<PAGE>
=============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
___________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997 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 April 30, 1997, 36,422,563 shares of the Registrant's Common Stock
were outstanding.
=============================================================================
<PAGE>
C-CUBE MICROSYSTEMS INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
March 31, 1997 and December 31, 1996
Condensed Consolidated Statements of Operations
Quarter ended March 31, 1997 and 1996
Condensed Consolidated Statements of Cash Flows
Quarter ended March 31, 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
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
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
March 31, December 31,
1997 1996
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $103,731 $ 76,241
Short-term investments 4,985 6,005
Receivables -- net 54,856 40,706
Inventories 19,607 28,056
Deferred taxes 16,425 18,423
Other current assets 14,929 23,246
-------- --------
Total current assets 214,533 192,677
Property and equipment -- net 24,101 22,653
Production capacity rights 45,150 46,200
Distribution rights -- net 1,771 1,812
Purchased technology -- net 12,023 12,895
Other assets 3,200 3,278
-------- --------
Total $300,778 $279,515
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 24,500 $ 24,500
Accounts payable 18,662 18,320
Accrued liabilities 22,442 17,823
Deferred contract revenue 1,721 6,710
Current portion of long-term obligations 780 837
-------- --------
Total current liabilities 68,105 68,190
Long-term obligations 87,587 87,700
Deferred taxes 4,831 4,440
-------- --------
Total liabilities 160,523 160,330
-------- --------
Minority interest in subsidiary 668 613
Stockholders' equity:
Common stock, $0.001 par value, 50,000
shares authorized; shares outstanding:
1997 -- 36,370; 1996 -- 36,013 196,432 191,044
Deferred stock compensation (144) (250)
Notes receivable from stockholders -- (305)
Accumulated translation adjustments (1,381) (1,238)
Unrealized loss on investments (49) (13)
Accumulated deficit (55,271) (70,666)
-------- --------
Total stockholders' equity 139,587 118,572
-------- --------
Total $300,778 $279,515
======== ========
See notes to condensed consolidated financial statements.
<PAGE>
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Quarter Ended
March 31,
-----------------
1997 1996
---- ----
Net revenues $94,132 $68,100
Costs and expenses:
Cost of revenues 40,975 31,979
Research and development 15,612 6,850
Selling, general and administrative 13,070 7,800
------- -------
Total 69,657 46,629
------- -------
Income from operations 24,475 21,471
Other income (expense), net (1,067) 471
------- -------
Income before income taxes and minority interest 23,408 21,942
Income tax expense 7,958 7,680
------- -------
Income before minority interest 15,450 14,262
Minority interest in net income of subsidiary 55 681
------- -------
Net income $15,395 $13,581
======= =======
Net income per share $ 0.41 $ 0.38
======= =======
Shares used in computation 37,944 36,042
======= =======
See notes to condensed consolidated financial statements.
<PAGE>
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Quarter Ended March 31,
-----------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 15,395 $ 13,581
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest in subsidiary 55 681
Depreciation and amortization 3,489 1,105
Deferred income taxes 2,389 --
Changes in assets and liabilities:
Receivables (14,503) (13,697)
Inventories 8,395 675
Prepaids and other assets 9,437 352
Accounts payable 352 6,251
Accrued liabilities 1,030 4,209
-------- --------
Net cash provided by operating activities 26,039 13,157
-------- --------
Cash flows from investing activities:
Sales and maturities of short-term investments 2,500 6,700
Purchases of short-term investments (1,524) (34,595)
Capital expenditures (4,027) (5,190)
Other assets 78 17
-------- --------
Net cash used in investing activities (2,973) (33,068)
-------- --------
Cash flows from financing activities:
Notes payable to banks -- net -- (1,044)
Repayments of capital lease obligations (170) (253)
Sale of common stock, net of notes receivable 4,010 1,536
Collection of stockholder notes receivable 305 91
-------- --------
Net cash provided by financing activities 4,145 330
-------- --------
Exchange rate impact on cash and equivalents 279 102
-------- --------
Net increase (decrease) in cash and equivalents 27,490 (19,479)
Cash and equivalents, beginning of period 76,241 133,414
-------- --------
Cash and equivalents, end of period $103,731 $113,935
======== ========
Supplemental schedule of noncash investing and
financing activities:
Unrealized gain (loss) on investments $ (36) $ (52)
Supplemental disclosure of cash flow information --
Cash paid during the period for:
Interest $ 106 $ 147
Income taxes 74 4,390
See notes to condensed consolidated financial statements.
