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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 September 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 or 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 October 31, 1996, 35,734,652 shares of the Registrant's Common Stock
were outstanding.
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C-CUBE MICROSYSTEMS INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 1996 and December 31, 1995
Condensed Consolidated Statements of Operations
Quarter and nine months ended September 30, 1996 and 1995
Condensed Consolidated Statements of Cash Flows
Nine months ended September 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)
September 30, December 31,
1996 1995
--------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $ 54,456 $133,414
Short-term investments 21,341 10,675
Receivables 55,841 24,421
Inventories 31,907 11,871
Deferred taxes and other current assets 36,836 5,882
-------- --------
Total current assets 200,381 186,263
Property and equipment -- net 20,304 7,222
Production capacity rights 46,900 --
Distribution rights -- net 1,854 1,977
Purchased technology -- net 13,766 3,095
Other assets 5,351 4,969
-------- --------
Total $288,556 $203,526
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 31,500 $ 1,934
Accounts payable 18,305 10,704
Accrued liabilities 44,392 8,240
Income taxes payable 15,959 5,649
Current portion of long-term obligations 914 1,159
-------- --------
Total current liabilities 111,070 27,686
Long-term obligations 88,531 88,010
-------- --------
Total liabilities 199,601 115,696
-------- --------
Minority interest in subsidiary 976 295
Stockholders' equity:
Common stock, $0.001 par value, 50,000 shares
authorized; shares outstanding: September 30,
1996 -- 35,629, December 31, 1995 -- 32,363 177,805 87,124
Deferred stock compensation (347) (635)
Notes receivable from stockholders (368) (459)
Accumulated translation adjustments (1,133) (860)
Unrealized loss on investments (27) (14)
Retained earnings (deficit) (87,951) 2,379
-------- --------
Total stockholders' equity 87,979 87,535
-------- --------
Total $288,556 $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 Nine Months Ended
September 30, September 30,
--------------- ---------------
1996 1995 1996 1995
---- ---- ---- ----
Net revenues:
Product $ 83,180 $35,322 $224,038 $72,837
Development contracts -- -- 200 1,212
--------- ------- -------- -------
Total 83,180 35,322 224,238 74,049
--------- ------- -------- -------
Costs and expenses:
Cost of product revenues 37,428 16,955 102,968 35,228
Research and development 12,637 3,598 28,850 9,351
Selling, general and
administrative 10,785 5,183 26,879 13,171
Purchased in-process
technology 131,349 -- 131,349 --
--------- ------- -------- -------
Total 192,199 25,736 290,046 57,750
--------- ------- -------- -------
Income (loss) from operations (109,019) 9,586 (65,808) 16,299
Other income (expense), net (59) 412 649 1,417
--------- ------- -------- -------
Income (loss) before income
taxes and minority interest (109,078) 9,998 (65,159) 17,716
Income tax expense 8,679 1,570 24,490 1,959
--------- ------- -------- -------
Income (loss) before minority
interest (117,757) 8,428 (89,649) 15,757
Minority interest in net
income of subsidiary -- -- 681 --
--------- ------- -------- -------
Net income (loss) $(117,757) $ 8,428 $(90,330) $15,757
========= ======= ======== =======
Net income (loss) per share $ (3.46) $ 0.24 $ (2.71) $ 0.45
========= ======= ======== =======
Shares used in computation 34,078 35,264 33,297 34,758
========= ======= ======== =======
See notes to condensed consolidated financial statements.
