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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 June 30, 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 June 30, 1996, 33,155,775 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
June 30, 1996 and December 31, 1995
Condensed Consolidated Statements of Operations
Quarter and six months ended June 30, 1996 and 1995
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 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)
June 30, December 31,
1996 1995
--------- ----------
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $107,115 $133,414
Short-term investments 35,003 10,675
Receivables 35,940 24,421
Inventories 23,249 11,871
Deferred taxes and other current assets 13,030 5,882
-------- --------
Total current assets 214,337 186,263
Property and equipment - net 14,553 7,222
Production capacity rights 47,600 --
Distribution rights -- net 1,895 1,977
Purchased technology -- net 2,839 3,095
Other assets 4,442 4,969
-------- --------
Total $285,666 $203,526
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 24,500 $ 1,934
Accounts payable 26,558 10,704
Accrued liabilities 8,049 8,240
Income taxes payable 10,541 5,649
Current portion of long-term obligations 969 1,159
-------- --------
Total current liabilities 70,617 27,686
Long-term obligations 87,816 88,010
-------- --------
Total liabilities 158,433 115,696
-------- --------
Minority interest in subsidiary 976 295
Stockholders' equity:
Common stock, $0.001 par value, 50,000 shares
authorized; shares outstanding: June 30,
1996 -- 33,156, December 31, 1995 -- 32,363 98,391 87,124
Deferred stock compensation (448) (635)
Notes receivable from stockholders (368) (459)
Accumulated translation adjustments (1,050) (860)
Unrealized loss on investments (74) (14)
Retained earnings 29,806 2,379
-------- --------
Total stockholders' equity 126,257 87,535
-------- --------
Total $285,666 $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 Six Months Ended
June 30, June 30,
-------------- ---------------
1996 1995 1996 1995
---- ---- ---- ----
Net revenues:
Product $72,958 $21,054 $140,858 $37,515
Development contracts -- 560 200 1,212
------- ------- -------- -------
Total 72,958 21,614 141,058 38,727
------- ------- -------- -------
Costs and expenses:
Cost of product revenues 33,561 10,480 65,540 18,273
Research and development 9,363 3,007 16,213 5,753
Selling, general and
administrative 8,294 4,235 16,094 7,988
------- ------- -------- -------
Total 51,218 17,722 97,847 32,014
------- ------- -------- -------
Income from operations 21,740 3,892 43,211 6,713
Other income (expense), net 237 528 708 1,005
------- ------- -------- -------
Income before income taxes and
minority interest 21,977 4,420 43,919 7,718
Income tax expense 8,131 285 15,811 389
------- ------- -------- -------
Income before minority interest 13,846 4,135 28,108 7,329
Minority interest in net income
of subsidiary -- -- 681 --
------- ------- -------- -------
Net income $13,846 $ 4,135 $ 27,427 $ 7,329
======= ======= ======== =======
Net income per share $ 0.39 $ 0.12 $ 0.76 $ 0.21
======= ======= ======== =======
Shares used in computation 35,697 34,332 35,869 34,176
======= ======= ======== =======
See notes to condensed consolidated financial statements.
