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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
___________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996 Commission File No. 0-23596
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
___________________
C-CUBE MICROSYSTEMS INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0192108
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
1778 McCarthy Boulevard
Milpitas, California 95035
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code (408) 944-6300
Former name, former address and former fiscal year, if changed since last
year: N/A
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.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of April 30, 1996, 33,038,821 shares of the Registrant's Common Stock
were outstanding.
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C-CUBE MICROSYSTEMS INC.
TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
March 31, 1996 and December 31, 1995
Condensed Consolidated Statements of Operations
Quarter ended March 31, 1996 and 1995
Condensed Consolidated Statements of Cash Flows
Quarter ended March 31, 1996 and 1995
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
March 31, December 31,
1996 1995
--------- ----------
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $113,935 $133,414
Short-term investments 38,596 10,675
Receivables 37,893 24,421
Inventories 11,184 11,871
Deferred taxes and other current assets 5,452 5,882
-------- --------
Total current assets 207,060 186,263
Property and equipment -- net 11,522 7,222
Distribution rights -- net 1,936 1,977
Purchased technology -- net 3,003 3,095
Other assets 4,945 4,969
-------- --------
Total $228,466 $203,526
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 837 $ 1,934
Accounts payable 16,950 10,704
Accrued liabilities 10,650 13,889
Current portion of long-term obligations 1,011 1,159
-------- --------
Total current liabilities 29,448 27,686
Long-term obligations 87,903 88,010
-------- --------
Total liabilities 117,351 115,696
-------- --------
Minority interest in subsidiary 976 295
Stockholders' equity:
Common stock, $0.001 par value, 50,000 shares
authorized; shares outstanding: March 31,
1996 -- 33,004, December 31, 1995 -- 32,363 96,095 87,124
Deferred stock compensation (541) (635)
Notes receivable from stockholders (368) (459)
Accumulated translation adjustments (941) (860)
Unrealized loss on investments (66) (14)
Retained earnings 15,960 2,379
-------- --------
Total stockholders' equity 110,139 87,535
-------- --------
Total $228,466 $203,526
======== ========
See notes to condensed consolidated financial statements.
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Quarter Ended March 31,
-----------------------
1996 1995
---------- ----------
Net revenues:
Product $ 67,900 $ 16,461
Development contracts 200 652
-------- --------
Total 68,100 17,113
-------- --------
Costs and expenses:
Cost of product revenues 31,979 7,793
Research and development 6,850 2,746
Selling, general and administrative 7,800 3,753
-------- --------
Total 46,629 14,292
-------- --------
Income from operations 21,471 2,821
Other income (expense), net 471 477
-------- --------
Income before income taxes and
minority interest 21,942 3,298
Income tax expense 7,680 104
-------- --------
Income before minority interest 14,262 3,194
Minority interest in net income of subsidiary 681 --
-------- --------
Net income $ 13,581 $ 3,194
======== ========
Net income per share $ 0.38 $ 0.10
======== ========
Shares used in computation 36,042 33,616
======== ========
See notes to condensed consolidated financial statements.
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Quarter Ended March 31,
-----------------------
1996 1995
---------- ----------
Cash flows from operating activities:
Net income $ 13,581 $ 3,194
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest in subsidiary 681 --
Depreciation and amortization 1,105 544
Changes in assets and liabilities:
Receivables (13,697) (832)
Inventories 675 1,015
Deferred taxes and other assets 352 (202)
Accounts payable 6,251 2,022
Accrued liabilities 4,209 678
-------- --------
Net cash provided by operating activities 13,157 6,419
-------- --------
Cash flows from investing activities:
Maturities of short-term investments 6,700 12,000
Purchases of short-term investments (34,595) (15,602)
Capital expenditures (5,190) (1,328)
Other assets 17 109
-------- --------
Net cash used in investing activities (33,068) (4,821)
-------- --------
Cash flows from financing activities:
Bank term loan repayment -- (111)
Notes payable to banks -- net (1,044) (111)
Repayments of capital lease obligations (253) (363)
Sale of common stock, net of notes receivable 1,536 893
Collection of stockholder notes receivable 91 5
-------- --------
Net cash provided by financing activities 330 313
-------- --------
Exchange rate impact on cash and equivalents 102 (25)
-------- --------
Net increase (decrease) in cash and equivalents (19,479) 1,886
Cash and equivalents, beginning of period 133,414 13,674
-------- --------
Cash and equivalents, end of period $113,935 $ 15,560
======== ========
Supplemental schedule of noncash investing
and financing activities:
Unrealized gain (loss) on investments $ (52) $ 82
Supplemental disclosure of cash flow
information --
Cash paid during the period for:
Interest $ 147 $ 158
Income taxes 4,390 104
See notes to condensed consolidated financial statements.