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
-----------------
1996 1995
---- ----
Cash flows from operating activities:
Net income (loss) $(90,330) $15,757
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Minority interest in subsidiary 681 --
Depreciation and amortization 5,040 2,119
Purchased in-process technology 131,349 --
Changes in assets and liabilities:
Receivables (15,763) (12,218)
Inventories (10,573) (6,025)
Production capacity rights (24,500) --
Deferred taxes and other assets (11,858) (67)
Accounts payable (6,692) 4,372
Accrued liabilities 16,850 2,804
Income taxes payable 5,850 1,847
--------- -------
Net cash provided by operating activities 54 8,589
--------- -------
Cash flows from investing activities:
Maturities of short-term investments 38,301 37,900
Purchases of short-term investments (48,297) (27,796)
Capital expenditures (12,507) (3,267)
Acquisition of business (see Note 3) (58,568) --
Other assets 138 111
--------- -------
Net cash provided by (used in) investing activities (80,933) 6,948
--------- -------
Cash flows from financing activities:
Bank term loan repayment -- (694)
Notes payable to banks -- net (1,866) 45
Repayments of capital lease obligations (499) (920)
Sale of common stock, net of notes receivable 4,317 1,749
Collection of stockholder notes receivable 91 38
--------- -------
Net cash provided by financing activities 2,043 218
--------- -------
Exchange rate impact on cash and equivalents (122) 163
--------- -------
Net increase (decrease) in cash and equivalents (78,958) 15,918
Cash and equivalents, beginning of period 133,414 13,674
--------- -------
Cash and equivalents, end of period $ 54,456 $29,592
========= =======
Supplemental schedule of noncash investing and
financing activities:
Unrealized gain (loss) on investments $ (13) $ 144
Purchase of production capacity rights for note
note payable (24,500) --
Supplemental disclosure of cash flow information --
Cash paid during the period for:
Interest $ 3,173 $ 392
Income taxes 19,595 1,959
See notes to condensed consolidated financial statements.
C-CUBE MICROSYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30,
1996, the results of operations for the quarters and nine months ended
September 30, 1996 and 1995 and cash flows for the nine months ended
September 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:
September 30, December 31,
1996 1995
------- -------
(in thousands)
Finished goods $18,161 $7,572
Work-in-process 3,634 1,667
Raw materials 10,112 2,632
------- -------
Total $31,907 $11,871
======= =======
3.Acquisition
On August 28, 1996, the Company acquired DiviCom Inc. a digital
video networking company. C-Cube paid $65.7 million in cash, issued 2.3
million shares of its common stock, assumed options exercisable for
264,000 shares of its common stock and incurred $1.35 million in other
costs in exchange for the outstanding shares of DiviCom stock that
C-Cube did not already own. The purchase price was allocated on the
basis of the estimated fair value of the assets acquired and liabilities
assumed as follows (in thousands):
Fair value of tangible assets acquired
(including cash of $8,448) $ 53,741
Purchased technology 14,159
In-process technology 131,349
Liabilities assumed (including deferred
tax liabilities of $5,239) (55,653)
--------
Purchase consideration $143,596
========
The purchased technology is being amortized over 5 years. The
Company incurred acquisition-related charges of $133 million, which include
the in-process technology write-off and bonuses paid to DiviCom employees.
The acquisition of DiviCom is accounted for as a purchase and
therefore DiviCom financial results from the date of acquisition,
August 28, 1996, are included in C-Cube's consolidated financial results.
The fourth quarter of 1996 will be the first full quarter of combined
C-Cube and DiviCom financial results.
Excluding the one-time charge of $133 million, intercompany sales
and cost of sales, and including amortization of purchased technology,
pro forma revenue, net income and earnings per share would be $258
million, $32 million and $.80, respectively for the nine months ended
September 30, 1996, and $93 million, $10 million and $.27, respectively
for the nine months ended September 30, 1995 assuming DiviCom had been
acquired at the beginning of the respective periods. The pro forma
results are not necessarily indicative of what actually would have
occurred if the acquisition had been in effect for the entire periods
presented or of future operations of the combined companies.