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
------------------
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 27,427 $ 7,329
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest in subsidiary 681 --
Depreciation and amortization 2,803 1,340
Changes in assets and liabilities:
Receivables (11,947) (2,686)
Inventories (11,407) (1,437)
Production capacity rights (24,500) --
Deferred taxes and other assets (5,903) (628)
Accounts payable 15,860 3,176
Accrued liabilities 9,054 1,081
Income taxes payable 4,892 337
-------- --------
Net cash provided by operating activities 6,960 8,512
-------- --------
Cash flows from investing activities:
Maturities of short-term investments 24,301 28,900
Purchases of short-term investments (48,297) (19,613)
Capital expenditures (9,868) (2,615)
Other assets 519 188
-------- --------
Net cash provided by (used in) investing (33,345) 6,860
-------- --------
Cash flows from financing activities:
Bank term loan repayment -- (194)
Notes payable to banks - net (1,879) 116
Repayments of capital lease obligations (381) (670)
Sale of common stock, net of notes receivable 2,047 1,070
Collection of stockholder notes receivable 91 38
-------- --------
Net cash provided by (used in) financing activities (122) 360
-------- --------
Exchange rate impact on cash and equivalents 208 (137)
-------- --------
Net increase (decrease) in cash and equivalents (26,299) 15,595
Cash and equivalents, beginning of period 133,414 13,674
-------- --------
Cash and equivalents, end of period $107,115 $ 29,269
======== ========
Supplemental schedule of noncash investing
and financing activities:
Unrealized gain (loss) on investments (60) 117
Purchase of production capacity rights for
note payable (24,500) --
Supplemental disclosure of cash flow
information --
Cash paid during the period for:
Interest 2,997 285
Income taxes 6,924 56
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 June 30, 1996, and the results of
operations and cash flows for the quarters and six months ended June 30,
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:
June 30, December 31,
1996 1995
------ ------
(in thousands)
Finished goods $17,260 $ 7,572
Work-in-process 3,764 1,667
Raw materials 2,225 2,632
------- -------
Total $23,249 $11,871
======= =======
3. Wafer supply agreement
In the second quarter of 1996 the Company expanded and formalized its
relationship with Taiwan Semiconductor Manufacturing Corporation ("TSMC")
to provide additional wafer production capacity over the 1996 to 2001
timeframe. The agreement with TSMC requires C-Cube to make two advance
payments totaling $49 million. The first advance payment of $24.5 million
was made in June 1996, and the final payment is due June 1997, which is
secured by a promissory note. At June 30, 1996, $1.4 million of the
$49 million production capacity rights is included in deferred taxes and
other current assets.
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 JUNE 30, 1996
The following table sets forth certain operating data as a percentage of
net revenues for the quarters ended June 30, 1996 and 1995:
Quarter Ended June 30,
----------------------
1996 1995
---------- ----------
Net revenues:
Product 100.0% 97.4%
Development contracts 0.0 2.6
----- -----
Total 100.0 100.0
Costs and expenses:
Cost of product revenues 46.0 48.5
Research and development 12.8 13.9
Selling, general and
administrative 11.4 19.6
----- -----
Total 70.2 82.0
----- -----
Income from operations 29.8 18.0
Interest income (expense), net 0.3 2.4
----- -----
Income before income taxes
and minority interest 30.1 20.4
Income tax expense 11.1 1.3
----- -----
Income before minority interest 19.0 19.1
Minority interest -- --
----- -----
Net income 19.0% 19.1%
===== =====
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 C-Cube's expenses are fixed in the
short term, and the timing of increases in expenses is based in large part on
the Company'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. In particular, C-Cube believes that there may be seasonality in
the Asia-Pacific region related to the Chinese New Year, which falls within
the first calendar quarter, which would indicate relatively lower product
demand in the second and third quarters. If the future geographic mix of the
Company's sales shifts towards the U.S. and Europe, C-Cube would anticipate
higher revenues and net income in the third and fourth calendar quarters as
system manufacturers in these areas make purchases in preparation for the
holiday season, and comparatively less revenues and net income 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.
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.
The market price of C-Cube's Common Stock has fluctuated significantly
since the initial public offering in April 1994. The market price of the
Common Stock could be subject to significant fluctuations in the future based
on factors such as announcements of new products by C-Cube or its competitors,
quarterly fluctuations in C-Cube's financial results or other semiconductor
companies' financial results, changes in analysts' estimates of C-Cube's
financial performance, general conditions in the semiconductor industry and
conditions in the financial markets. In addition, the stock market in general
has experienced extreme price and volume fluctuations, which have particularly
affected the market prices for many high technology companies and which have
often been unrelated to the operating performance of the specific companies.
Many technology companies, including C-Cube, have recently experienced historic
highs in the market price of their equity securities. The market price of
C-Cube's Common Stock recently has declined substantially from such historic
highs, and may continue to experience significant fluctuations in the future.
NET REVENUES
Product revenues in the second quarter of 1996 were $73.0 million, an
increase of 247% 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 MPEG 2 encoder family of products, and the CL9110
MPEG 2 transport demultiplexer product. In addition, the CL484VCD advanced
MPEG 1 system decoder was introduced and began significant volume shipments
in the first quarter of 1996. The increase in product revenues noted above
were partially offset by a decline in the CL450 MPEG 1 video decoder product
shipments.
The Company had no revenues from development contracts in the second
quarter of 1996 as compared to $0.6 million in the second quarter of 1995.
