______________________________________________________________________________
<PAGE>
THIS DOCUMENT IS A COPY OF THE FORM 10-Q FILED ON MAY 16, 1996 PURSUANT TO A
RULE 201 TEMPORARY HARDSHIP EXEMPTION.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-21126
S3 Incorporated
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0204341
----------- ------------
State or other jurisdiction I.R.S. Employer
of incorporation or Identification No.
organization]
2770 San Tomas Expressway
Santa Clara, California 95051-0968
---------------------------- ------------
Address of principal executive Zip Code
offices
Registrant`s telephone number, including area code: (408) 980-5400
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
The number of shares of the Registrant`s Common Stock, $.0001 par value,
outstanding at
May 7, 1996 was 47,191,335
________________________________________________________________________________
<PAGE>
S3 INCORPORATED
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
<S> <C>
PAGE
PART I. CONSOLIDATED CONDENSED FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets
March 31, 1996 and December 31, 1995 3
Consolidated Condensed Statements of Operations
Three months ended March 31, 1996 and 1995 4
Consolidated Condensed Statements of Cash Flows
Three months ended March 31, 1996 and 1995 5
Notes to Unaudited Consolidated Condensed Financial 6-8
Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities Not
Applicable
Item 3. Defaults Upon Senior Securities Not
Applicable
Item 4. Submission of Matters to a Vote of Security Not
Holders Applicable
Item 5. Other Information Not
Applicable
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
Page 2 of 16
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
S3 INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
(Unaudited)
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $71,131 $69,289
Short-term investments 22,795 24,630
Accounts receivable (net of allowances of $1,614 in 1996
and $1,614 in 1995) 81,154 84,210
Inventories, net 47,889 43,293
Prepaid expenses and other 15,583 14,216
------------- -------------
Total current assets 238,552 235,638
Property and equipment, net 23,733 20,678
Production capacity rights 24,000 24,000
Investment in joint venture 36,425 36,425
Other assets 8,981 4,902
------------- -------------
Total $331,691 $321,643
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $51,108 $62,081
Notes payable 11,200 9,200
Accrued liabilities 15,664 13,461
Income taxes payable 7,486 6,276
------------- -------------
Total current liabilities 85,458 91,018
Notes payable 24,000 24,000
Other liabilities 3,423 761
------------- -------------
Total liabilities 112,881 115,779
------------- -------------
Commitments and contingencies (Notes 4 and 5)
Stockholders' equity:
Common Stock, $.0001 par value; 70,000,000 shares
authorized; 47,014,551
and 46,797,327 shares outstanding in 1996 and 1995 157,113 156,474
Unrealized gain on short-term investments 13 14
Retained earnings 61,684 49,376
------------- -------------
Total stockholders' equity 218,810 205,864
-------------- -------------
Total $331,691 $321,643
============== =============
</TABLE>
See accompanying notes to the unaudited consolidated condensed financial
statements.
Page 3 of 16
<PAGE>
S3 INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1996 1995
-------------- -------------
<S> <C> <C>
Net sales $110,072 $57,422
Cost of sales 66,510 34,793
-------------- -------------
Gross margin 43,562 22,629
-------------- -------------
Operating expenses:
Research and development 14,721 6,935
Selling, marketing and administrative 10,914 6,627
-------------- -------------
Total operating expenses 25,635 13,562
-------------- -------------
Income from operations 17,927 9,067
Other income, net 1,006 433
-------------- -------------
Income before income taxes 18,933 9,500
Provision for income taxes 6,625 3,415
-------------- -------------
Net income $12,308 $6,085
============== =========
Per share amounts:
Net income $0.25 $0.15
============== =========
Number of shares used in computing per share amounts 50,047 41,152
============== =========
</TABLE>
See accompanying notes to the unaudited consolidated condensed financial
statements.
