain tender offers or exchange offers. If not yet exercised, the warrants will expire on May 14, 2014.


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Preferred Stock
 
In connection with the NXP acquisition, the Company issued to NXP four shares of a newly created Series B Preferred Stock, having the rights, privileges and preferences set forth in the Certificate of Designation of the Series B Preferred Stock filed on February 5, 2010 (“Series B Certificate”). The number of shares of Series B Preferred Stock is fixed at four. Each share has a liquidation preference of $1.00, which must be paid prior to any distribution to holders of common stock upon any liquidation of the Company, and no subsequent right to participate in further distributions on liquidation. The shares of Series B Preferred Stock have no dividend rights. The voting rights of the shares of Series B Preferred Stock primarily relate to the nomination and election of up to four members of the Company’s Board of Directors (“Series B Directors”), as distinguished from the other members of the Company’s Board of Directors. For so long as the holders of the Series B Preferred Stock beneficially own 11% or more of the Company’s common stock and are entitled to elect a director, the size of the Company’s Board will be fixed at nine directors. The holders of the Series B Preferred Stock are solely entitled to elect a number of Series B Directors based on a formula relating to their aggregate beneficial ownership of the Company’s common stock as follows: (a) at 40% or greater, four Series B Directors, (b) less than 40% but at least 30%, three series B Directors, (c) less than 30% but at least 20%, two Series B Directors and (d) less than 20% but at least 11%, one Series B Director. The Series B Certificate sets forth the rights of the holders of the Series B Preferred Stock to remove and replace the Series B Directors, as well as their rights to vote as a class to amend, alter or repeal any of its provisions that would adversely affect the powers, designations, preferences and other special rights of the Series B Preferred Stock.
 
Preferred Shares Rights
 
On July 24, 1998, the Company’s Board of Directors adopted a Preferred Shares Rights Agreement (the “Original Rights Agreement”). Pursuant to the Agreement, the Company’s Board of Directors authorized and declared a dividend of one preferred share purchase right (“Right”) for each outstanding share of the Company’s common stock, par value $0.001 (“Common Shares”) of the Company as of August 14, 1998. The Rights are designed to protect and maximize the value of the outstanding equity interests in Trident in the event of an unsolicited attempt by an acquirer to take over Trident, in a manner or terms not approved by the Board of Directors.
 
On July 23, 2008, the Board approved an amendment to the Original Rights Agreement pursuant to an Amended and Restated Rights Agreement dated as of July 23, 2008 (the “Amended and Restated Rights Agreement”). The Amended and Restated Rights Agreement (i) extended the Final Expiration Date, as defined in the Original Rights Agreement, through July 23, 2018; (ii) adjusted the number of shares of Series A Preferred Stock (“Preferred Shares”) issuable upon exercise of each Right from one one-hundredth to one one-thousandth; (iii) changed the purchase price (the “Purchase Price”) of each Right to $38.00; and (iv) added a provision requiring periodic evaluation (at least every three years after July 23, 2008) of the Amended and Restated Rights Agreement by a committee of independent directors to determine if maintenance of the Amended and Restated Rights Agreement continues to be in the best interests of the Company and its stockholders. The Company subsequently amended the Amended and Restated Rights Agreement to provide that the issuance of shares of Trident common stock to Micronas and to NXP, respectively, does not trigger the Rights under the Amended and Restated Rights Agreement.
 
8.   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 on March 10, 2010.
 
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


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who were subject to U.S. income taxation received 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.
 
Equity Incentive Plans
 
The Company grants nonstatutory and incentive stock options, restricted stock awards, and restricted stock units to attract and retain officers, directors, employees and consultants. As of December 31, 2010, the Company made awards under two equity incentive plans: the 2006 Equity Incentive Plan (the “2006 Plan”), the 2002 Stock Option Plan (the “2002 Plan”). The Company has also adopted the 2001 Employee Stock Purchase Plan; however purchases under this plan have been suspended. Options to purchase Trident’s common stock remain outstanding under three incentive plans which have expired or been terminated: the 1992 Stock Option Plan, the 1994 Outside Directors Stock Option Plan and the 1996 Nonstatutory Stock Option 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 TTI’s officers, employees and consultants under the TTI 2003 Employee Option Plan (“TTI Plan”). The options granted under the TTI Option 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.
 
In May 2006, Trident’s stockholders approved the 2006 Plan, which 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, deferred compensation awards, cash-based and other stock-based awards and nonemployee director awards of up to 4,350,000 shares. On March 31, 2008, Trident’s Board of Directors approved an amendment to the 2006 Plan to increase the number of shares available for issuance from 4,350,000 shares to 8,350,000 shares, which was subsequently approved in a special stockholders’ meeting on May 16, 2008. For purposes of the total number of shares available for grant under the 2006 Plan, any shares that are subject to awards of stock options, stock appreciation rights, deferred compensation award or other award that requires the option holder to purchase shares for monetary consideration equal to their fair market value determined at the time of grant shall be counted against the available-for-grant limit as one share for every one share issued, and any shares issued in connection with awards other than stock options, stock appreciation rights, deferred compensation award or other award that requires the option holder to purchase shares for monetary consideration equal to their fair market value determined at the time of grant shall be counted against the available-for-grant limit as 1.38 shares for every one share issued. Stock options granted under the 2006 Plan 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. In February, 2010, the stockholders of the Company approved the adoption of the 2010 Equity Incentive Plan, which supersedes the 2006 Plan and the 2002 Plan. The 2006 Plan and 2002 Plan were terminated on January 26, 2010.
 