<PAGE>
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 March 31, 1997,
and the results of operations and cash flows for the quarters ended
March 31, 1997 and 1996. 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 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
Inventories are stated at the lower of cost or market. Cost is
computed on a currently adjusted standard basis (which approximates
actual cost on a current average or first-in, first-out basis).
Inventories consist of:
March 31, December 31,
1997 1996
------- -------
(in thousands)
Finished goods $14,335 $22,817
Work-in-process 3,561 2,898
Raw materials 1,711 2,341
------- -------
Total $19,607 $28,056
======= =======
3. Recently Issued Accounting Standard
In February 1997, the Financial Accounting Standards Board 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 $0.43 and $0.41 for the quarters
ended March 31, 1997 and 1996, respectively. Diluted EPS under SFAS 128
would not have been significantly different from EPS currently reported
for the periods.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk factors
set forth in this report.
Quarter ended March 31, 1997
The following table sets forth certain operating data as a percentage
of net revenues for the quarters ended March 31, 1997 and 1996:
Quarter Ended March 31,
-----------------------
1997 1996
---------- -----------
Net revenues 100.0% 100.0%
Costs and expenses:
Cost of revenues 43.5 47.0
Research and development 16.6 10.1
Selling, general and administrative 13.9 11.5
----- -----
Total 74.0 68.5
----- -----
Income from operations 26.0 31.5
Interest income (expense), net (1.1) 0.7
----- -----
Income before income taxes and
minority interest 24.9 32.2
Income tax expense 8.5 11.3
----- -----
Income before minority interest 16.4 20.9
Minority interest in net income
of subsidiary 0.1 1.0
----- -----
Net income 16.4% 19.9%
===== =====
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,
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.
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.
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 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 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 acquisition of DiviCom Inc., which has placed, and could
continue to place, a significant strain on the Company's limited personnel
and other resources. The combined 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 has recently expanded 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 manage a broader sales and marketing organization. In
addition, the sale and distribution of products to numerous large customers
in diverse markets and the requirements of such customers for design
support would also place substantial demands on the Company'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 and subcontract manufacturing
relationships. The failure of the Company'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 has declined
substantially from such historic highs, and may continue to experience
significant fluctuations in the future.
Net Revenues
Net revenues in the first quarter of 1997 were $94.1 million, an
increase of 38.2% from the $68.1 million reported in the corresponding
quarter a year ago. Revenue from the Company's family of encoder products
increased primarily due to sales of program encoders developed by DiviCom,
which was acquired in the third quarter of 1996. Revenue from MPEG 1
decoder chips used in VideoCD players increased slightly from the first
quarter of 1996 reflecting a significant increase in volume shipments of
such products, substantially offset by price reductions made in response to
competition.
International revenues accounted for 71% of net revenues for the first
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. 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 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 increased to 56.5% in the first
quarter of 1997 from 53.0% in the prior year quarter. This increase was due
primarily to a shift in product mix to the higher margin family of encoder
products. Lower product transition costs also contributed to the
improvement in gross margin. Margins for like product lines remained
comparable to those realized in the first quarter of 1996, as declines in
average selling prices were largely offset by reductions in product costs.
The Company reduced product costs through the negotiation of lower foundry
wafer prices, the adoption of finer geometry fabrication processes and the
redesign of products which reduced die size. The negotiation of lower wafer
prices was facilitated by the surplus of foundry capacity which has existed
for the past year. The Company believes that foundry wafer demand is
beginning to come into balance with wafer supply and that the steep
declines in wafer prices which resulted in reduced product costs will not
continue beyond the second quarter of 1997.