Page 4 of 16
<PAGE>
S3 INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION> Three Months Ended
March 31, March 31,
1996 1995
-------------- ---------------
<S> <C> <C>
Operating activities:
Net income $12,308 $6,085
Adjustments to reconcile net income to net cash
provided by
(used for) operating activities:
Deferred income taxes (472) 358
Depreciation and amortization 2,276 1,351
Provision for doubtful accounts receivable - 364
Deferred rent (23) 40
Changes in assets and liabilities:
Accounts receivable 3,056 (13,472)
Inventories (4,596) (1,772)
Prepaid expenses and other (2,874) (788)
Accounts payable (10,973) 9,458
Accrued liabilities and other 4,887 2,108
Income taxes payable 1,210 2,927
--------------- ---------------
Net cash provided by operating activities 4,799 6,659
--------------- ---------------
Investing activities:
Property and equipment purchases, net (5,331) (3,202)
Investment in real estate partnership (2,100) -
Sales/maturities of short-term investments, net 1,835 952
--------------- ---------------
Net cash used for investing activities (5,596) (2,250)
--------------- ---------------
Financing activities:
Sale of common stock, net 639 350
Repayment of notes payable (2,000) -
Borrowings of notes payable 4,000 -
--------------- ---------------
Net cash provided by financing activities 2,639 350
--------------- ---------------
Net increase in cash and equivalents 1,842 4,759
Cash and cash equivalents at beginning of period 69,289 25,772
--------------- ---------------
Cash and cash equivalents at end of period $71,131 $30,531
=============== ===============
</TABLE>
See accompanying notes to the unaudited consolidated condensed financial
statements.
Page 5 of 16
<PAGE>
S3 INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation:
The consolidated condensed financial statements have been prepared by
S3 Incorporated, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission and include the accounts of S3
Incorporated and its wholly-owned subsidiaries (`S3` or collectively the
`Company`). Certain information and footnote disclosures, normally
included in financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to
such rules and regulations. In the opinion of the Company, the financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position at
March 31, 1996 and December 31, 1995, and the operating results and cash
flows for the three months ended March 31, 1996 and 1995. These financial
statements and notes should be read in conjunction with the Company's
audited financial statements and notes thereto for the year ended December
31, 1995, included in the Company's Form 10-K filed with the Securities and
Exchange Commission.
All common share and per share information has been restated to
reflect the two-for-one stock split effected September 19, 1995.
The results of operations for the three months ended March 31, 1996
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2. Inventories:
Inventories consist of work in process and finished goods and are
stated at the lower of cost (first-in, first-out) or market.
<TABLE>
<CAPTION>
Three Months Ended
March 31, December 31,
1996 1995
------------- -------------
<S>
Inventories consist of: <C> <C>
Work in process $26,394 $23,469
Finished goods 21,495 19,824
------------- -------------
Total $47,889 $43,293
============= =============
</TABLE>
3. Net income per share:
Net income per share is computed based on the weighted average number
of common and dilutive common equivalent shares outstanding. Common
equivalent shares include stock options and shares subscribed under the
employee stock purchase plan.
Page 6 of 16
<PAGE>
4. Wafer supply agreements and commitments
In the third quarter of 1995, the Company entered into two long-term
manufacturing capacity arrangements. The Company entered into an agreement with
United Microelectronics Corporation (UMC) and Alliance Semiconductor Corporation
to form a separate Taiwanese company for the purpose of building and managing a
semiconductor manufacturing facility in the Science Based Industrial Park in
Hsin Chu City, Taiwan, Republic of China. The Company invested $36.4 million in
1995 and is committed to invest New Taiwanese Dollars (NTD) 1,500,000
(approximately $56.2 million) in July 1996 for its 25% equity interest. The
facility is currently scheduled to begin production utilizing advanced submicron
semiconductor manufacturing processes in late 1996, although there can be no
assurance that production will begin on schedule. The Company has the right to
purchase up to 31.25% of the output from the foundry. At March 31, 1996, the
Company had forward exchange swap agreements with a bank to hedge all of its
obligation. Operations through March 31, 1996 have consisted primarily of
construction and other capitalizable preproduction activities and, therefore,
results of operations for the entity have been immaterial. To the extent the
joint venture experiences operating losses during the ramp up of production, the
Company will recognize its proportionate share of such losses.