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 SEPTEMBER 30, 1996
The following table sets forth certain operating data as a percentage
of net revenues for the quarters ended September 30, 1996 and 1995:
Quarter Ended September 30,
---------------------------
1996 1995
---------- ----------
Net revenues:
Product 100.0% 100.0%
Development contracts 0.0 0.0
----- -----
Total 100.0 100.0
Costs and expenses:
Cost of product revenues 45.0 48.0
Research and development 15.2 10.2
Selling, general and administrative 13.0 14.7
Purchased in-process technology 157.9 0.0
----- -----
Total 231.1 72.9
----- -----
Income (loss) from operations (131.1) 27.1
Interest income (expense), net (0.1) 1.2
----- -----
Income (loss) before income taxes and
minority interest (131.1) 28.3
Income tax expense 10.4 4.4
----- -----
Income (loss) before minority interest (141.6) 23.9
Minority interest in net income
of subsidiary 0.0 0.0
----- -----
Net income (loss) (141.6)% 23.9%
===== =====
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, the substantial
seasonality of sales in that market 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 from mid-first quarter until mid-third quarter. 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
including its recent acquisition of DiviCom Inc., 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, Europe
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
and digital video networking industries, conditions in the financial
markets and general conditions in the global economy which might adversely
affect consumer purchasing. 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 experienced
historic highs in the market price of their equity securities within the
last 12 months. 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.
ACQUISITION
On August 28, 1996, C-Cube Microsystems Inc. acquired DiviCom Inc. a
digital video networking company. C-Cube paid $65.7 million in cash, issued
2.3 million shares of its common stock, assumed options exercisable for
264,000 shares of its common stock and incurred $1.35 million in other
costs in exchange for the outstanding shares of DiviCom stock that C-Cube
did not already own. C-Cube assumed net liabilities of $1.9 million,
purchased technology of $14.2 million, which will be amortized over five
years, and wrote-off $131.3 million of in-process technology.
The Company incurred acquisition-related charges of $133 million in the
third quarter of 1996, which include the in-process technology write-off
and bonuses paid to DiviCom employees.
The acquisition of DiviCom is accounted for as a purchase and therefore
DiviCom financial results from the date of acquisition, August 28, 1996,
are included in C-Cube's consolidated financial results. The fourth quarter
of 1996 will be the first full quarter of combined C-Cube and DiviCom
financial results.
NET REVENUES
Product revenues in the third quarter of 1996 were $83.2 million, an
increase of 135% from the corresponding quarter a year ago. Revenue from
the Company's family of encoder products increased primarily due to the
acquisition of DiviCom and shipments of its MediaView (tm) MV20 program encoder
as well as increased volume shipments of C-Cube's MPEG 2 encoder chips.
Revenue from the Video CD market increased significantly due to an increase
in volume shipments of MPEG 1 Video CD system decoders, led by the CL484VCD
advanced MPEG 1 system decoder, which was introduced and began significant
volume shipments in the first quarter of 1996. Revenue from the digital
video broadcast market increased due to increased volume shipments of the
CL9100 MPEG 2 video decoder product and the CL9110 MPEG 2 transport
demultiplexer product. The increase in product revenues noted above was
partially offset by a decline in the CL450 MPEG 1 video decoder product
shipments.
International revenues accounted for 56% of net revenues for the third
quarter, compared to 76% for the same period last year. The decline in
international sales as a percentage of total sales is primarily due to
increased encoder revenue in the U.S. market. 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, which could have a material adverse effect on
the Company's business and results of operations.
PRODUCT GROSS MARGIN
The following table sets forth the components of product gross margin
for the quarters ended September 30, 1996 and 1995:
Quarter Ended September 30,
---------------------------
1996 1995
---------- ----------
(in thousands)
Product gross margin:
Net product revenues $83,180 $35,322
Cost of product revenues 37,428 16,955
------- -------
Product gross margin $45,752 $18,367
======= =======
Product gross margin percentage 55.0% 52.0%
======= =======
C-Cube's product gross margin percentage increased to 55.0% in the
third quarter of 1996 from 52.0% in the prior year quarter primarily due to
cost reductions over the same period and a shift in product mix to the
higher margin encoder products, partially offset by a decline in the
average selling prices of several of the Company's products and an
increased provision for inventory reserves.