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 first quarter of 1997, research and development expenses were
$15.6 million, or 16.6% of net revenues, as compared with $6.9 million, or
10.1% of net revenues in the first quarter of 1996. The increase in
research and development expense primarily represents additional employee-
related costs associated with increases in product engineering staff,
reflecting the Company's continuing efforts to maintain its leadership in
bringing to market innovative and cost-effective digital video solutions at
the chip and systems levels.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $13.1
million, or 13.9% of net revenues, in the first quarter of 1997, as
compared to $7.8 million, or 11.5% of net revenues, for the same quarter
last year. The increase in spending was primarily due to increased
headcount and related expenses and increased commissions on higher sales
levels.
Other Income (Expense)
Interest expense, net of interest income was $1.1 million for the first
quarter of 1997, a decrease from the net interest income amount of $0.5
million for the first quarter of 1996. The decrease is primarily due to
lower average cash and investment balances during the current quarter as
compared to the prior 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 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.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments were $108.7 million
at March 31, 1997 as compared to $82.2 million at the end of 1996. Working
capital increased to $146.4 million at March 31, 1997 from $124.5 million
at the end of 1996.
The Company's operating activities generated cash of $26.0 million in
the first quarter of 1997, mainly from operating income, lower inventory
levels and reduced prepaid expenses, partially offset by increases in
accounts receivable. Inventories decreased from December 31, 1996 to March
31, 1997 due to significantly increased volume of MPEG 1 decoder unit
shipments in the first quarter. Accounts receivable increased primarily
because a substantial portion of the Company's shipments were made on
letters of credit in December 1996. These shipments were made early enough
in the month to allow collection before the quarter end. Shipments made in
March 1997 followed a more normal pattern and thus, days outstanding
increased from an abnormally low 38 days at year-end 1996 to 52 days at the
end of the first quarter of 1997.
C-Cube's investing activities, exclusive of the sales and maturities of
$2.5 million and purchases of $1.5 million of short-term investments used
cash of $3.9 million primarily for capital expenditures.
Cash provided by financing activities was $4.1 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 March 31, 1997 there were no borrowings under these lines.
The Company has an available bank line of credit of $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 $114.5 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 March 31, 1997, the
Company was in compliance with these covenants, and there were no
borrowings under this line.
Based on current plans and business conditions, C-Cube expects that its
cash, 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.
<PAGE>
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
------- -------------
10.37 Sublease agreement with LSI Logic Corporation
dated January 8, 1997.
11.1 Statement regarding computation of net income per
share.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
C-Cube Microsystems Inc.
(Registrant)
Dated: May 15, 1997 By: /s/ John J. Hagedorn
-------------- -----------------------
John J. Hagedorn
Vice President of Finance and
Administration, Chief Financial Officer
and Secretary
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -------------
10.37 Sublease agreement with LSI Logic Corporation
dated January 8, 1997.
11.1 Statement regarding computation of net income per
share.
27.1 Financial Data Schedule.
<PAGE>
SUBLEASE AGREEMENT
This Sublease is entered into as of January 8, 1997 by and between LSI
Logic Corporation, a Delaware corporation ("Sublessor") and C-Cube
Microsystems, Inc., a Delaware corporation ("Sublessee"), as a Sublease
under that Single Tenant Net Lease dated as of August 25, 1995 between Oak
Creek Delaware, Inc., a Delaware corporation, ("Landlord"), and Sublessor,
as tenant (the "Lease"). A copy of the Lease is attached hereto as Exhibit
A.
1. SUBLEASE
1.1 Sublessor leases to Sublessee and Sublessee leases from
Sublessor real property commonly known as 1855 Barber Lane, Milpitas,
California, and more particularly described in Exhibit A to the Lease,
together with the building thereon (the "Building"), subject, however, to
any and all existing encumbrances, easements, conditions, covenants, and
restriction, rights-of-way, any other matters of record, and such matters
as may be disclosed by inspection or survey. The real property and the
Building shall be referred to herein as the "Premises."