During the second quarter of 1996, Samsung accounted for 17% of net
revenues, and sales to Kanematsu Semiconductor Corporation, a distributor
selling to seventeen customers, accounted for 14% of the Company's net
revenues. During the same period last year, no individual customer
represented 10% or more 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 82% of net revenues for the second
quarter, compared to 47% 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 and 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 June 30, 1996 and 1995:
Quarter Ended June 30,
----------------------
1996 1995
---------- ----------
(in thousands)
Product gross margin:
Net product revenues $72,958 $21,054
Cost of product revenues 33,561 10,480
------- -------
Product gross margin $39,397 $10,574
======= =======
Product gross margin percentage 54.0% 50.2%
======= =======
C-Cube's product gross margin percentage increased to 54.0% in the second
quarter of 1996 from 50.2% in the prior year quarter primarily due to cost
reductions over the same period, partially offset by a decline in the average
selling prices of several of the Company's products, an increased provision
for inventory reserves and a shift in product mix to the lower margin decoder
products.
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 second quarter of 1996, research and development expenses were
$9.4 million, or 13% of net revenues, as compared to $3.0 million, or 14% 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 $8.3 million,
or 11% of net revenues, in the second quarter of 1996, as compared to $4.2
million, or 20% 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 $2.4 million for
the second quarter of 1996 from $5.3 million for the second quarter of 1995
primarily due to interest expense 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 second quarter of 1996 was 37%.
The Company's effective tax rate increased from that of 1995 as the benefits
from operating loss carryforwards were fully utilized.
SIX MONTHS ENDED JUNE 30, 1996
The following table sets forth certain operating data as a percentage of
net revenues for the six months ended June 30, 1996 and 1995:
Six Months Ended June 30,
----------------------
1996 1995
---------- ----------
Net revenues:
Product 99.9% 96.9%
Development contracts 0.1 3.1
----- -----
Total 100.0 100.0
Costs and expenses:
Cost of product revenues 46.5 47.2
Research and development 11.5 14.9
Selling, general and
administrative 11.4 20.6
----- -----
Total 69.4 82.7
----- -----
Income from operations 30.6 17.3
Interest income (expense), net 0.5 2.6
----- -----
Income before income taxes
and minority interest 31.1 19.9
Income tax expense 11.2 1.0
----- -----
Income before minority interest 19.9 18.9
Minority interest 0.5 --
----- -----
Net income 19.4% 18.9%
===== =====
NET REVENUES
Product revenues for the first half of 1996 were $140.9 million, a 275%
increase from $37.5 million in product revenues during the corresponding
period in 1995. 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 MPEG 2 encoder
family of products, and the CL9110 MPEG 2 transport demultiplexer product. In
addition, the CL484VCD advanced MPEG 1 system decoder was introduced and
began significant volume shipments in the first quarter of 1996. The increase
in product revenues noted above were partially offset by a decline in the
CL450 MPEG 1 video decoder product shipments.
The Company's revenues from development contracts decreased to $0.2
million in the first half of 1996 from $1.2 million in the first half of
1995.
PRODUCT GROSS MARGIN
Six Months Ended June 30,
----------------------
1996 1995
---------- ----------
(in thousands)
Product gross margin:
Net product revenues $140,858 $37,515
Cost of product revenues 65,540 18,273
-------- -------
Product gross margin $ 75,318 $19,242
======== =======
Product gross margin percentage 53.5% 51.3%
======== =======
C-Cube's product gross margin percentage increased to 53.5% in the first
half of 1995 from 51.3% in the prior year period primarily due to cost
reductions over the same period, partially offset by a decline in the average
selling prices of several of the Company's products, an increased provision
for inventory reserves and a shift in product mix to the lower margin decoder
products.
RESEARCH AND DEVELOPMENT EXPENSES
In the first half of 1996, research and development expenses, which
include development costs associated with customer development contracts,
were $16.2 million or 11% of net revenues, as compared to $5.8 million, or
15% of net revenues, in the comparable prior year period. The increase in
research and development expenses from the prior year period reflects an
increase in employee-related costs as well as an increase in product start-up
costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $16.1 million,
or 11% of net revenues in the first half of 1996, as compared to $8.0
million, or 21% of net revenues for the same period last year. The increase
was primarily due to increased commissions on higher sales levels as well as
increased headcount and related expenses, partially offset by a lower
provision for doubtful accounts.