C-CUBE MICROSYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of presentation
In the opinion of management, these unaudited condensed
consolidated financial statements include all adjustments, consisting
only of normal recurring adjustments and accruals, C-Cube Microsystems
Inc. ("C-Cube" or the "Company") considers necessary for a fair
presentation of the Company's financial position as of March 31, 1996,
and the results of operations and cash flows for the quarters ended
March 31, 1996 and 1995. This unaudited quarterly information should be
read in conjunction with the audited consolidated financial statements
of C-Cube and the notes thereto included in the Company's Annual Report
to Stockholders for the year ended December 31, 1995.
The growth in revenues and operating income experienced by the
Company in recent quarters is not necessarily indicative of future
results. In addition, in view of the significant growth in recent years,
C-Cube believes that period-to-period comparisons of its financial
results should not be relied upon as an indication of future
performance.
2. Inventories consist of:
March 31, December 31,
1996 1995
--------- ----------
(in thousands)
Finished goods $ 6,062 $ 7,572
Work-in-process 1,255 1,667
Raw materials 3,867 2,632
------- -------
Total $11,184 $11,871
======= =======
3. Supplemental stock option plan
In the first quarter of 1996 the Board of Directors approved a
supplemental stock option plan which authorizes the issuance of up to
800,000 shares of common stock pursuant to exercises of nonstatutory
stock options granted to employees (excluding officers and directors)
and consultants under such plan.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk factors
set forth in this report.
QUARTER ENDED MARCH 31, 1996
The following table sets forth certain operating data as a percentage
of net revenues for the quarters ended March 31, 1996 and 1995:
Quarter Ended March 31,
-----------------------
1996 1995
---------- ----------
Net revenues:
Product 99.7% 96.2%
Development contracts 0.3 3.8
----- -----
Total 100.0 100.0
Costs and expenses:
Cost of product revenues 47.0 45.5
Research and development 10.1 16.0
Selling, general and
administrative 11.5 21.9
----- -----
Total 68.5 83.5
----- -----
Income from operations 31.5 16.5
Interest income (expense), net 0.7 2.8
----- -----
Income before income taxes
and minority interest 32.2 19.3
Income tax expense 11.3 0.6
----- -----
Income before minority interest 20.9 18.7
Minority interest 1.0 --
----- -----
Net income 19.9% 18.7%
===== =====
The Company's quarterly and annual operating results have been, and
will continue to be, affected by a wide variety of factors that could have
a material adverse effect on revenues and profitability during any
particular period, including the level of orders which are received and can
be shipped in a quarter, the rescheduling or cancellation of orders by its
customers, competitive pressures on selling prices, changes in product or
customer mix, availability and cost of foundry capacity and raw materials,
fluctuations in yield, loss of any strategic relationships, C-Cube's
ability to introduce new products and technologies on a timely basis, new
product introductions by the Company's competitors, market acceptance of
products of both C-Cube and its customers, supply constraints for other
components incorporated into its customers' products, currency
fluctuations, and the level of expenditures in manufacturing, research and
development, and sales, general and administrative functions.