1.2 Sublessee accepts the Premises as being in good and sanitary
order, condition and repair, and accepts the improvements included in the
Premises in their present condition, "as is," and without representation
or warranty by Sublessor as to the condition of the Premises or as to the
use or occupancy which may be made thereof. Upon the expiration or sooner
termination of this Sublease, Sublessee shall surrender the Premises,
together with all Alterations (as defined in Paragraph 24 of the Lease),
to Sublessor in the same condition as when received or installed, ordinary
wear and tear excepted, and clean and free of debris and free of any liens
created or suffered to be created by Sublessee. Sublessee shall not,
however, be required to remove any tenant improvements to the Premises
installed or constructed by, on behalf of or for the benefit of Sublessor,
nor shall Sublessor require Sublessee to remove any tenant improvements to
the Premises installed or constructed by Sublessee pursuant to the Tenant
Improvements Agreement except to the extent Landlord requires the removal
of any tenant improvements installed by Sublessee.
2. TERM
2.1 The term of this Sublease shall be for a period of
approximately forty-eight (48) months commencing on the date on which all
of the following has occurred: (i) this Sublease has been fully executed
by both Sublessor and Sublessee, (ii) this Sublease has been consented to
in writing by Landlord ("Consent of Landlord to Sublease) and (iii)
Sublessor has delivered possession of the Premises to Sublessee. The term
shall end on December 31, 2000, unless sooner terminated pursuant to any
provision hereof.
2.2 Sublessor shall deliver possession of the Premises to
Sublessee when this Sublease and the Consent of Landlord to Sublease have
both been fully executed (the "Commencement Date"). If the Commencement
Date has not occurred for any reason whatsoever on or before April 1, 1997
then, in addition to Sublessee's other rights, Sublessee may terminate
this Sublease by written notice to Sublessor, whereupon any monies
previously paid by Sublessee to Sublessor shall be immediately reimbursed
to Sublessee.
3. RENT
3.1 Sublessee shall pay to Sublessor as net monthly rent for the
Premises the amounts set forth below, in advance, on the first day of each
month of the term hereof:
Months of Term Monthly Rent
Until February 28,1997 $0/month
March 1,1997 - Dec. 31,1998 $93,725.00/month
Jan 1,1999 - Dec. 31, 2000 $101,875.00/month
Sublessee shall pay Sublessor upon the execution hereof the sum of
Ninety-three Thousand Seven Hundred and Twenty Five Dollars ($93,725.00)
as rent in advance for the first month due. Rent for any period during the
term hereof which is for less than one month shall be prorated. Rent shall
be payable in advance on the 1st day of each month during the term,
without notice or demand without any deduction, offset, or abatement
(except to the extent expressly permitted by this Sublease) in lawful
money of the United States of America to Sublessor at the address stated
herein or to such other persons or at such other places as Sublessor may
designate in writing.
3.2 Notwithstanding anything to the contrary in this Sublease,
Sublessee shall not be required to pay any Impositions, maintenance
charges or any other charges, costs or expenses that may be required to be
paid by Sublessee under the terms of this Sublease (except utilities for
the Premises) until rent commencement or March 1,1997, whichever occurs
first. Sublessee recognizes its obligations to pay Sublessee's liability
insurance premiums as required after the Commencement Date.
3.3 Sublessee hereby acknowledges that late payment by Sublessee
to Sublessor of rent and other sums due hereunder will cause Sublessor to
incur costs not contemplated by this Sublease, the exact amount of which
will be difficult to ascertain. Such costs include, but are not limited
to, processing and accounting charges, and late charges which may be
imposed on Sublessor by the terms of the Lease. Accordingly, if any
installment of rent or other sums due from Sublessee is not received by
Sublessor within five (5) business days after its due date, Sublessee
shall pay to Sublessor a late charge equal to five percent (5%) of such
overdue amount. The parties hereby agree that such late charge represents
a fair and reasonable estimate of the costs Sublessor will incur by reason
of late payment by Sublessee based upon the circumstances existing as of
the date of this Sublease. Acceptance of such late charge by Sublessor
shall in no event constitute a waiver of Sublessee's default with respect
to such overdue amount, nor prevent Sublessor from exercising any of its
other rights or remedies granted to it by law or this Sublease.