INTEREST INCOME (EXPENSE)
Interest income net of interest expense decreased to $0.7 million for the
first half of 1996 from $1.0 million for the first half of 1995 primarily due
to interest expense 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 half of 1996 was 36%. 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 $142.1 million at
June 30, 1996 as compared to $144.1 million at the end of 1995. Working
capital decreased to $143.7 million at June 31, 1996 from $158.6 million at
the end of 1995.
The Company's operating activities provided cash of $7.0 million in the
first half of 1996 primarily from net income and higher accounts payable,
accrued liabilities and income taxes payable, partially offset by an advance
payment for wafer production capacity and an increase in accounts receivable,
inventory, deferred taxes and other assets. 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 second
quarter.
C-Cube's investing activities, exclusive of the maturities and purchases
of short-term investments of $24.3 million and $48.3 million, respectively,
used cash of $9.3 million, primarily for capital expenditures.
Cash used in financing activities was $0.1 million, consisting of
payments of debt partially offset by proceeds from sales of stock pursuant to
employee stock plans.
C-Cube had an aggregate outstanding balance of $1.2 million under capital
lease lines at June 30, 1996. The Company's 65%-owned subsidiary, KCC, has
yen denominated credit lines with a group of Japanese banks. At June 30, 1996
there were no borrowings under this line.
In January 1996, the Company increased its available bank line of credit
from $8.5 million to $20 million. The line of credit expires November 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 (as defined) of $140 million, 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
June 30, 1996, the Company was in compliance with these covenants, and there
were no borrowings under this line.
In the second quarter the Company expanded and formalized its
relationship with Taiwan Semiconductor Manufacturing Corporation ("TSMC") to
provide additional wafer production capacity over the 1996 to 2001 timeframe.
The agreement with TSMC requires C-Cube to make two advance payments totaling
$49 million. The first advance payment of $24.5 million was made in June
1996, and the final payment is due June 1997, which is secured by a promissory
note. At June 30, 1996, $1.4 million of the $49 million production capacity
rights is included in deferred taxes and other current assets.
In the second quarter the Company signed a definitive merger agreement
with DiviCom Inc. whereby C-Cube will acquire all of the outstanding shares
of DiviCom that it does not already own. In this transaction, C-Cube will
acquire DiviCom for $70 million in cash and approximately 2.6 million shares
of C-Cube stock. Based on preliminary valuation, C-Cube anticipates taking a
write-off of approximately $150 million for in-process R&D upon closing of
the transaction.
Based on current plans and business conditions, C-Cube expects that its
cash, 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
The Annual Meeting of Stockholders was held on April 18, 1996. At the
meeting, the following actions were taken:
Number of Common Shares Voted
-----------------------------
Votes Broker
Proposal For Against Withheld Non-Votes
-------- --- ------- -------- ---------
1) Election of Directors
Donald T. Valentine 29,021,298 -- 66,745 --
Alexandre A. Balkanski, Ph.D. 29,019,843 -- 68,200 --
Gregorio Reyes 29,029,258 -- 58,785 --
2) Amendment to Company's Restated
Certificate of Incorporation. 23,361,232 5,130,048 596,763 --
3) Amendment to Company's 1994
Employee Stock Plan. 15,769,165 5,993,001 617,092 6,708,785
4) Amendment to Company's 1994 Outside
Directors Stock Option Plan. 16,798,863 5,179,941 686,884 6,422,355
5) Amendment to Company's 1994
Employee Stock Purchase Plan. 19,367,928 2,673,343 624,417 6,422,355
6) Ratification of Deloitte & Touche LLP
as Independent Accountants. 28,431,486 62,212 594,345 --
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------- -------------
10.32 Option Agreement dated May 18, 1996 with Taiwan Semiconductor
Manufacturing Co., Ltd.*
11.1 Statement regarding computation of net income per share.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
A report on Form 8-K filed on June 14, 1996 reporting under
Item 5 an announcement that the Company had entered into a
definitive merger agreement with DiviCom Inc. ("DiviCom")
whereby the registrant will acquire all of the outstanding
shares of DiviCom that it does not already own and DiviCom
will become a wholly owned subsidiary of the registrant.
* To be filed by amendment. Confidential treatment will be requested
as to certain portions of this exhibit.
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: July 26, 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
------- -------------
10.32 Option Agreement dated May 18, 1996 with Taiwan Semiconductor
Manufacturing Co., Ltd.*
11.1 Statement regarding computation of net income per share.
27.1 Financial Data Schedule.
* To be filed by amendment. Confidential treatment will be requested
as to certain portions of this exhibit.