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 third quarter of 1996, research and development expenses were
$12.6 million, or 15% of net revenues, as compared to $3.6 million, or 10%
of net revenues, in the comparable prior year period. Excluding the DiviCom
acquisition-related charges, research and development expenses would have
been $11.2 million or 14% of net revenues. 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 $10.8
million, or 13% of net revenues, in the third quarter of 1996, as compared
to $5.2 million, or 15% of net revenues, for the same quarter last year.
Excluding the DiviCom acquisition-related charges, selling, general and
administrative expenses would have been $10.0 million or 12% of net
revenues. 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.
OTHER INCOME (EXPENSE)
Interest expense, net of interest income was $0.1 million for the third
quarter of 1996, a decrease from the net interest income amount of $0.4
million for the third quarter of 1995. The decrease is 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 higher average investment
balances in the third quarter of 1996 as compared to the prior year quarter
resulting from the proceeds of a sale of convertible subordinated notes in
November 1995. See "Liquidity and Capital Resources."
INCOME TAX EXPENSE
Excluding the $131 million purchased in-process technology write-off,
which is not tax deductible, the Company's effective tax rate for the third
quarter of 1996 was 39%. The Company's effective tax rate increased from
that of 1995 as the benefits from operating loss carryforwards were fully
utilized.
NINE MONTHS ENDED SEPTEMBER 30, 1996
The following table sets forth certain operating data as a percentage
of net revenues for the nine months ended September 30, 1996 and 1995:
Nine Months Ended September 30,
---------------------------
1996 1995
---------- ----------
Net revenues:
Product 99.9% 98.4%
Development contracts 0.1 1.6
----- -----
Total 100.0 100.0
Costs and expenses:
Cost of product revenues 45.9 47.6
Research and development 12.9 12.6
Selling, general and administrative 12.0 17.8
Purchased in-process technology 58.6 0.0
----- -----
Total 129.3 78.0
----- -----
Income (loss) from operations (29.3) 22.0
Interest income (expense), net 0.3 1.9
----- -----
Income (loss) before income taxes and
minority interest (29.1) 23.9
Income tax expense 10.9 2.6
----- -----
Income (loss) before minority interest (40.0) 21.3
Minority interest in net income of
of subsidiary 0.3 0.0
----- -----
Net income (loss) (40.3)% 21.3%
===== =====
NET REVENUES
Product revenues for the nine months ending September 30, 1996 were
$224.0 million, a 208% increase from $72.8 million in product revenues
during the corresponding period in 1995. Revenue from the Video CD market
increased significantly due to an increase in volume shipments of MPEG 1
Video CD system decoders, led by the CL484VCD advanced MPEG 1 system
decoder, which was introduced and began significant volume shipments in the
first quarter of 1996. Revenue from the Company's family of encoder
products increased primarily due to the acquisition of DiviCom and
shipments of its MediaView (tm) MV20 program encoder as well as increased
volume shipments of C-Cube's MPEG 2 encoder chips. Revenue from the digital
video broadcast market increased due to increased volume shipments of the
CL9100 MPEG 2 video decoder product and the CL9110 MPEG 2 transport
demultiplexer product. 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 during the first nine months of 1996 as compared to $1.2 million
for the first nine months of 1995 due to the Company's focus on product
sales.
PRODUCT GROSS MARGIN
Nine Months Ended September 30,
---------------------------
1996 1995
---------- ----------
(in thousands)
Product gross margin:
Net product revenues $224,038 $72,837
Cost of product revenues 102,968 35,228
-------- -------
Product gross margin $121,070 $37,609
======== =======
Product gross margin percentage 54.0% 51.6%
======== =======
C-Cube's product gross margin percentage increased to 54.0% during the
first nine months of 1996 from 51.6% 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 nine months of 1996, research and development expenses,
which include development costs associated with customer development
contracts, were $28.9 million or 13% of net revenues, as compared to $9.4
million, or 13% of net revenues, in the comparable prior year period.
