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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-23596
___________________
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, 1997, 36,761,942 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, 1997 and December 31, 1996
Condensed Consolidated Statements of Operations
Quarter and nine months ended September 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996
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 and Use of Proceeds
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,
1997 1996
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $136,911 $76,241
Short-term investments 4,835 6,005
Receivables -- net 45,004 40,706
Inventories 26,912 28,056
Deferred taxes 15,118 18,423
Other current assets 13,737 23,246
-------- --------
Total current assets 242,517 192,677
Property and equipment -- net 24,388 22,653
Production capacity rights 19,425 46,200
Distribution rights -- net 1,689 1,812
Purchased technology -- net 10,279 12,895
Other assets 6,204 3,278
-------- --------
Total $304,502 $279,515
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ -- $ 24,500
Accounts payable 15,423 18,320
Accrued liabilities 30,144 17,823
Deferred contract revenue 2,281 6,710
Current portion of long-term obligations 660 837
-------- --------
Total current liabilities 48,508 68,190
Long-term obligations 89,820 87,700
Deferred taxes 3,024 4,440
-------- --------
Total liabilities 141,352 160,330
Minority interest in subsidiary 490 613
Stockholders' equity:
Common stock, $0.001 par value, 50,000
shares authorized; shares outstanding:
1997 -- 36,688; 1996 -- 36,013 202,105 191,044
Deferred stock compensation -- (250)
Notes receivable from stockholders -- (305)
Accumulated translation adjustments (1,521) (1,238)
Unrealized loss on investments -- (13)
Accumulated deficit (37,924) (70,666)
-------- --------
Total stockholders' equity 162,660 118,572
-------- --------
Total $304,502 $279,515
======== ========
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,
----------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
Net revenues $ 81,717 $ 83,180 $246,947 $224,238
Costs and expenses:
Cost of revenues 36,750 37,428 109,003 102,968
Research and development 16,798 12,637 47,860 28,850
Selling, general and
administrative 13,555 10,785 38,965 26,879
Purchased in-process
technology -- 131,349 -- 131,349
-------- --------- -------- --------
Total 67,103 192,199 195,828 290,046
-------- --------- -------- --------
Income (loss) from operations 14,614 (109,019) 51,119 (65,808)
Other income (expense), net (33) (59) (1,635) 649
-------- --------- -------- --------
Income before income taxes
and minority interest 14,581 (109,078) 49,484 (65,159)
Income tax expense 4,958 8,679 16,865 24,490
-------- --------- -------- --------
Income before minority interest 9,623 (117,757) 32,619 (89,649)
Minority interest in net
income (loss) of subsidiary (40) -- (123) 681
-------- --------- -------- --------
Net income (loss) $ 9,663 $(117,757) $ 32,742 $(90,330)
======== ========= ======== ========
Net income (loss) per share $ 0.25 $ (3.46) $ 0.85 $ (2.71)
======== ========= ======== ========
Shares used in computation 39,246 34,078 38,440 33,297
======== ========= ======== ========
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,
-------------------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income (loss) $ 32,742 $(90,330)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Minority interest in subsidiary (123) 681
Depreciation and amortization 12,343 5,040
Purchased in-process technology -- 131,349
Deferred income taxes 2,766 (10,739)
Changes in assets and liabilities:
Receivables (4,441) (15,763)
Inventories 1,119 (10,573)
Production capacity rights -- (24,500)
Other current assets 11,576 (1,356)
Accounts payable (2,895) (6,692)
Accrued liabilities 6,011 16,850
Income taxes payable 3,373 5,850
-------- --------
Net cash provided by (used in) operating
activities 62,471 (183)
-------- --------
Cash flows from investing activities:
Sales and maturities of short-term investments 12,050 38,301
Purchases of short-term investments (10,827) (48,297)
Capital expenditures (10,951) (12,507)
Acquisition of business -- (58,568)
Other assets 98 375
-------- --------
Net cash used in investing activities (9,630) (80,696)
-------- --------
Cash flows from financing activities:
Notes payable -- net -- (1,866)
Repayments of capital lease obligations (460) (499)
Sale of common stock, net of notes receivable 8,090 4,317
Collection of stockholder notes receivable 305 91
-------- --------
Net cash provided by financing activities 7,935 2,043
-------- --------
Exchange rate impact on cash and equivalents (106) (122)
-------- --------
Net increase (decrease) in cash and equivalents 60,670 (78,958)
Cash and equivalents, beginning of period 76,241 133,414
-------- --------
Cash and equivalents, end of period $136,911 $ 54,456
======== ========
Supplemental schedule of noncash investing
and financing activities:
Unrealized gain (loss) on investments $ 13 $ (13)
Purchase of production capacity rights for
note payable -- (24,500)
Forgiveness of note payable for production
capacity rights 24,500 --
Supplemental disclosure of cash flow information --
Cash paid during the period for:
Interest $ 2,914 $ 3,173
Income taxes 5,169 19,595
See notes to condensed consolidated financial statements.