Stock options granted under the TTI Plan expire no later than ten years from the grant date. Options granted under the TTI Plan were generally exercisable one or two years after date of grant and vest over a requisite service


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period of generally two or four years following the date of grant. No further awards may be made under the TTI Plan.
 
In December 2002, Trident adopted the stockholder-approved 2002 Plan under which shares of common stock could be issued to officers, directors, employees and consultants. Stock options granted under the 2002 Plan must have an exercise price equal to at least 85% of the closing market price of the underlying stock on the grant date and expire no later than ten years from the grant date. Options granted under the 2002 Plan were generally exercisable in cumulative installments of one-third or one-fourth each year, commencing one year following the date of grant.
 
The Company accounts for share-based payments, including grants of stock options and awards to employees and directors, in accordance with applicable accounting guidance, which requires that share-based payments be recognized in its consolidated statements of operations based on their fair values and the estimated number of shares the Company ultimately expects will vest. Stock-based compensation expense recognized in the Consolidated Statements of Operations for the year ended December 31, 2010, six month period ended December 31, 2009 and the years ended June 30, 2009 and 2008 include compensation expense for stock-based payment awards granted prior to, but not yet vested as of, June 30, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of previous accounting guidance, and compensation expense for the stock-based payment awards granted subsequent to June 30, 2005 based on the grant date fair value estimated in accordance with the provisions accounting guidance applicable since then. In accordance with applicable accounting guidance, the Company recognizes stock-based compensation expense on a straight-line basis over the service period of all stock options and awards other than the performance-based restricted stock award with market conditions that was granted to its former Chief Executive Officer under the 2006 Plan. For purposes of expensing this single performance-based grant, the Company elected to use the accelerated method.
 
Valuation Assumptions
 
The Company values its stock-based payment awards granted using the Black-Scholes model, except for the performance-based restricted stock award with a market condition granted under the 2006 Plan during the year ended June 30, 2008, for which the Company elected to use a Monte Carlo simulation to value the award.
 
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 characteristics significantly different from those of traded options, and changes in the assumptions can materially affect the fair value estimates.
 
For the year ended December 31, 2010, six months ended December 31, 2009 and the years ended June 30, 2009 and 2008, respectively, the fair value of options granted were estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions:
 
                                 
    Year Ended
  Six Months Ended
       
    December 31,
  December 31,
  Years Ended June 30,
    2010   2009   2009   2008
 
Expected terms (in years)
    4.78       4.74       3.94       4.20  
Volatility
    69.02 %     68.58 %     62.68 %     52.25 %
Risk-free interest rate
    2.25 %     2.41 %     2.83 %     3.97 %
Expected dividend rate
                       
Weighted average fair value
    1.79     $ 1.13     $ 1.27     $ 5.04  
 
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 as allowed under applicable accounting guidance 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


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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 Consolidated Statements of Operations for the year ended December 31, 2010, six months ended December 31, 2009 and the years ended June 30, 2009 and 2008 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Accounting guidance requires forfeitures to be estimated 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. The Company adjusts stock-based compensation expense based on its actual forfeitures on an annual basis, if necessary.
 
Stock-Based Compensation Expense
 
The following table summarizes the impact of recording stock-based compensation expense under applicable accounting guidance for the year ended December 31, 2010, six months ended December 31, 2009 and the years ended June 30, 2009 and 2008. The Company has not capitalized any stock-based compensation expense in inventory for the year ended December 31, 2010, six months ended December 31, 2009 or the years ended June 30, 2009 and 2008 as such amounts were immaterial.
 
                                 
    Year Ended,
    Six Months Ended
             
    December 31,
    December 31,
    Year Ended June 30,  
    2010     2009     2009     2008  
    (Dollars in thousands)  
 
Cost of revenues
  $ 372     $ 124     $ 587     $ 763  
Research and development
    3,550       1,665       7,539       12,418  
Selling, general and administrative
    2,981       1,666       4,547       15,424  
                                 
Total stock-based compensation expense
  $ 6,903     $ 3,455     $ 12,673     $ 28,605  
                                 
 
$4.3 million of the $15.4 million in selling, general and administrative expenses for the year ended June 30, 2008 was related to the contingent liability and we reduced selling, general and administrative expense and the contingent liability by $1.5 million during the year ended December 31, 2010, due to a partial settlement with two former non-employee directors as discussed below in “Modification of Certain Options.”
 
The following table summarizes the Company’s stock option activities for the year ended December 31, 2010, six months ended December 31, 2009 and for the years ended June 30, 2009 and 2008:
 
                         
    Shares
    Options Outstanding  
    Available for
    Number of
    Weighted Average
 
    Grant     Shares     Exercise Price  
    (Shares in thousands, except per share amounts)  
 
Balance at June 30, 2007
    3,584       9,802     $ 6.82  
Options increase under 2006 Plan
    4,000                  
Plan shares expired
    (594 )            
Restricted stock granted(1)
    (1,273 )            
Restricted stock cancellation(1)
    192              
Options granted
    (1,870 )     1,870       10.60  
Options exercised
          (2,778 )     2.01  
Options cancelled, forfeited or expired
    1,369       (1,369 )     10.58  
                         
Balance at June 30, 2008
    5,408       7,525     $ 8.94  
Plan shares expired
    (594 )            
Restricted stock granted(1)
    (1,512 )