<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
___________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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 July 31, 1997, 36,520,587 shares of the Registrant's Common Stock
were outstanding.
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<PAGE>
C-CUBE MICROSYSTEMS INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 1997 and December 31, 1996
Condensed Consolidated Statements of Operations
Quarter and six months ended June 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows
Six months ended June 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
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)
June 30, December 31,
1997 1996
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $117,129 $ 76,241
Short-term investments 9,513 6,005
Receivables -- net 42,871 40,706
Inventories 21,471 28,056
Deferred taxes 19,692 18,423
Other current assets 15,722 23,246
-------- --------
Total current assets 226,398 192,677
Property and equipment -- net 25,452 22,653
Production capacity rights 20,650 46,200
Distribution rights -- net 1,730 1,812
Purchased technology -- net 11,151 12,895
Other assets 3,124 3,278
-------- --------
Total $288,505 $279,515
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ -- $ 24,500
Accounts payable 17,119 18,320
Accrued liabilities 22,792 17,823
Deferred contract revenue 6,019 6,710
Current portion of long-term obligations 715 837
-------- --------
Total current liabilities 46,645 68,190
Long-term obligations 87,539 87,700
Deferred taxes 4,576 4,440
-------- --------
Total liabilities 138,760 160,330
-------- --------
Minority interest in subsidiary 530 613
Stockholders' equity:
Common stock, $0.001 par value, 50,000
shares authorized; shares outstanding:
1997 -- 36,491; 1996 -- 36,013 198,181 191,044
Deferred stock compensation (39) (250)
Notes receivable from stockholders -- (305)
Accumulated translation adjustments (1,302) (1,238)
Unrealized loss on investments (38) (13)
Accumulated deficit (47,587) (70,666)
-------- --------
Total stockholders' equity 149,215 118,572
-------- --------
Total $288,505 $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 June 30, Six Months Ended June 30,
---------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
Net revenues $71,098 $72,958 $165,230 $141,058
Costs and expenses:
Cost of revenues 31,278 33,561 72,253 65,540
Research and development 15,450 9,363 31,062 16,213
Selling, general and
administrative 12,340 8,294 25,410 16,094
------- ------- -------- --------
Total 59,068 51,218 128,725 97,847
------- ------- -------- --------
Income from operations 12,030 21,740 36,505 43,211
Other income (expense), net (535) 237 (1,602) 708
------- ------- -------- --------
Income before income taxes
and minority interest 11,495 21,977 34,903 43,919
Income tax expense 3,949 8,131 11,907 15,811
------- ------- -------- --------
Income before minority
interest 7,546 13,846 22,996 28,108
Minority interest in net
income (loss) of subsidiary (138) -- (83) 681
------- ------- -------- --------
Net income $ 7,684 $13,846 $ 23,079 $ 27,427
======= ======= ======== ========
Net income per share $ 0.20 $ 0.39 $ 0.61 $ 0.76
======= ======= ======== ========
Shares used in computation 38,128 35,697 38,036 35,869
======= ======= ======== ========
See notes to condensed consolidated financial statements.
<PAGE>
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 23,079 $ 27,427
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest in subsidiary (83) 681
Depreciation and amortization 7,727 2,803
Deferred income taxes (1,133) (5,225)
Changes in assets and liabilities:
Receivables (2,211) (11,947)
Inventories 6,596 (11,407)
Production capacity rights -- (24,500)
Prepaids and other assets 8,730 (334)
Accounts payable (1,209) 15,860
Accrued liabilities 2,274 9,054
Income taxes payable 4,411 4,892
-------- --------
Net cash provided by operating activities 48,181 7,304
-------- --------
Cash flows from investing activities:
Sales and maturities of short-term investments 4,000 24,301
Purchases of short-term investments (7,496) (48,297)
Capital expenditures (8,674) (9,868)
Other assets 154 175
-------- --------
Net cash used in investing activities (12,016) (33,689)
-------- --------
Cash flows from financing activities:
Notes payable to banks -- net -- (1,879)
Repayments of capital lease obligations (283) (381)
Sale of common stock, net of notes receivable 4,737 2,047
Collection of stockholder notes receivable 305 91
-------- --------
Net cash provided by (used in) financing activities 4,759 (122)
-------- --------
Exchange rate impact on cash and equivalents (36) 208
-------- --------
Net increase (decrease) in cash and equivalents 40,888 (26,299)
Cash and equivalents, beginning of period 76,241 133,414
-------- --------
Cash and equivalents, end of period $117,129 $107,115
======== ========
Supplemental schedule of noncash investing and
financing activities:
Unrealized loss on investments $ (25) $ (60)
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 $ 2,726 $ 2,997
Income taxes 3,685 6,924
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 normal recurring
adjustments and accruals, C-Cube Microsystems Inc. ("C-Cube" or the
"Company") considers necessary for a fair presentation of the Company's
financial position as of June 30, 1997, and the results of operations
for the quarters and six months ended June 30, 1997 and 1996 and cash
flows for the six months ended June 30, 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 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:
June 30, December 31,
1997 1996
------- -------
(in thousands)
Finished goods $11,759 $22,817
Work-in-process 7,986 2,898
Raw materials 1,726 2,341
------- -------
Total $21,471 $28,056
======= =======
3. Production capacity rights
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 June
30, 1997, $3.9 million of the $24.5 million production capacity rights
is included in other current assets.