Initials: /s/ RDN (Sublessor) /s/ MKA (Sublessee)
------- -------
4. SECURITY DEPOSIT
4.1 Sublessee shall deposit with Sublessor upon the execution
hereof the sum of One Hundred One Thousand Eight Hundred Seventy-five
Dollars ($101,875) as security for Sublessee's faithful performance of
Sublessee's obligations hereunder. If Sublessee fails to pay rent or other
charges due hereunder, or otherwise defaults with respect to any provision
of this Sublease, Sublessor may use, apply or retain all or any portion of
said deposit for the payment of any rent or other charge in default or for
the payment of any other sum to which Sublessor may become obligated by
reason of Sublessee's default, or to compensate Sublessor for any loss or
damage which Sublessor may suffer thereby. If Sublessor so uses or applies
all or any portion of said deposit, Sublessee shall within fifteen (15)
days after written demand therefor deposit cash with Sublessor in an
amount sufficient to restore said deposit to the full amount herein above
stated and Sublessee's failure to do so shall be a breach of this
Sublease, and Sublessor may at his option terminate this Sublease.
Sublessor shall not be required to keep said deposit separate from its
general accounts. Said deposit or so much thereof as had not theretofore
been applied by Sublessor shall be returned without payment of interest
for its use, to Sublessee within ten (10) days after the expiration of the
term hereof (or earlier termination of the Sublease if Sublessee does not
have any remaining contractual obligations to Sublessor), or after
Sublessee has vacated the Premises, whichever is later.
5. PROVISIONS CONSTITUTING SUBLEASE
5.1 This Sublease is and at all times shall be subject and
subordinate to the Lease. Sublessee shall take no action which would cause
Sublessor to be in default of its obligations under the Lease, and
Sublessee shall perform all of its obligations under this Sublease, and
Sublessee shall indemnify and hold Sublessor harmless from and against all
liability, costs, damages, claims, demands and expenses, including
reasonable attorney's fees and costs, arising out of Sublessee's failure
to do so. Sublessor shall fully perform all of its obligations under the
Lease (except to the extent any of the same are the obligation of
Sublessee hereunder) and shall indemnify and hold Sublessee harmless from
and against all liability, costs, damages, claims, demands and expenses,
including reasonable attorneys' fees and costs, arising out of Sublessor's
failure to do so. Upon any termination of the Lease, this Sublease shall
terminate concurrently therewith except as otherwise provided in the
Consent of Landlord to Sublease and without any liability of Sublessor to
Sublessee; provided, however, that a Lease termination due to Sublessor's
default of its obligations under the Lease or this Sublease, shall be
subject to the indemnification set forth above. Sublessor shall not enter
into any amendment or modification of the Lease without the consent of
Sublessee, nor shall Sublessor consent to a termination of the Lease or
exercise any option to terminate the Lease that it may have, or surrender
the Lease, without the prior written consent of Sublessee which will not
unreasonably be withheld (and except as may be specifically permitted by
this Sublease).
5.2 Except for paragraphs 1, 2, 3, 49, and 52 of the Lease; and
the second sentence of paragraph 9 of Exhibit B to the Lease (the "Tenant
Improvement Agreement"); all of the terms and conditions contained in the
Lease in the form attached hereto as Exhibit A are incorporated herein as
terms and conditions of this Sublease. All references in the Lease to the
"Lease" or the "lease" shall be deemed to refer to this Sublease and all
references in the Lease to "Landlord" and "Tenants shall be deemed to
refer to Sublessor and Sublessee, respectively, except that any reference
to "Landlord" in Paragraph 12, 13, 23, 24, 27, 33, 34, 36, 39, 40, and 41
of the Lease shall be deemed to refer to both Landlord and Sublessor and
any reference in Paragraphs 11 (except that Sublessee's reimbursement of
insurance premiums paid by Landlord for the Premises shall be paid to
Sublessor), 16, 20, 25, 26, 29, 30, 31, 32, 35, 37, and 53 of the Lease
shall be deemed to refer to Landlord only; provided, however, that
Sublessor shall use reasonable efforts to enforce the obligations of
Landlord pursuant to Paragraphs 11, 16, 20, 25, 26, 29, 30, 31, and 32 of
the Lease for the benefit of Sublessee. Such efforts shall include the
following: (i) upon Sublessee's written request, promptly notifying