C-CUBE MICROSYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of presentation
The unaudited condensed consolidated financial statements contained in
this report have been prepared by C-Cube Microsystems Inc. ("C-Cube" or
the "Company"). In the opinion of management, such financial statements
include all normal recurring adjustments and accruals necessary for a
fair presentation of the Company's financial position as of
September 30, 1997, and the results of operations for the quarters and
nine months ended September 30, 1997 and 1996 and cash flows for the
nine months ended September 30, 1997 and 1996. Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted in accordance with the rules and regulations of the
Securities and Exchange Commission. 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, 1996.
The fluctuations in revenues and operating income experienced by the
Company in recent quarters are 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
Inventories are stated at the lower of cost or market. Cost is based on
standard costs which approximate actual cost on a first-in, first-out
basis. Inventories consist of:
September 30, December 31,
1997 1996
------- -------
(in thousands)
Finished goods $11,994 $22,817
Work-in-process 9,770 2,898
Raw materials 5,148 2,341
------- -------
Total $26,912 $28,056
======= =======
3. Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("SFAS 128"). The Company is required to adopt SFAS 128 in
the fourth quarter of fiscal 1997 and will restate at that time earnings
per share ("EPS") data for prior periods to conform with SFAS 128.
Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires the
Company to present both basic and diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income by the weighted average
of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
If SFAS 128 had been in effect during the current and prior year
periods, basic EPS would have been $0.26 and $(3.46) for the quarters
ended September 30, 1997 and 1996, respectively, and $0.90 and $(2.71)
for the nine months ended September 30, 1997 and 1996, respectively.
Diluted EPS under SFAS 128 would not have been significantly different
from EPS currently reported for the periods.
In June 1997, the FASB adopted Statements of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," which requires that
an enterprise report, by major components and a single total, the change
In its net assets during the period from nonowner sources; and No. 131
"Disclosures about Segments of an Enterprise and Related Information,"
which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. Adoption of
these statements will not impact the Company's consolidated financial
position, results of operations or cash flows. Both statements are
effective for fiscal years beginning after December 15, 1997, with
earlier application permitted.
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 certain factors,
including those set forth in this Item 2 and elsewhere in, or incorporated
by reference into, this report. The Company has attempted to identify
forward-looking statements in this report by placing an asterisk (*)
following each sentence containing such statements.
Quarter Ended September 30, 1997
The following table sets forth certain operating data as a percentage
of net revenues for the quarters ended September 30, 1997 and 1996:
Quarter Ended September 30,
---------------------------
1997 1996
-------- --------
Net revenues 100.0% 100.0%
Costs and expenses:
Cost of revenues 45.0 45.0
Research and development 20.6 15.2
Selling, general and administrative 16.6 13.0
Purchased in-process technology 0.0 157.9
----- -----
Total 82.1 231.1
----- -----
Income (loss) from operations 17.9 (131.1)
Interest income (expense), net (0.0) (0.1)
----- -----
Income (loss) before income taxes and
minority interest 17.8 (131.1)
Income tax expense 6.1 10.4
----- -----
Income (loss) before minority interest 11.8 (141.6)
Minority interest in net income (loss)
of subsidiary 0.0 0.0
----- -----
Net income (loss) 11.8% (141.6)%
===== =====
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,
unanticipated problems in the performance of the Company's next generation
or cost-reduced products, the ability to successfully introduce products in
accordance with OEM design requirements and design cycles, 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, fluctuations in the Japanese yen
to U.S. dollar exchange rate, 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. The
Company has devoted a substantial portion of its research and development
efforts in recent quarters to developing chips used in Digital Video Disk
("DVD") systems. The Company's DVD products are subject to the new product
risks described in the preceding paragraph, including in particular C-
Cube's ability to timely introduce these products and the market's
acceptance of them, which could have a materially adverse affect on its
operating results. Furthermore, to the extent the Company is unable to
fulfill its customers' purchase orders on a timely basis, these orders may
be canceled due to changes in demand in the markets for its customers'
products. Historically, the Company has generally shipped a substantial
portion of its product 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.