In addition, the Company expanded and formalized its relationship with
Taiwan Semiconductor Manufacturing Company (TSMC) to provide additional capacity
over the 1996 to 2000 timeframe. The agreement with TSMC requires the Company
to make certain annual advance payments to be applied against the following
year`s capacity. The Company has signed promissory notes to secure these
payments over the term of the agreement. At March 31, 1996, the remaining
advance payments (and corresponding promissory notes) totaled $31.2 million
($7.2 million in prepaid expenses and $24.0 million in production capacity
rights).
In the ordinary course of business, the Company places purchase orders with
its wafer suppliers based on its existing and anticipated customer orders for
its products. Should the Company experience a substantial unanticipated decline
in the selling price of its products and/or demand thereof, it could result in a
material loss on such purchase commitments.
During December 1995, the Company entered into a limited partnership
arrangement with a developer to obtain a ground lease and develop and operate
the Company`s future Santa Clara facilities. The facilities are currently
scheduled to be ready for occupancy in the first half of 1997. At March 31,
1996, the Company had invested $2.1 million in the limited partnership.
5. Contingencies:
On October 2, 1995, Brooktree Corporation (`Brooktree`) filed a complaint
against the Company in the United States District Court for the Southern
District of California (Action No. 952388R (AJB)). The complaint alleges that
S3`s Trio64V+ product infringes Brooktree`s United States Letters Patent No.
5,406,306 (the `306 Patent`), which was issued on April 11, 1995. Brooktree has
alleged that such infringement was willful and seeks a preliminary and permanent
injunction against S3 making, using or selling its Trio64V+ product or any other
product substantially equivalent thereto. In addition, Brooktree seeks damages,
costs and attorneys` fees and interest. On March 12, 1996, the Court ruled
against Brooktree in its request for a preliminary injunction. The case has
been set for trial August 6,1996, where Brooktree`s request for a permanent
injunction and damages will be decided.
The Company has been advised by patent counsel that its Trio64V+ product
does not infringe the `306 Patent`, and it plans to continue to defend the suit
vigorously. The Company believes that it has meritorious defenses, including
that the `306 Patent` is not valid and/or that the patent is unenforceable due
to inequitable conduct on the part of Brooktree in obtaining the patent.
However, there can be no assurance that the Company will be successful in the
defense of such suit, and even if successful, such litigation could result in
substantial expense to the Company and divert the efforts of the Company`s
technical and management personnel. In addition, an adverse result in such
litigation could have a material adverse effect on the Company`s business and
results of operations, however no estimate of such effect can be made.
Page 7 of 16
<PAGE>
The semiconductor and software industries are characterized by frequent
litigation regarding patent and other intellectual property rights. The Company
is party to various claims of this nature. Although the ultimate outcome of
these matters and the Brooktree matter above is not presently determinable,
management believes that the resolution of all such pending matters will not
have a material adverse effect on the Company`s financial position or results of
operations.
Page 8 of 16
<PAGE>
Part I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
When used in this discussion, the word `expects` and similar
expressions are intended to identify forward-looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected, including market
conditions in the PC industry, the impact of competitive products and
pricing, the timely development and market acceptance of new products and
upgrades to existing products, availability and cost of products from the
Company`s suppliers, the factors discussed below and the factors discussed
in Item 1 of the Company`s annual report on Form 10K for the year ended
December 31, 1995 under the caption `Business-Factors that May Affect
Results.` These forward-looking statements speak only as of the date
hereof. The portions of the Form 10-K referred to in this paragraph are
expressly incorporated herein by reference. The Company expressly
disclaims any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in the Company`s expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based.
Overview
The Company is a leading supplier of high performance multimedia
acceleration solutions for the PC market. The Company`s accelerators are
designed to work cooperatively with a PC`s central processing unit (`CPU`),
implementing functions best suited for a dedicated accelerator while
allowing the CPU to perform the more general purpose computing functions of
today`s advanced graphical user interface (`GUI`) environment and
applications.