Landlord of any nonperformance under the Lease and requesting that
Landlord perform its obligations thereunder; and (ii) after the time by
which Landlord must cure a breach has expired, cooperating with Sublessee
to institute, in the name of Sublessor, such legal proceedings as may be
appropriate, with legal counsel selected by Sublessee and approved by
Sublessor, to enforce the obligations of Landlord under the Lease
(including the execution of such documents as may be reasonably required
by such legal counsel). Sublessor and Sublessee shall be entitled to
jointly control the conduct of the litigation; provided, however, that in
the conduct of any litigation brought against Landlord to enforce its
obligations under the Lease for the benefit of Sublessee, both Sublessor
and Sublessee shall have an obligation to act in a commercially reasonable
manner and with the goal of employing a strategy which is designed to
ensure that Landlord will fully perform its obligations under the Lease,
and no action may be taken which may materially and adversely affect the
other party's rights or obligations under the Lease or Sublease without
such other party's consent, including settlement. All reasonable costs
incurred in connection with any enforcement undertaken by Sublessor at the
request of Sublessee shall be paid by Sublessee. Sublessor agrees;
however, that if Sublessor is the prevailing party in any action
instituted against Landlord at Sublessee's request to enforce the
obligations of Landlord under the Lease, and Sublessor recovers any
attorneys' fees and costs from Landlord in connection therewith, Sublessor
shall apply the amount recovered by Sublessor to any attorneys' fees and
costs incurred by Sublessor in connection with such action (to the extent
such fees and costs have not yet been paid or reimbursed by Sublessee)
and, to the extent that Sublessee has incurred and paid legal fees in
connection with such action, the balance, if any, of the amount recovered
by Sublessor shall be paid to Sublessee.
5.3 Except as otherwise expressly provided in this Sublease, all
references to "Landlord" in paragraphs 2,4, and 5 and Appendix 1 of the
Tenant Improvements Agreement shall refer to Landlord only.
5.4 The following portions of the incorporated provisions of the
Lease are
hereby expressly deleted or modified as follows:
a. Paragraph 10: the date "September 1, 1995" in the last sentence is
hereby deleted and replaced with ________, 1997.
b. Paragraph 5: the words "light manufacturing with the written consent
of Landlord" shall be inserted after the word "offices" in the second
line.
c. Paragraph 26.1: the number "12" in the second sentence is deleted and
replaced with the number "11".
d. The Tenant Improvements Agreement: the date "September 1, 1995" in
paragraph 1 is hereby deleted and replaced with ________, 1997.
6. TENANT IMPROVEMENTS
6.1 Except as expressly provided herein, any tenant improvements
to the Premises shall be constructed by Sublessee in accordance with the
terms of Exhibit B to the Lease (the "Tenant Improvement Agreement").
Sublessee shall submit to Landlord complete, finished drawings and
specifications (the "Plans") for the tenant improvements to be constructed
by Sublessee (the "Tenant Improvements") together with a proposed schedule
for completion. The Plans shall reflect and be in accordance with (i) a
space plan approved by Landlord, and (ii) that certain list of Landlord's
Required Specifications attached as Appendix 1 of the Tenant Improvement
Agreement. Sublessee intends to submit a space plan depicting tenant
improvements to the Premises substantially as shown and/or described on
Exhibit B to this Sublease. Notwithstanding anything set forth herein,
provided that Landlord approves the Plans, the Final Plans, Sublessee's
architect, engineers and contractors, Sublessee's insurance and payment
and performance bonds, and Tenant's Work, Sublessee shall not be required
to obtain Sublessor's approval of any such matters. Sublessee will
indemnify Sublessor and hold Sublessor harmless from and against all
liability, costs, damages, claims, demands and expenses, including
reasonable attorney's fees and costs, arising out of or in any way
connected with the immediately preceding Sublease provision and the Tenant
Improvement Agreement. So long as Landlord approves any disbursements of
the Tenant Improvement Allowance, Sublessor shall deem all conditions to
such disbursements to have been satisfied.
6.2 No construction management fee shall be payable to Sublessor,
nor shall any fees be payable to Sublessor's architects, engineers or
consultants in connection with the Tenant Improvements.