Due to the Company's dependence on the consumer electronics market, the
substantial seasonality of sales in that market could impact the Company's
revenues and net income. In particular, C-Cube believes that there is
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 fourth calendar quarter as system manufacturers in these
areas make purchases in preparation for their holiday season, and
comparatively less revenues and net income in the first and second calendar
quarters.*
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 market price of C-Cube's common stock has fluctuated significantly
since its 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. The market price of C-Cube's common stock has declined
substantially from its historic highs, and may continue to experience
significant fluctuations in the future.
Net Revenues
Net revenues in the third quarter of 1997 were $81.7 million, a
decrease of 1.8% from the $83.2 million reported in the corresponding
quarter a year ago. Revenue from MPEG 1 decoder chips used in VideoCD
players, sold primarily in China, decreased from the third quarter of 1996
due to price reductions made in response to competition. A significant
increase in the volume of shipments of such products partially offset the
price reduction. Revenue from the Company's family of encoder products
increased primarily due to sales of encoder systems developed by the
Company's subsidiary, DiviCom Inc. ("DiviCom"), which was acquired in the
third quarter of 1996.
International revenues accounted for 65% of net revenues for the third
quarter, compared to 56% for the same period last year. The rise in
international sales as a percentage of total sales is primarily due to a
shift in encoder revenue from the U.S. market to Europe. The Company
expects that international revenues will continue to represent a
significant portion of net revenues. The Company's success will depend in
part upon its ability to manage international marketing and sales
operations and manufacturing relationships. In addition, C-Cube purchases a
substantial portion of its assembly services from foreign suppliers.
C-Cube's international manufacturing and sales are subject to changes in
foreign political and economic conditions and to other risks including
currency or export/import controls, changes in tax laws, tariffs and
freight rates and changes in the ownership and/or leadership of
international customers that may result in delayed or canceled orders. For
example, China and Taiwan comprise substantial markets for consumer
electronics products utilizing the Company's MPEG 1 decoder products, such
as VideoCD 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. The Company has made a
significant investment in additional foundry capacity in Taiwan and is
subject to the risk of political instability in Taiwan, including but not
limited to the potential for conflict between Taiwan and the People's
Republic of China. The Company manufactures and sells product to customers
in Korea and is subject to the risk of economic and political instability
in Korea, including the potential for conflict between North and South
Korea. In addition, the Company sells certain of its products in
international markets and buys certain products from its foundries in
currencies other than the U.S. dollar and as a result, currency
fluctuations could have a material adverse effect on the Company's business
and results of operations. With respect to international sales that are
denominated in U.S. dollars, increases in the value of the U.S. dollar
relative to foreign currencies can increase the effective price of and
reduce demand for the Company's products relative to competitive products
priced in the local currency. The United States has considered trade
sanctions against Japan and has had disputes with China relating to trade
and human rights issues. If trade sanctions were imposed, Japan or China
could enact trade sanctions in response. Because a number of the Company's
current and prospective customers and suppliers are located in Japan and
China, trade sanctions, if imposed, could have a material adverse effect on
C-Cube's business and results of operations. Similarly, protectionist trade
legislation in either the United States or foreign countries could have a
material adverse effect on the Company's ability to manufacture or to sell
its products in foreign markets.
Gross Margin
C-Cube's gross margin percentage for the third quarter of 1997 was the
same as the prior year quarter at 55.0%. Although the average selling
prices of the Company's products have declined, this has been mostly offset
by lower product transition costs and reduced product costs. The Company
has been able to reduce product costs through the negotiation of lower
foundry wafer prices, the adoption of finer geometry fabrication processes
and the redesign of products to reduce die size. The negotiation of lower
wafer prices was facilitated by the surplus of foundry capacity during the
past year.