4. 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 $0.21 and $0.42 for the quarters
ended June 30, 1997 and 1996, respectively, and $0.64 and $0.83 for the
six months ended June 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.
<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 certain factors,
including those set forth in this Item 2 and elsewhere in, or incorporated
by reference into, this report. The Registrant has attempted to identify
forward-looking statements in this report by placing an asterick (*)
following each sentence containing such statements.
QUARTER ENDED JUNE 30, 1997
The following table sets forth certain operating data as a percentage
of net revenues for the quarters ended June 30, 1997 and 1996:
Quarter Ended June 30,
----------------------
1997 1996
-------- --------
Net revenues 100.0% 100.0%
Costs and expenses:
Cost of revenues 44.0 46.0
Research and development 21.7 12.8
Selling, general and administrative 17.4 11.4
----- -----
Total 83.1 70.2
----- -----
Income from operations 16.9 29.8
Interest income (expense), net (0.8) 0.3
----- -----
Income before income taxes and
minority interest 16.2 30.1
Income tax expense 5.6 11.1
----- -----
Income before minority interest 10.6 19.0
Minority interest in net income
(loss) of subsidiary (0.2) 0.0
----- -----
Net income 10.8% 19.0%
===== =====
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 materially adversely affect 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 third and fourth calendar quarters 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 second quarter of 1997 were $71.1 million, a
decrease of 2.5% from the $73.0 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 second 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 63% of net revenues for the second
quarter, compared to 82% 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 and decreased sales of
decoders into China. 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 56.0% in the second
quarter of 1997 from 54.0% in the prior year quarter. The improvement in
the gross margin percentage is due primarily to lower product transition
costs and a shift in product mix to the higher margin family of encoder
products. Margin percentages for like product lines remained comparable to
those realized in the second 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 into the third 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 second quarter of 1997, research and development expenses were
$15.5 million, or 21.7% of net revenues, as compared with $9.4 million, or
12.8% of net revenues in the second 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 $12.3
million, or 17.4% of net revenues, in the second quarter of 1997, as
compared to $8.3 million, or 11.4% of net revenues, for the same quarter
last year. The increase in spending was primarily due to increased
headcount and related expenses, an increased provision for doubtful
accounts and higher advertising and sales promotion costs.
Other Income (Expense)
Interest expense, net of interest income, was $0.5 million for the
second quarter of 1997, a decrease from the net interest income amount of
$0.2 million for the second quarter of 1996. The decrease is primarily due
to lower average cash and investment balances during the current quarter
compared to the prior year quarter due to the $65.7 million paid in cash in
conjunction with the acquisition of DiviCom in August 1996.
Income Tax Expense
The Company's effective tax rate for the second 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.
SIX MONTHS ENDED JUNE 30, 1997
The following table sets forth certain operating data as a percentage
of net revenues for the six months ended June 30, 1997 and 1996:
Six Months Ended June 30,
------------------------
1997 1996
---------- ----------
Net revenues 100.0% 100.0%
Costs and expenses:
Cost of revenues 43.7 46.5
Research and development 18.8 11.5
Selling, general and administrative 15.4 11.4
----- -----
Total 77.9 69.4
----- -----
Income from operations 22.1 30.6
Interest income (expense), net (1.0) 0.5
----- -----
Income before income taxes and
minority interest 21.1 31.1
Income tax expense 7.2 11.2
----- -----
Income before minority interest 13.9 19.9
Minority interest in net income
(loss) of subsidiary (0.1) 0.5
----- -----
Net income 14.0% 19.4%
===== =====
Net Revenues
Revenues for the six months ending June 30, 1997 were $165.2
million, a 17% increase from $141.1 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. Revenue from MPEG
1 decoder chips used in VideoCD players decreased from the first six months
of 1996 due to price reductions made in response to competition and
partially offset by a significant increase in volume shipments of such
products.
The Company had no revenues from development contracts during the first
six months of 1997 as compared to $0.2 million for the first six months of
1996 due to the Company's focus on product sales.
