<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 September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-23596
___________________
C-CUBE MICROSYSTEMS INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0192108
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1778 McCarthy Boulevard
Milpitas, California 95035
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code: (408) 944-6300
Former name, former address and former fiscal year, if changed since last
year: N/A
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of October 31, 1997, 36,761,942 shares of the registrant's Common Stock
were outstanding.
=============================================================================
<PAGE>
C-CUBE MICROSYSTEMS INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
Condensed Consolidated Statements of Operations
Quarter and nine months ended September 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
September 30, December 31,
1997 1996
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $136,911 $76,241
Short-term investments 4,835 6,005
Receivables -- net 45,004 40,706
Inventories 26,912 28,056
Deferred taxes 15,118 18,423
Other current assets 13,737 23,246
-------- --------
Total current assets 242,517 192,677
Property and equipment -- net 24,388 22,653
Production capacity rights 19,425 46,200
Distribution rights -- net 1,689 1,812
Purchased technology -- net 10,279 12,895
Other assets 6,204 3,278
-------- --------
Total $304,502 $279,515
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ -- $ 24,500
Accounts payable 15,423 18,320
Accrued liabilities 30,144 17,823
Deferred contract revenue 2,281 6,710
Current portion of long-term obligations 660 837
-------- --------
Total current liabilities 48,508 68,190
Long-term obligations 89,820 87,700
Deferred taxes 3,024 4,440
-------- --------
Total liabilities 141,352 160,330
Minority interest in subsidiary 490 613
Stockholders' equity:
Common stock, $0.001 par value, 50,000
shares authorized; shares outstanding:
1997 -- 36,688; 1996 -- 36,013 202,105 191,044
Deferred stock compensation -- (250)
Notes receivable from stockholders -- (305)
Accumulated translation adjustments (1,521) (1,238)
Unrealized loss on investments -- (13)
Accumulated deficit (37,924) (70,666)
-------- --------
Total stockholders' equity 162,660 118,572
-------- --------
Total $304,502 $279,515
======== ========
See notes to condensed consolidated financial statements.
<PAGE>
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
----------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
Net revenues $ 81,717 $ 83,180 $246,947 $224,238
Costs and expenses:
Cost of revenues 36,750 37,428 109,003 102,968
Research and development 16,798 12,637 47,860 28,850
Selling, general and
administrative 13,555 10,785 38,965 26,879
Purchased in-process
technology -- 131,349 -- 131,349
-------- --------- -------- --------
Total 67,103 192,199 195,828 290,046
-------- --------- -------- --------
Income (loss) from operations 14,614 (109,019) 51,119 (65,808)
Other income (expense), net (33) (59) (1,635) 649
-------- --------- -------- --------
Income before income taxes
and minority interest 14,581 (109,078) 49,484 (65,159)
Income tax expense 4,958 8,679 16,865 24,490
-------- --------- -------- --------
Income before minority interest 9,623 (117,757) 32,619 (89,649)
Minority interest in net
income (loss) of subsidiary (40) -- (123) 681
-------- --------- -------- --------
Net income (loss) $ 9,663 $(117,757) $ 32,742 $(90,330)
======== ========= ======== ========
Net income (loss) per share $ 0.25 $ (3.46) $ 0.85 $ (2.71)
======== ========= ======== ========
Shares used in computation 39,246 34,078 38,440 33,297
======== ========= ======== ========
See notes to condensed consolidated financial statements.
<PAGE>
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income (loss) $ 32,742 $(90,330)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Minority interest in subsidiary (123) 681
Depreciation and amortization 12,343 5,040
Purchased in-process technology -- 131,349
Deferred income taxes 2,766 (10,739)
Changes in assets and liabilities:
Receivables (4,441) (15,763)
Inventories 1,119 (10,573)
Production capacity rights -- (24,500)
Other current assets 11,576 (1,356)
Accounts payable (2,895) (6,692)
Accrued liabilities 6,011 16,850
Income taxes payable 3,373 5,850
-------- --------
Net cash provided by (used in) operating
activities 62,471 (183)
-------- --------
Cash flows from investing activities:
Sales and maturities of short-term investments 12,050 38,301
Purchases of short-term investments (10,827) (48,297)
Capital expenditures (10,951) (12,507)
Acquisition of business -- (58,568)
Other assets 98 375
-------- --------
Net cash used in investing activities (9,630) (80,696)
-------- --------
Cash flows from financing activities:
Notes payable -- net -- (1,866)
Repayments of capital lease obligations (460) (499)
Sale of common stock, net of notes receivable 8,090 4,317
Collection of stockholder notes receivable 305 91
-------- --------
Net cash provided by financing activities 7,935 2,043
-------- --------
Exchange rate impact on cash and equivalents (106) (122)
-------- --------
Net increase (decrease) in cash and equivalents 60,670 (78,958)
Cash and equivalents, beginning of period 76,241 133,414
-------- --------
Cash and equivalents, end of period $136,911 $ 54,456
======== ========
Supplemental schedule of noncash investing
and financing activities:
Unrealized gain (loss) on investments $ 13 $ (13)
Purchase of production capacity rights for
note payable -- (24,500)
Forgiveness of note payable for production
capacity rights 24,500 --
Supplemental disclosure of cash flow information --
Cash paid during the period for:
Interest $ 2,914 $ 3,173
Income taxes 5,169 19,595
See notes to condensed consolidated financial statements.