The markets into which C-Cube sells its products are subject to extreme
price competition. Thus, the Company expects to continue to experience
declines in the selling prices of its products over the life cycle of each
product.* In particular, C-Cube expects to continue to experience
significant price competition in the markets for decoder products.* Due to
an increasing percentage of sales represented by lower margin MPEG 1 and
MPEG 2 decoder products and to decreasing selling prices of certain
products, the Company anticipates that its gross margin percentages may
decrease in the future.* In order to offset or partially offset declines in
the selling prices of its products, C-Cube must continue to reduce the
costs of products through product design changes, manufacturing process
changes, volume discounts, yield improvements and other savings negotiated
with its manufacturing subcontractors. Since the Company does not believe
that it can continually achieve cost reductions which fully offset the
price declines of its products, it expects gross margin percentages to
decline for existing products over their life cycles.*
C-Cube does not operate its own manufacturing facilities and must make
volume commitments to subcontractors at prices that remain fixed over
certain periods of time. Therefore, the Company may not be able to reduce
its costs as rapidly as its competitors who perform their own
manufacturing. Failure of the Company to design and introduce, in a timely
manner, lower cost versions of existing products or higher gross margin new
products or to successfully manage its manufacturing subcontractor
relationships would have a material adverse effect on C-Cube's gross
margins.
Research and Development Expenses
In the third quarter of 1997, research and development expenses were
$16.8 million, or 21% of net revenues, as compared with $12.6 million, or
15% of net revenues in the third quarter of 1996. Excluding the DiviCom
acquisition-related charges, research and development expenses would have
been $11.2 million or 14% of net revenues in the third quarter of 1996. The
increase in research and development expenses primarily represents
additional employee-related costs associated with increases in product
engineering staff, reflecting the Company's continuing efforts to provide
digital video solutions at the chip and systems levels.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $13.6
million, or 17% of net revenues, in the third quarter of 1997, as compared
to $10.8 million, or 13% 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 in the third quarter of 1996. The increase in spending was
primarily due to increased headcount and related expenses, increased travel
costs and higher advertising and sales promotion costs.
Other Income (Expense)
Other expense, net of other income, was $33,000 for the third quarter
of 1997, a decrease from the net other expense amount of $59,000 for the
third quarter of 1996. The improvement over the prior year quarter is
primarily due to higher interest income earned on higher average cash and
investment balances.
Income Tax Expense
The Company's effective tax rate for the third quarter of 1997 was 34%.
The Company's effective tax rate is less than the combined federal and
state statutory rate primarily due to tax credits and foreign taxes.
Nine Months Ended September 30, 1997
The following table sets forth certain operating data as a percentage
of net revenues for the nine months ended September 30, 1997 and 1996:
Nine months Ended September 30,
-------------------------------
1997 1996
-------- --------
Net revenues 100.0% 100.0%
Costs and expenses:
Cost of revenues 44.1 45.9
Research and development 19.4 12.9
Selling, general and administrative 15.8 12.0
Purchased in-process technology 0.0 58.6
----- -----
Total 79.3 129.3
----- -----
Income (loss) from operations 20.7 (29.3)
Interest income (expense), net (0.7) 0.3
----- -----
Income (loss) before income taxes
and minority interest 20.0 (29.1)
Income tax expense 6.8 10.9
----- -----
Income (loss) before minority interest 13.2 (40.0)
Minority interest in net income
(loss) of subsidiary (0.0) 0.3
----- -----
Net income (loss) 13.3% (40.3)%
===== =====
Net Revenues
Net revenues for the nine months ending September 30, 1997 were $246.9
million, a 10.1% increase from $224.2 million in revenues during the
corresponding period in 1996. Revenue from the Company's family of encoder
products increased primarily due to sales of encoder systems developed by
DiviCom, which was acquired in the third quarter of 1996. The Company also
began volume shipments of its MPEG 2 decoder chips used in DVD systems.
Revenue from MPEG 1 decoder chips used in VideoCD players decreased from
the comparable nine month period of 1996 due to price reductions made in
response to competition. The decreased prices were partially offset by a
significant increase in volume shipments of such products.
Gross Margin
C-Cube's gross margin percentage increased to 55.9% in the first nine
months of 1997 from 54.1% in the prior year period. The improvement in the
gross margin percentage is due primarily to lower product transition costs,
reduced product costs and a shift in product mix to the higher margin
family of encoder products. These changes were partially offset by
decreases in average selling prices for the Company's products.