6.3 Landlord shall provide Sublessee with an allowance of up to
One Million Four Hundred Sixty Seven Thousand Dollars ($1,467,000.00) to
be applied to the Tenant Improvement Costs (the "Tenant Improvement
Allowance"). Sublessee shall NOT have the right to utilize the Additional
Tenant Improvement Allowance as described in paragraph 9 of the Tenant
Improvements Agreement. The Tenant Improvement Allowance shall be paid to
Sublessee as provided in the Tenant Improvements Agreement. Upon Sublessor
receipt of written notice from Sublessee that the Tenant Improvements have
been completed in accordance with the requirements of the Tenant
Improvements Agreement, Sublessor shall submit to Landlord a written
request that reimbursement of the Tenant Improvement Costs, up to an
amount equal to the Tenant Improvement Allowance, be paid directly to
Sublessee upon Sublessee's satisfaction of the requirements set forth in
paragraph 9 of the Tenant Improvements Agreement (as modified, if
applicable, by the terms of Landlord's consent).
7. BROKERS
7.1 Sublessee warrants and represents that it has had no dealings
with any real estate broker or agent in connection with the negotiation of
this Sublease other than Colliers Parrish International and CPS, The
Commercial Property Services Company, whose commission shall be paid by
Sublessor, and that it knows of no other real estate broker or agent
(other than the brokers described above) who is or might be entitled to a
commission in connection with this Sublease. Sublessee shall indemnify,
defend and hold Sublessor harmless from and against any and all
liabilities or expenses, including reasonable attorneys' fees and costs,
arising from any claims made by any broker or individual (other than the
brokers described above) for commissions or fees who claims to have
represented Sublessee in connection with this Sublease.
8. RECOGNITION & ATTORNMENT AGREEMENT
8.1 Sublessor shall use its reasonable best efforts to obtain
from Landlord a recognition and attornment agreement which provides that,
if the Lease is terminated as a result of any default by Sublessor, (a)
(i) the Sublease will not be terminated; (ii) Landlord will recognize all
of Sublessee's right to possession of the Premises pursuant to the terms
of this Sublease; and (iii) Landlord will assume all of Sublessor's
obligations under the Sublease arising on and after the date of the event
of default by Sublessor, and (b) Sublessee will attorn to Landlord and
perform all of Sublessee's obligations under the Sublease directly to
Landlord as if Landlord were the Sublessor under the Sublease.
9. CONSENTS AND APPROVALS
9.1 Whenever the consent or approval of either party is required
under this Sublease, such consent or approval shall not be unreasonably
withheld or delayed.
10. LANDLORD'S CONSENT
10.1 Sublessee acknowledges that this Sublease is subject to the
consent of the Landlord under the Lease. Accordingly, this Sublease shall
not be effective unless and until Landlord's consent has been executed by
Landlord. Sublessor shall use diligent efforts to obtain such consent as
soon as reasonably possible following execution of this Sublease by
Sublessor and Sublessee. Either party shall have the right to terminate
this Sublease if Landlords consent hereto, in form and content reasonably
acceptable to Sublessor and Sublessee, cannot be obtained within fifteen
(15) business days after this Sublease has been fully executed. Sublessor
shall have no liability whatsoever to Sublessee, however, if Sublessor is
unable to obtain such consent from Landlord.
11. SUBLESSOR'S OPTION TO EXTEND LEASE
11.1 Sublessor agrees that it will not exercise its option to
extend the Lease past December 31, 2000, pursuant to paragraph 2 of the
Lease.
12. NOTICES
12.1 All notices, unless otherwise provided herein, will be in
writing and deemed given on the date the notice is hand delivered, mailed,
or electronically transmitted (with a confirmation or acknowledgment of
receipt) to the receiving party at such party's address. Either party may
change its address upon notice to the other party as set forth herein.
For Sublessor: For Sublessee:
LSI Logic Corporation C-Cube Microsystems, Inc.