The following information should be read in conjunction with the
`Management's Discussion and Analysis of Financial Condition and Results of
Operations` on pages 20 through 23 of the Company's 1995 Annual Report to
Stockholders and with the section of the Company`s annual report on Form 10-
K for the year ended December 31, 1995 entitled, `Item 1. Business-Factors
That May Affect Results.`
Results of Operations
The following table sets forth for the periods indicated certain financial
data as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1996 1995
-------------- --------------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 60.4 60.6
-------------- --------------
Gross margin 39.6 39.4
-------------- --------------
Operating expenses
Research and development 13.4 12.1
Selling, marketing and administrative 9.9 11.5
-------------- --------------
Total operating expenses 23.3 23.6
-------------- --------------
Income from operations 16.3 15.8
Other income, net .9 .7
-------------- --------------
Income before income taxes 17.2 16.5
Provision for income taxes 6.0 5.9
-------------- --------------
Net income 11.2% 10.6%
============== ==============
</TABLE>
Page 9 of 16
<PAGE>
The Company's operating results have historically been, and will
continue to be, subject to quarterly and other fluctuations due to a
variety of factors, including changes in pricing policies by the Company,
its competitors or its suppliers, anticipated and unanticipated decreases
in unit average selling prices of the Company`s products, availability and
cost of products from the Company's suppliers, changes in the mix of
products sold and in the mix of sales by distribution channels, the gain or
loss of significant customers, new product introductions by the Company or
its competitors, marketing acceptance of new or enhanced versions of the
Company's products, seasonal customer demand, and the timing of significant
orders.
The Company`s operating results may fluctuate from those in prior
quarters or may be adversely affected in quarters in which it is undergoing
a product line transition in which production and sales of new products are
ramping up and in which existing products are under extreme price pressures
due to competitive factors. If new products are not brought to market in a
timely manner or do not address market needs or performance requirements,
then the Company`s operating results will be adversely affected. As a
result of the foregoing, the Company`s operating results and stock price
may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in net sales or net income from levels expected by
securities analysts could have an immediate and significant adverse effect
on the trading price of the Company`s common stock.
Net Sales
The Company's net sales to date have been generated from the sale of
its graphics and multimedia accelerators. The Company`s products are used
in, and its business is dependent on, the personal computer industry with
sales primarily in the U.S., Asia, and Europe. Net sales were $110.1
million for the three months ended March 31, 1996, a 92% increase above the
$57.4 million of net sales for the three months ended March 31, 1995. Net
sales increased primarily as a result of strong demand for the Company`s 64-
bit products that resulted in increased unit shipments and increased
product availability from the Company`s qualified independent foundries.
The increase in unit shipments was partially offset by lower overall
average selling prices. Sales for the three months ended March 31, 1996
consisted primarily of the Trio family of integrated accelerators while
sales for the three months ended March 31, 1995 consisted primarily of the
64-bit Vision family of integrated accelerators. The Company expects that
the percentage of its net sales represented by any one product or type of
product may change significantly from period to period as new products are
introduced and existing products reach the end of their product life
cycles. Due to competitive price pressures, the Company's products
experience declining unit average selling prices over time, which at times
can be substantial.
The market for PCs in the first half of 1996 is expected to grow at a
slower rate than in the first half of 1995, which could result in increases
in certain customers` inventories of the Company`s products. These factors
could adversely affect demand for the Company`s products. In addition, the
pricing environment for graphics accelerators has recently experienced and
is expected to continue to experience increasing pricing pressures due in
part to the alleviation of supply constraints that contributed to more
stable pricing in 1995 and to aggressive pricing from certain of the
Company`s competitors.
Export sales accounted for 56% and 42% of net sales for the three
months ended March 31, 1996 and 1995, respectively. Approximately 43% of
export sales for the three months ended March 31, 1996 were to affiliates
of United States customers. The Company expects that export sales will
continue to represent a significant portion of net sales, although there
can be no assurance that export sales as a percentage of net sales will
remain at current levels. All sale transactions were denominated in U.S.
dollars.
Three customers accounted for 16%, 13% and 12% of net sales for the
three months ended March 31, 1996. In comparison, sales to one customer
was 21% for the three months ended March 31, 1995. The Company expects a
significant portion of its future sales to remain concentrated within a
limited number of strategic customers. There can be no assurance that the
Company will be able to retain its strategic customers or that such
customers will not cancel or reschedule orders or, in the event orders are
canceled, that such orders will be replaced by other sales. In addition,
sales to any particular customer may fluctuate significantly from quarter
to
Page 10 of 16
<PAGE>
quarter. The occurrence of any such events or the loss of a strategic
customer could have a material adverse effect on the Company's operating
results.