Excluding the DiviCom acquisition-related charges, research and development
expenses would have been $27.5 million or 12% of net revenues. 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 $26.9
million, or 12% of net revenues in the first nine months of 1996, as
compared to $13.2 million, or 18% of net revenues for the same period last
year. Excluding the DiviCom acquisition-related charges, selling, general
and administrative expenses would have been $26.1 million or 12% of net
revenues. The increase was primarily due to increased commissions on higher
sales levels as well as increased headcount and related expenses.
OTHER INCOME (EXPENSE)
Interest income net of interest expense decreased to $0.6 million for
the nine months ending September 30, 1996 from $1.4 million for the nine
months ending September 30, 1995 primarily due to interest expense accrued
for the Company's convertible subordinated notes which were issued in
November 1995 net of the interest income from the proceeds from the sale of
these notes. See "Liquidity and Capital Resources."
INCOME TAX EXPENSE
Excluding the $131 million purchased in-process technology write-off,
which is not tax deductible, the Company's effective tax rate for the first
nine months 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.
LIQUIDITY AND CAPITAL RESOURCES
In November 1995, the Company completed a public debt offering of $86.3
million aggregate principal amount of convertible subordinated notes due
2005.
Cash, cash equivalents and short-term investments were $75.8 million at
September 30, 1996 as compared to $144.1 million at the end of 1995.
Working capital decreased to $89.3 million at September 30, 1996 from
$158.6 million at the end of 1995.
The Company spent approximately $58.6 million in net cash as part of
the DiviCom acquisition in the third quarter of 1996. As a result of the
acquisition, the Company recorded acquisition-related charges totaling $133
million.
The Company's operating activities provided cash of $0.1 million in the
first nine months of 1996 primarily from operations and an increase in
accrued liabilities, partially offset by the payment of $24.5 million for
production capacity rights, increases in accounts receivable and inventory
and a decline in accounts payable.
C-Cube's investing activities, exclusive of the maturities and
purchases of short-term investments of $38.3 million and $48.3 million,
respectively, used cash of $70.9 million, which includes net cash paid
related to the DiviCom acquisition and cash paid for capital expenditures.
Cash provided by financing activities was $2.0 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 $1.1 million under
capital lease lines at September 30, 1996. In the third quarter the
Company's 65%-owned subsidiary, Kubota C-Cube, changed its name to C-Cube
Japan. C-Cube Japan has yen denominated credit lines with a group of
Japanese banks. At September 30, 1996 there were no borrowings under these
lines.
In January 1996, the Company increased its available bank line of
credit from $8.5 million to $20 million. The line of credit expires
September 30, 1997. 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 $90 million, quarterly net income (no more than one
quarterly loss per fiscal year), a quick ratio of 0.8 to 1, and a maximum
debt to tangible net worth (as defined) ratio of 1.4 to 1. In addition,
this agreement prohibits the payment of cash dividends. Borrowings bear
interest at the bank's prime rate. At September 30, 1996, the Company was
in compliance with these covenants, and there were no borrowings under this
line.
In the second quarter of 1996 the Company expanded and formalized its
relationship with Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC") to
provide additional wafer production capacity over the 1996 to 2001
timeframe. The agreement with TSMC provides that TSMC will produce and ship
wafers to C-Cube at specified prices and requires C-Cube to make two
advance payments totaling $49 million. TSMC will apply this prepayment
against a portion of the wafer cost as product is delivered to C-Cube.
Accordingly, the prepaid amount will be amortized to inventory as wafers
are received. The first advance payment of $24.5 million was made in June
1996, and the final payment is due June 1997, which is evidenced by an
unsecured promissory note. At September 30, 1996, $2.1 million of the
$49 million production capacity rights is included in deferred taxes and
other current assets.
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 matters 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
------- -------------
10.36 Lease agreement with Callahan-Pentz Properties
dated July 9, 1996.
11.1 Statement regarding computation of net income (loss)
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: November 13, 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
------- -------------
10.36 Lease agreement with Callahan-Pentz Properties
dated July 9, 1996.
11.1 Statement regarding computation of net income (loss)
per share.
27.1 Financial Data Schedule.