In addition, C-Cube's operating results are subject to fluctuation in
the markets for its customers' products, particularly the consumer
electronics market, which has been extremely volatile in the past, and the
satellite broadcast and wireless cable markets, which are in an early stage
creating uncertainty with respect to product volume and timing.
Furthermore, to the extent the Company is unable to fulfill its customers'
purchase orders on a timely basis, these orders may be cancelled due to
changes in demand in the markets for its customers' products. Historically,
the Company has generally recognized a substantial portion of its product
revenues in the last month of a given quarter. A significant portion of the
Company's expenses is relatively fixed, and the timing of increases in
expenses is based in large part on C-Cube's forecast of future revenues. As
a result, if revenues do not meet the Company's expectations, it may be
unable to quickly adjust expenses to levels appropriate to actual revenues,
which could have a material adverse effect on the Company's business and
results of operations.
The growth in revenues and operating income experienced by C-Cube in
recent quarters is not necessarily indicative of future results. In
addition, in view of the significant growth in recent years, the Company
believes that period-to-period comparisons of its financial results should
not be relied upon as an indication of future performance. Due to the
Company's dependence on the consumer electronics and home computer markets,
the substantial seasonality of sales in such markets could impact the
Company's revenues and net income, with the highest levels experienced in
the third and fourth calendar quarters as system manufacturers make
purchases in preparation for the holiday season, and relatively less strong
demand in the first and second calendar quarters. The Company's significant
growth in prior periods makes it impossible to assess the effect of any
such seasonal trends on the Company's operating results. There can be no
assurance, however, that the Company's operating results will not exhibit
such seasonal characteristics in the future.
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 revenues 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.
The Company has recently experienced a period of significant growth,
which has placed, and could continue to place, a significant strain on
C-Cube's limited personnel and other resources. The Company's ability to
manage any further growth, should it occur, would require significant
expansion of its research and development and marketing and sales
capabilities and personnel. In particular, the Company is in the process of
expanding its sales and marketing organization to increase coverage of the
United States and the Asia-Pacific region. There can be no assurance that
the Company will be able to find qualified personnel to fill such sales and
marketing positions or be able to successfully manage a broader sales and
marketing organization. In addition, the sale and distribution of products
to numerous large system manufacturers in diverse markets and the
requirements of such manufacturers for design support would also place
substantial demands on C-Cube's research and development and sales
functions. The Company's ability to manage any further growth, should it
occur, would depend upon its ability to manage and potentially expand its
foundry relationships. The failure of C-Cube's management to effectively
expand or manage these functions consistent with any growth which may occur
could have a material adverse effect on the Company's business and results
of operations.
NET REVENUES
Product revenues in the first quarter of 1996 were $67.9 million, an
increase of 312% from the corresponding quarter a year ago. The increase in
product revenues was primarily due to significantly increased volume of
shipments for the CL480 MPEG 1 system decoder product, the CL9100 MPEG 2
video decoder product, the CL9110 MPEG 2 transport demultiplexer product,
and the MPEG 2 encoder family of products. In addition, the CL484VCD
advanced MPEG 1 system decoder was introduced and began significant volume
shipments in the first quarter of 1996.
The Company's revenues from development contracts decreased to $0.2
million in the first quarter of 1996 from $0.7 million in the first quarter
of 1995.
During the first quarter of 1996, three divisions of Samsung
collectively accounted for 22% of net revenues and sales to Kanematsu
Semiconductor Corporation, a distributor selling to seventeen customers,
accounted for 12% of the Company's net revenues. During the same period
last year, Scientific Atlanta Inc. accounted for 10% of net revenues. There
can be no assurance that such customers will continue to account for a
significant percentage of the Company's revenues in the future. The loss of
any of such customers could have a material adverse effect on the Company's
business and results of operations.