Gross Margin
C-Cube's gross margin percentage increased to 56.3% in the first six
months of 1997 from 53.5% in the prior year period. The improvement in the
gross margin percentage is due primarily to lower product transition costs
and a shift in product mix to the higher margin family of encoder products.
Margin percentages for like product lines remained comparable to those
realized in the first six months of 1996, as declines in average selling
prices were largely offset by reductions in product costs.
Research and Development Expenses
In the first six months of 1997, research and development expenses were
$31.1 million or 18.8% of net revenues, as compared to $16.2 million, or
11.5% of net revenues, in the comparable prior year period. 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 $25.4
million, or 15.4% of net revenues in the first six months of 1997, as
compared to $16.1 million, or 11.4% of net revenues for the same period
last year. The increase was primarily due to increased headcount and
related expenses and a higher provision for doubtful accounts.
Other Income (Expense)
Interest expense, net of interest income, was $1.6 million for the
first six months of 1997, a decrease from the net interest income amount of
$0.7 million for the six months ending June 30, 1996. The decrease is
primarily due to lower average cash and investment balances during the
first six 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 six 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 $126.6 million
at June 30, 1997 as compared to $82.2 million at the end of 1996. Working
capital increased to $179.8 million at June 30, 1997 from $124.5 million at
the end of 1996.
The Company's operating activities generated cash of $48.2 million in
the first six months of 1997, mainly from operating income, reduced prepaid
expenses and lower inventory levels, partially offset by an increase in
accounts receivable. Inventories decreased from December 31, 1996 to June
30, 1997 due to significantly increased volume of MPEG 1 decoder unit
shipments in the second 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
June 1997 followed a more normal pattern and thus days outstanding
increased from an abnormally low 38 days at year-end 1996 to 54 days at the
end of the second quarter of 1997.
C-Cube's investing activities, exclusive of the sales and maturities of
$4.0 million and purchases of $7.5 million of short-term investments used
cash of $8.5 million primarily for capital expenditures.
Cash provided by financing activities was $4.8 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 June 30, 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 of credit agreement
requires the Company, among other things, to maintain a tangible net worth
(as defined) of $120.3 million, quarterly net income (no more than one
quarterly loss per fiscal year), a quick ratio of 1 to 1 and a maximum debt
to tangible net worth (as defined) ratio of 1.41 to 1. In addition, this
agreement prohibits the payment of cash dividends. Borrowings bear interest
at the bank's prime rate. At June 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 June 30, 1997, $3.9 million of the
$24.5 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, 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
The Annual Meeting of Stockholders was held on April 22, 1997.
At the meeting, the following actions were taken:
Number of Common Shares Voted
-----------------------------
Votes Broker
Proposal For Against Withheld Non-Votes
-------- --- ------- -------- ---------
1) Election of Class III
directors for a three-
year term
T.J. Rodgers 32,475,019 338,884 -- --
Baryn S. Futa 32,512,691 301,212 -- --
2) Ratification of
Deloitte & Touche LLP
as the Company's
independent public
accountants for
fiscal year ending
December 31, 1997. 32,546,326 137,761 129,816 --
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------- -------------
10.38 Amendment to Option Agreement dated May 30, 1997
with Taiwan Semiconductor Manufacturing Co., Ltd. (1)
11.1 Statement regarding computation of net income per
share.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
(1) To be filed by amendment. Confidential treatment will be requested
as to certain portions of this exhibit.
<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: August 13, 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
------- -------------
10.38 Amendment to Option Agreement dated May 30, 1997
with Taiwan Semiconductor Manufacturing Co., Ltd. (1)
11.1 Statement regarding computation of net income per
share.
27.1 Financial Data Schedule
(1) To be filed by amendment. Confidential treatment will be requested
as to certain portions of this exhibit.
<PAGE>
Exhibit 11.1
C-CUBE MICROSYSTEMS INC.
COMPUTATION OF NET INCOME PER SHARE
Quarter and Six Months Ended June 30, 1997 and 1996
(in thousands, except per share amounts)
Quarter Ended Six Months Ended
June 30, June 30,
---------------------- --------------------
1997 1996 1997 1996
--------- --------- -------- --------
Net income $ 7,684 $ 13,846 $ 23,079 $ 27,427
========= ========= ======== ========
Weighted average common
shares outstanding 36,430 33,072 36,323 32,906
Common share equivalents
related to stock options 1,698 2,625 1,713 2,963
--------- --------- -------- --------
Weighted average common and
equivalent shares 38,128 35,697 38,036 35,869
========= ========= ======== ========
Net income per share $0.20 $0.39 $0.61 $0.76
========= ========= ======== ========
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