The occurrence of any supply problems for the Company`s products may
adversely affect the rate of growth in net sales. Net sales may also be
adversely affected by delays in the production ramp of customers` new
programs and systems which incorporate the Company`s products. In
addition, the Company ships more product in the third month of each quarter
than in either of the first two months of the quarter, with shipments in
the third month higher at the end of the month. This pattern, which is
common in the semiconductor industry, is likely to continue. The
concentration of sales in the last month of the quarter may cause the
Company`s quarterly results of operations to more difficult to predict.
Moreover, a disruption in the Company`s production or shipping near the end
of a quarter could materially reduce the Company`s net sales for that
quarter. The Company`s reliance on outside foundries and independent
assembly and testing houses reduces the Company`s ability to control, among
other things, delivery schedules.
Gross Margin
Gross margin percentage increased to 39.6% for the three months ended
March 31, 1996 from 39.4% for the three months ended March 31, 1995. The
increase was due to the Company achieving proportionately greater decreases
in unit average costs compared to decreases in overall average selling
prices. The unit average cost decreases were principally the result of
changes in the Company`s design method and manufacturing strategy and
shifts to lower cost foundries.
In the future, the Company`s gross margin percentages may be affected
by increased competition and related decreases in unit average selling
prices (particularly with respect to older generation products), timing of
volume shipments of new products, the availability and cost of products
from the Company's suppliers, changes in the mix of products sold, and
further shifts in sales from add-in card manufacturers to systems OEMs.
The Company must order products and build inventory substantially in
advance of product shipments and because the markets for the Company`s
products are volatile and its products are subject to rapid technological
and price changes, there is a risk that the Company will forecast
incorrectly and produce excess or insufficient inventories of particular
products. The Company`s customers` ability to reschedule or cancel orders
without significant penalty could adversely affect the Company`s operating
results, as the Company may be unable to adjust its purchases from its
independent foundries to match such customers` changes and cancellations.
To the extent the Company produces excess or insufficient inventories of
particular products, the Company`s operating results could be adversely
affected.
Research and Development Expenses
The Company has made and intends to continue to make significant
investments in research and development to remain competitive by developing
new and enhanced products. Research and development expenses were $14.7
million for the three months ended March 31, 1996, an increase of $7.8
million from $6.9 million for the three months ended March 31, 1995.
Research and development spending increases reflect additions to the
Company's engineering staff and nonrecurring engineering and initial
product verification expenses related to the introduction of new products.
Research and development spending is expected to increase in absolute
dollars in 1996 as a result of the product development activities currently
underway for the desktop, mobile and home PC markets with a focus on video,
3D, audio and communications.
Products in the Company`s market typically have a life cycle of 12 to
18 months. The successful development and commercialization of new
products required to replace or supplement existing products involve many
risks, including the identification of new product opportunities, the
successful and timely completion of the development process, and the
selection of the Company`s products by leading systems suppliers and board
manufacturers for design into their products. There can be no assurance
that the Company will successfully
Page 11 of 16
<PAGE>
identify new product opportunities and develop and bring to the market in a
timely manner successful new products, that products or technologies
developed by others will not render the Company`s products noncompetitive,
or that the Company`s products will be selected for design into its
customers` products. In addition, it is possible that the Company`s
products may be found defective after the Company has already shipped
significant volume production. There can be no assurance that the Company
would be able to successfully correct such problems or that such
corrections would be acceptable to customers. The occurrence of any such
events would have a material adverse effect on the Company`s operating
results.
Selling, Marketing and Administrative Expenses
Selling, marketing and administrative expenses were $10.9 million for
the three months ended March 31, 1995, an increase of $4.3 million from
$6.6 million for the three months ended March 31, 1995. Selling and
marketing costs increased as a result of additional personnel, increased
commissions associated with higher sales levels and increased marketing
costs associated with the introduction of new products. Administrative
costs have increased due to the hiring of additional personnel necessary to
support the increased level of operations. The Company anticipates that
selling, marketing and administrative expenses will increase in absolute
dollars in 1996.