International revenues accounted for 76% of net revenues for the first
quarter, compared to 39% for the same period last year. The significant
increase in international sales is primarily due to volume shipments of the
CL480 and CL484 MPEG 1 system decoders in Asia for video CD players in the
consumer market, the CL9100 MPEG 2 video decoder product and the CL9110
MPEG 2 transport demultiplexer product primarily for international
deployments of direct broadcast satellite. The Company expects that
international revenues will continue to represent a significant portion of
net revenues. C-Cube's international sales and manufacturing are subject to
changes in foreign political and economic conditions and to other risks
including fluctuations in foreign exchange rates, export/import controls
and changes in tax laws, tariffs and freight rates. For example, China and
Taiwan comprise substantial markets for consumer electronics products
utilizing the Company's MPEG 1 system decoders, such as Video CD players.
As a consequence, any political or economic instability in such countries
could significantly reduce demand for products from certain of the
Company's major customers.
PRODUCT GROSS MARGIN
The following table sets forth the components of product gross margin
for the quarters ended March 31, 1996 and 1995:
Quarter Ended March 31,
-----------------------
1996 1995
---------- ----------
Product gross margin:
Net product revenues $67,900 $16,461
Cost of product revenues 31,979 7,793
------- -------
Product gross margin $35,921 $ 8,668
======= =======
Product gross margin percentage 52.9% 52.7%
======= =======
C-Cube's product gross margin percentage increased to 52.9% in the
first quarter of 1996 from 52.7% in the prior year quarter primarily due to
improved manufacturing yields over the same period, partially offset by a
shift in product mix to the lower margin decoder products.
The Company anticipates that its product gross margin percentage may
decrease due to competitive pricing pressure and the increasing demand for
volume shipments of the CL480 product, a relatively lower margin product.
The markets into which C-Cube sells its products are characterized by
extreme price competition, and the Company expects the average selling
prices of its products and the gross margin for such products will decrease
over the life of each product. In order to partially offset declines in the
selling price of its products, C-Cube will need to reduce the cost of its
products by implementing cost reduction design changes, obtaining costs
reductions as and if volumes increase and successfully managing
manufacturing and subcontracting relationships. Since the Company does not
operate its own manufacturing facilities and must make long-term binding
commitments to purchase products, it may not be able to reduce its costs as
rapidly as companies that operate their own manufacturing facilities. The
failure of the Company to design and introduce lower cost versions of the
Company's products in a timely manner or to successfully manage its
manufacturing relationships would have a material adverse effect on
C-Cube's business and results of operations.
RESEARCH AND DEVELOPMENT EXPENSES
In the first quarter of 1996, research and development expenses, which
include development costs associated with customer development contracts,
were $6.9 million, or 10% of net revenues, as compared to $2.7 million, or
16% of net revenues, in the comparable prior-year period. The decrease in
research and development expenses as a percent of net revenues is primarily
due to the significant increase in net revenues over the same period. The
increase in research and development spending from the prior-year quarter
reflects an increase in employee-related costs as well as the Company's
continuing efforts to develop and bring to market innovative and cost-
effective digital video solutions. The Company expects that absolute levels
of research and development expenses will continue to increase in future
periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $7.8 million,
or 11% of net revenues, in the first quarter of 1996, as compared to $3.8
million, or 22% of net revenues, for the same quarter last year. The
decrease in selling, general and administrative expenses as a percent of
net revenues is primarily due to the significant increase in net revenues
over the same period. The increase in spending was primarily due to
increased headcount and related expenses and increased commissions on
higher sales levels. The Company expects that absolute levels of selling,
general and administrative expenses will continue to increase in future
periods.
INTEREST INCOME (EXPENSE)
Interest income, net of interest expense decreased to $471,000 for the
first quarter of 1996 from $477,000 for the first quarter of 1995 primarily
due to interest accrued for the Company's convertible subordinated notes
which were issued in the fourth quarter of 1995. The decline was partially
offset by the increased interest income from the proceeds of a sale of
convertible subordinated notes in November 1995. See "Liquidity and Capital
Resources."