Research and Development Expenses
In the first nine months of 1997, research and development expenses
were $47.9 million or 19% of net revenues, as compared to $28.9 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 in the first nine
months of 1996. The increase in research and development expenses primarily
represents additional employee-related costs associated with increases in
product engineering staff, reflecting the Company's continuing efforts to
provide digital video solutions at the chip and systems levels.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $39.0
million, or 16% of net revenues in the first nine months of 1997, as
compared to $26.9 million, or 12% 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 in the first nine months of 1996. The increase was primarily due
to increased headcount and related expenses, increased travel costs and
higher advertising and sales promotion costs.
Other Income (Expense)
Other expense, net of other income, was $1.6 million for the first nine
months of 1997, a decrease from the net other income amount of $0.6 million
for the nine months ending September 30, 1996. The decrease is primarily
due to lower average cash and investment balances during the first nine
months of 1997 compared to the same period last year, due to the $65.7
million paid in conjunction with the acquisition of DiviCom in August 1996,
and foreign exchange losses on the Company's yen denominated assets.
Income Tax Expense
The Company's effective tax rate for the first nine months of 1997 was
34%. The Company's effective tax rate is less than the combined federal and
state statutory rate primarily due to tax credits and foreign taxes.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments were $141.7 million
at September 30, 1997 as compared to $82.2 million at the end of 1996.
Working capital increased to $194.0 million at September 30, 1997 from
$124.5 million at the end of 1996.
The Company's operating activities generated cash of $62.5 million in
the first nine months of 1997, mainly from operating income, reduced
prepaid expenses and increased accrued liabilities, partially offset by an
increase in accounts receivable. Accounts receivable increased as a
substantial portion of the Company's shipments were made on letters of
credit in December 1996 and collected before the quarter end. Shipments
made in September 1997 followed a more normal pattern and thus days
outstanding increased from an abnormally low 38 days at year-end 1996 to 50
days at the end of the third quarter of 1997.
C-Cube's investing activities, exclusive of the sales and maturities of
$12.1 million and purchases of $10.8 million of short-term investments used
cash of $10.9 million primarily for capital expenditures.
Cash provided by financing activities was $7.9 million, consisting of
proceeds from sales of stock pursuant to employee stock plans and the
collection of stockholder notes receivable, partially offset by payments of
debt.
C-Cube Japan has yen denominated credit lines with a group of Japanese
banks. At September 30, 1997 there were no borrowings under these lines.
The Company has an available bank line of credit of $30 million. The
line of credit expires May 1, 1999. The line of credit agreement requires
the Company, among other things, to maintain a minimum tangible net worth,
quarterly net income (no more than one quarterly loss per fiscal year), and
certain financial ratios. In addition, this agreement prohibits the payment
of cash dividends. Borrowings bear interest at LIBOR plus 1.25% or the
bank's prime rate. At September 30, 1997, 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 in the years 1996 to 2001. The
agreement with TSMC provided that TSMC would produce and ship wafers to C-
Cube at specified prices and required C-Cube to make two advance payments
totaling $49 million. An advance payment of $24.5 million was made in June
1996.
In May 1997, the Company amended its agreement with TSMC which resulted
in a reduction of the Company's future wafer purchase commitments and the
elimination of the remaining prepayment of $24.5 million. TSMC will apply
the original prepayment against a portion of the wafer cost as product is
delivered to C-Cube. Accordingly, the prepaid amount, which has been
allocated between current and long-term assets, will be amortized to
inventory as wafers are received. At September 30, 1997, $4.6 million of
the remaining $24.1 million production capacity rights is included in 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 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 and Use of Proceeds
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
------- -------------
10.39 Amendment to Lease Agreement with APT-IND/APTS
Realty, Inc. dated September 2, 1997.
10.40 Amendment to Loan Agreement with Comerica Bank-
California dated October 10, 1997.
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: November 14, 1997 By: /s/ John J. Hagedorn
------------------- -----------------------
John J. Hagedorn
Vice President of Finance and
Administration, Chief Financial Officer
and Secretary
EXHIBIT INDEX
Exhibit
Number Description
------- -------------
10.39 Amendment to Lease Agreement with APT-IND/APTS
Realty, Inc. dated September 2, 1997.
10.40 Amendment to Loan Agreement with Comerica Bank-
California dated October 10, 1997.
11.1 Statement regarding computation of net income per
share.
27.1 Financial Data Schedule