Other Income, Net
Other income, net increased to $1.0 million for the three months ended
March 31, 1995, from $0.4 million for the three months ended March 31,
1995. The increase is due to higher average amounts of cash and short-term
investments for the three months ended March 31, 1996 compared to the same
period in 1995.
Income Taxes
The Company's effective tax rate for the three months ended March 31,
1996 is 35%, compared to the 36% effective rate for the three months ended
March 31, 1995.
Page 12 of 16
<PAGE>
Liquidity and Capital Resources
Cash provided by operating activities for the three months ended March
31, 1996 was $4.8 million, as compared to $6.7 million for the three months
ended March 31, 1995. The Company experienced an increase in inventory,
prepaid expenses and other, income tax payable and accrued liabilities.
These increases were partially offset by decreases in accounts receivable
and accounts payable. Inventory increased due to the absence of capacity
constraints and an increase in finished goods inventory to support sales
levels.
Investing activities for the three months ended March 31, 1996 and
1995 reflected property and equipment purchases of $5.3 million and $3.2
million, respectively, short term investments and the 1996 investment in
the real estate partnership of $2.1 million. Continued expansion of the
Company`s business is likely to require higher levels of capital equipment
purchases, foundry investments and other payments to secure manufacturing
capacity.
Financing activities provided cash of $2.6 million. Borrowings on the
line of credit and proceeds from the issuance of common stock were the
principal financing activities generating cash.
Working capital at March 31, 1996 and March 31, 1995 was $153.1
million and $64.1 million, respectively. At March 31, 1996, the Company`s
principal sources of liquidity included cash and equivalents of $71.1
million and $22.8 million in short-term investments. In addition, the
Company has a $25.0 million unsecured revolving line of credit that expires
June 1, 1996. The Company had $4.0 million outstanding under the line of
credit as of March 31, 1996. In addition, the Company is currently in the
process of establishing two separate secured equipment lines of credit
totaling $10.0 million. The Company believes that its available funds and
its anticipated funds from operations will satisfy the Company`s projected
working capital, existing foundry supply agreement and capital expenditure
requirements for at least the next 12 months, other than expenditures for
future potential manufacturing agreements. In connection with the
Company`s investment in the real estate partnership, the Company (together
with the developer) is subject to recourse provisions of the construction
financing loan for up to $24.0 million. Upon completion of the
construction and satisfaction of certain criteria of the lender, permanent
nonrecourse financing has been secured.
In order to obtain an adequate supply of wafers, especially wafers
manufactured using advanced process technologies, the Company has entered
into and will continue to consider various possible transactions, including
the use of `take or pay` contracts that commit the Company to purchase
specified quantities of wafers over extended periods, equity investments
in, advances or issuances of equity securities to wafer manufacturing
companies in exchange for guaranteed production or the formation of joint
ventures to own and operate or construct wafer fabrication facilities.
Manufacturing arrangements such as these may require substantial capital
investments, which may require the Company to seek additional equity or
debt financing. There can be no assurance that such additional financing,
if required, will be available when needed or, if available, will be on
satisfactory terms. In addition, the Company may, from time to time, as
business conditions warrant, invest in or acquire businesses, technology or
products that complement the business of the Company.
In the third quarter of 1995, the Company entered into two long-term
manufacturing capacity arrangements. The Company entered into an agreement
with United Microelectronics Corporation (UMC) and Alliance Semiconductor
Corporation to form a separate Taiwanese company for the purpose of
building and managing a semiconductor manufacturing facility in the Science
Based Industrial Park in Hsin Chu City, Taiwan, Republic of China. The
Company invested $36.4 million in 1995 and is committed to invest New
Taiwanese Dollars (NTD) 1,500,000 (approximately $56.2 million) in July
1996 for its 25% equity interest. The facility is currently scheduled to
begin production utilizing advanced submicron semiconductor manufacturing
processes in late 1996, although there can be no assurance that production
will begin on schedule. The Company has the right to
Page 13 of 16
<PAGE>
purchase up to 31.25% of the output from the foundry. At March 31, 1996,
the Company had forward exchange swap agreements with a bank to hedge all
of its obligation. Operations through March 31, 1996 have consisted
primarily of construction and other capitalizable preproduction activities
and, therefore, results of operations for the entity have been immaterial.