INCOME TAX EXPENSE
The Company's effective tax rate for the first quarter of 1996 was 35%
before consideration of minority interest. The Company's effective tax rate
increased from that of 1995 as the benefits from operating loss
carryforwards were fully utilized.
LIQUIDITY AND CAPITAL RESOURCES
In November 1995, the Company completed a public debt offering of
$86,250,000 aggregate principal amount of convertible subordinated notes
due 2005.
Cash, cash equivalents and short-term investments were $152.5 million
at March 31, 1996 as compared to $144.1 million at the end of 1995. Working
capital increased to $177.6 million at March 31, 1996 from $158.6 million
at the end of 1995.
The Company's operating activities provided cash of $13.2 million in
the first quarter of 1996 primarily from net income and higher accounts
payable and accrued liabilities, partially offset by an increase in
accounts receivable. The increase in receivables from December 31, 1995
reflects an increase in the volume of sales of the Company's key products.
The increase in accounts payable is primarily due to a significant increase
in production activities near the end of the first quarter.
C-Cube's investing activities, exclusive of the maturities and
purchases of short-term investments of $6.7 million and $34.6 million,
respectively, used cash of $5.2 million, primarily for capital
expenditures.
Cash provided by financing activities was $0.3 million, consisting of
proceeds from sales of stock pursuant to employee stock plans partially
offset by payments of debt.
C-Cube had an aggregate outstanding balance of $1.3 million under
capital lease lines at March 31, 1996. The Company's 65%-owned subsidiary,
KCC, has yen denominated credit lines with a group of Japanese banks, the
outstanding balance of which was $0.8 million at March 31, 1996.
In January 1996, the Company increased its available bank line of
credit from $8.5 million to $20 million. The line of credit expires August
1, 1996. The line is collateralized by the Company's receivables, inventory
and fixed assets. The line of credit agreement requires the Company, among
other things, to maintain a tangible net worth of $162,720,000, 80% of its
tangible consolidated assets within the U.S. parent company, quarterly net
income (no more than one quarterly loss per fiscal year), a quick ratio of
1.75 to 1, and a maximum debt to tangible net worth (as defined) ratio of
0.75 to 1. In addition, this agreement prohibits the payment of cash
dividends. Borrowings bear interest at the bank's prime rate. At
March 31, 1996, the Company was in compliance with these covenants, and
there were no borrowings under this line.
Based on current plans and business conditions, C-Cube expects that its
cash equivalents and short-term investments together with any amounts
generated from operations and available borrowings, if any, will be
sufficient to meet the Company's cash requirements for at least the next 12
months. However, there can be no assurance that the Company will not be
required to seek other financing sooner or that such financing, if
required, will be available on terms satisfactory to the Company. In
addition, the Company has considered and will continue to consider various
possible transactions to secure additional foundry capacity, which could
include, without limitation, equity investments in, prepayments to,
deposits with or loans to foundries in exchange for guaranteed capacity,
"take or pay" contracts that commit the Company to purchase specified
quantities of wafers over extended periods or joint ventures or other
partnership relationships with foundries.
C-CUBE MICROSYSTEMS INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the Company is party to certain litigation or
legal claims. Management has reviewed all pending legal matters and
believes that the resolution of such will not have a significant
adverse effect on the Company's financial position or results of
operations.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------- -------------
10.30 Supplemental Stock Option Plan.
10.31 Amendment to Revolving Credit Loan Agreement dated
January 3, 1996.
11.1 Statement regarding computation of net income per share.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None.
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.
C-Cube Microsystems Inc.
(Registrant)
Dated: May 10, 1996 By: /s/ James G. Burke
-------------- ---------------------
James G. Burke
Vice President of Finance and
Administration, Chief Financial Officer
and Secretary
EXHIBIT INDEX
Exhibit
Number Description
------- -------------
10.30 Supplemental Stock Option Plan.
10.31 Amendment to Revolving Credit Loan Agreement dated
January 3, 1996.
11.1 Statement regarding computation of net income per share.
27.1 Financial Data Schedule.