M/S D-106, 1551 McCarthy Blvd. 1778 McCarthy Boulevard
Milpitas, CA 95035 Milpitas, CA 95035
Attn: General Counsel Attn: Manager, Corp. Facilities
Telephone: (408) 433-7189 Telephone: (408) 944-8606
Fax: (408) 433-6896 Fax: (408) 944-6762
13. CONFLICT
13.1 If any terms of the Master Lease contradict the terms of
this Sublease, the terms of this Sublease shall control over the Master
Lease as between Sublessor and Sublessee.
14. ASSIGNMENT OF WARRANTIES
14.1 Sublessor hereby assigns to Sublessee all warranties given
and indemnities made by Landlord to Sublessor under the Lease subject to
Landlord's written consent to such assignment. Sublessor shall cooperate
with Sublessee to enforce all such warranties and indemnities.
15. ADDITIONAL PROVISIONS
15.1 Without limiting any other right or remedy of Sublessee
under this Sublease, if Landlord seeks to terminate the Lease because of a
default or alleged default by Sublessor, Sublessor shall use its
reasonable good faith efforts to maintain the Lease in full force and
effect for the benefit of Sublessee, and Sublessor shall take reasonable
actions required to reinstate the Lease and/or to claim and pursue any
right of redemption or relief from forfeiture of the Lease (and as a
consequence thereof any forfeiture of this Sublease) to which Sublessor
may be entitled at law or in equity.
15.2 As an inducement to Sublessee to enter this Sublease, to the
best of Sublessor's knowledge, Sublessor represents and warrants with
respect to the Premises that: (a) the Lease is in full force and effect,
and there exists under the Lease no default or event of default by either
Landlord or Sublessor, nor has there occurred any event which, with the
giving of notice or passage of time or both, could constitute such a
default or event of default; (b) there are no pending or threatened
actions, suits or proceedings before any court or administrative agency
against Sublessor or Landlord or third parties which could, in the
aggregate, adversely affect the Premises or any part thereof or the
ability of either party to perform its obligations under the Lease, and
Sublessor is not aware of any facts which might result in such actions,
suits or proceedings; (c) there is no pending or threatened condemnation
or similar proceeding affecting the Premises or any portion thereof, and
Sublessor has no knowledge that any such action currently is contemplated;
and (d) Sublessor has not received any notice from any insurance company
of any defects or inadequacies in the Premises or any part thereof which
could adversely affect the insurability of the Premises or the premiums
for the insurance thereof.
SUBLESSOR
LSI Logic Corporation,
a Delaware corporation
By: /s/ R. Douglas Norby
Its: EVP & CFO
SUBLESSEE
C-Cube Microsystems, Inc.,
a Delaware corporation
By: /s/ Mark K. Allen
Its: V.P.
<PAGE>
Exhibit 11.1
C-CUBE MICROSYSTEMS INC.
COMPUTATION OF EARNINGS PER SHARE
Quarter Ended March 31, 1997 and 1996
(in thousands, except per share amounts)
Quarter Ended March 31,
----------------------
1997 1996
--------- ---------
Net income $ 15,395 $ 13,581
========= =========
Weighted average common
shares outstanding 36,214 32,742
Common share equivalents
related to stock options 1,730 3,300
--------- ---------
Weighted average common and
equivalent shares 37,944 36,042
========= =========
Net income per share $ 0.41 $ 0.38
========= =========
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 103,731
<SECURITIES> 4,985
<RECEIVABLES> 54,856
<ALLOWANCES> 0
<INVENTORY> 19,607
<CURRENT-ASSETS> 214,533
<PP&E> 46,863
<DEPRECIATION> 22,762
<TOTAL-ASSETS> 300,778
<CURRENT-LIABILITIES> 68,105
<BONDS> 0
0
0
<COMMON> 196,432
<OTHER-SE> (56,845)
<TOTAL-LIABILITY-AND-EQUITY> 300,778
<SALES> 94,132
<TOTAL-REVENUES> 94,132
<CGS> 40,975
<TOTAL-COSTS> 40,975
<OTHER-EXPENSES> 28,682
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,067
<INCOME-PRETAX> 23,408
<INCOME-TAX> 7,958
<INCOME-CONTINUING> 15,395
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,395
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
</TABLE>