To the extent the joint venture experiences operating losses during the
ramp up of production, the Company will recognize its proportionate share
of such losses.
In addition, the Company expanded and formalized its relationship with
Taiwan Semiconductor Manufacturing Company (TSMC) to provide additional
capacity over the 1996 to 2000 timeframe. The agreement with TSMC requires
the Company to make certain annual advance payments to be applied against
the following year`s capacity. The Company has signed promissory notes to
secure these payments over the term of the agreement. At March 31, 1996,
the remaining advance payments (and corresponding promissory notes) totaled
$31.2 million ($7.2 million in prepaid expenses and $24.0 million in
production capacity rights).
The cyclical nature of the semiconductor industry periodically results
in shortages of advanced process wafer fabrication capacity such as the
Company experiences from time to time. The Company's ability to maintain
adequate levels of inventory is primarily dependent upon the Company
obtaining sufficient supply of products to meet future demand, and any
inability of the Company to maintain adequate inventory levels may
adversely affect its relations with its customers. In addition, because
the Company must order products and build inventory substantially in
advance of product shipments, there is a risk that the Company will
forecast incorrectly and produce excess or insufficient inventories of
particular products because the Company's products are volatile and subject
to rapid technology and price change. This inventory risk is heightened
because certain of the Company's key customers place orders with short lead
times. The Company's customers' ability to reschedule or cancel orders
without significant penalty could adversely affect the Company's liquidity,
as the Company may be unable to adjust its purchases from its independent
foundries to match such customer changes and cancellations. To the extent
the Company produces excess or insufficient inventories of particular
products, the Company's operating results could be adversely affected.
In October 1995, a complaint was filed by Brooktree Corporation
against the Company alleging patent infringement. The costs of defending
such suit may be substantial and an adverse result in such litigation could
materially and adversely affect the Company`s liquidity and capital
resources. See Part II, Item 1. `Legal Proceedings.`
Page 14 of 16
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
On October 2, 1995, Brooktree Corporation (`Brooktree`) filed a complaint
against the Company in the United States District Court for the Southern
District of California (Action No. 952388R (AJB)). The complaint alleges that
S3`s Trio64V+ product infringes Brooktree`s United States Letters Patent No.
5,406,306 (the `306 Patent`), which was issued on April 11, 1995. Brooktree has
alleged that such infringement was willful and seeks a preliminary and permanent
injunction against S3 making, using or selling its Trio64V+ product or any other
product substantially equivalent thereto. In addition, Brooktree seeks damages,
costs and attorneys` fees and interest. On March 12, 1996, the Court ruled
against Brooktree in its Request for a preliminary injunction. The case has
been set for trial August 6, 1996, where Brooktree`s request for a permanent
injunction and damages will be decided.
The Company has been advised by patent counsel that its Trio64V+ product
does not infringe the `306 Patent`, and it plans to continue to defend the suit
vigorously. The Company believes that it has meritorious defenses, including
that the `306 Patent` is not valid and/or that the patent is unenforceable due
to inequitable conduct on the part of Brooktree in obtaining the patent.
However, there can be no assurance that the Company will be successful in the
defense of such suit, and even if successful, such litigation could result in
substantial expense to the Company and divert the efforts of the Company`s
technical and management personnel. In addition, an adverse result in such
litigation could have a material adverse effect on the Company`s business and
results of operations, however no estimate of such effect can be made.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (filed only with the electronic submission of
of Form 10-Q in accordance with the Edgar requirements)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three
months ended March 31, 1996.
Page 15 of 16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
S3 INCORPORATED
(Registrant)
/S/GEORGE A. HERVEY
GEORGE A. HERVEY
Vice President, Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
May 15, 1996
Page 16 of 16
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from S3
Incorporated Condensed Consolidated Financial Statements for the period ended
March 31, 1996 and is qualified in its entirety by reference to such 10-Q
filing.
</LEGEND>
<CIK> 0000990294
<NAME> S3 INCORPORATED
<MULTIPLIER> 1,000
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<S> <C>
<PERIOD-TYPE> 3-MOS
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0
0
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