<PAGE>
C-CUBE MICROSYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of presentation
The unaudited condensed consolidated financial statements contained in
this report have been prepared by C-Cube Microsystems Inc. ("C-Cube" or
the "Company"). In the opinion of management, such financial statements
include all normal recurring adjustments and accruals necessary for a
fair presentation of the Company's financial position as of
September 30, 1997, and the results of operations for the quarters and
nine months ended September 30, 1997 and 1996 and cash flows for the
nine months ended September 30, 1997 and 1996. Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted in accordance with the rules and regulations of the
Securities and Exchange Commission. This unaudited quarterly information
should be read in conjunction with the audited consolidated financial
statements of C-Cube and the notes thereto included in the Company's
Annual Report to Stockholders for the year ended December 31, 1996.
The fluctuations in revenues and operating income experienced by the
Company in recent quarters are not necessarily indicative of future
results. In addition, in view of the significant growth in recent years,
C-Cube believes that period-to-period comparisons of its financial
results should not be relied upon as an indication of future
performance.
2. Inventories
Inventories are stated at the lower of cost or market. Cost is based on
standard costs which approximate actual cost on a first-in, first-out
basis. Inventories consist of:
September 30, December 31,
1997 1996
------- -------
(in thousands)
Finished goods $11,994 $22,817
Work-in-process 9,770 2,898
Raw materials 5,148 2,341
------- -------
Total $26,912 $28,056
======= =======
3. Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("SFAS 128"). The Company is required to adopt SFAS 128 in
the fourth quarter of fiscal 1997 and will restate at that time earnings
per share ("EPS") data for prior periods to conform with SFAS 128.
Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires the
Company to present both basic and diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income by the weighted average
of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
If SFAS 128 had been in effect during the current and prior year
periods, basic EPS would have been $0.26 and $(3.46) for the quarters
ended September 30, 1997 and 1996, respectively, and $0.90 and $(2.71)
for the nine months ended September 30, 1997 and 1996, respectively.
Diluted EPS under SFAS 128 would not have been significantly different
from EPS currently reported for the periods.
In June 1997, the FASB adopted Statements of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," which requires that
an enterprise report, by major components and a single total, the change
In its net assets during the period from nonowner sources; and No. 131
"Disclosures about Segments of an Enterprise and Related Information,"
which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. Adoption of
these statements will not impact the Company's consolidated financial
position, results of operations or cash flows. Both statements are
effective for fiscal years beginning after December 15, 1997, with
earlier application permitted.
<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 Company has attempted to identify
forward-looking statements in this report by placing an asterisk (*)
following each sentence containing such statements.
Quarter Ended September 30, 1997
The following table sets forth certain operating data as a percentage
of net revenues for the quarters ended September 30, 1997 and 1996:
Quarter Ended September 30,
---------------------------
1997 1996
-------- --------
Net revenues 100.0% 100.0%
Costs and expenses:
Cost of revenues 45.0 45.0
Research and development 20.6 15.2
Selling, general and administrative 16.6 13.0
Purchased in-process technology 0.0 157.9
----- -----
Total 82.1 231.1
----- -----
Income (loss) from operations 17.9 (131.1)
Interest income (expense), net (0.0) (0.1)
----- -----
Income (loss) before income taxes and
minority interest 17.8 (131.1)
Income tax expense 6.1 10.4
----- -----
Income (loss) before minority interest 11.8 (141.6)
Minority interest in net income (loss)
of subsidiary 0.0 0.0
----- -----
Net income (loss) 11.8% (141.6)%
===== =====
The Company's quarterly and annual operating results have been, and
will continue to be, affected by a wide variety of factors that could have
a material adverse effect on revenues and profitability during any
particular period, including the level of orders which are received and can
be shipped in a quarter, the rescheduling or cancellation of orders by its
customers, competitive pressures on selling prices, changes in product or
customer mix, availability and cost of foundry capacity and raw materials,
fluctuations in yield, loss of any strategic relationships, C-Cube's
ability to introduce new products and technologies on a timely basis,
unanticipated problems in the performance of the Company's next generation
or cost-reduced products, the ability to successfully introduce products in
accordance with OEM design requirements and design cycles, new product
introductions by the Company's competitors, market acceptance of products
of both C-Cube and its customers, supply constraints for other components
incorporated into its customers' products, fluctuations in the Japanese yen
to U.S. dollar exchange rate, and the level of expenditures in
manufacturing, research and development, and sales, general and
administrative functions.
In addition, C-Cube's operating results are subject to fluctuation in
the markets for its customers' products, particularly the consumer
electronics market, which has been extremely volatile in the past, and the
satellite broadcast and wireless cable markets, which are in an early
stage, creating uncertainty with respect to product volume and timing. The
Company has devoted a substantial portion of its research and development
efforts in recent quarters to developing chips used in Digital Video Disk
("DVD") systems. The Company's DVD products are subject to the new product
risks described in the preceding paragraph, including in particular C-
Cube's ability to timely introduce these products and the market's
acceptance of them, which could have a materially adverse affect on its
operating results. Furthermore, to the extent the Company is unable to
fulfill its customers' purchase orders on a timely basis, these orders may
be canceled due to changes in demand in the markets for its customers'
products. Historically, the Company has generally shipped a substantial
portion of its product in the last month of a given quarter. A significant
portion of C-Cube's expenses are fixed in the short term, and the timing of
increases in expenses is based in large part on the Company's forecast of
future revenues. As a result, if revenues do not meet the Company's
expectations, it may be unable to quickly adjust expenses to levels
appropriate to actual revenues, which could have a material adverse effect
on the Company's business and results of operations.
Due to the Company's dependence on the consumer electronics market, the
substantial seasonality of sales in that market could impact the Company's
revenues and net income. In particular, C-Cube believes that there is
seasonality in the Asia-Pacific region related to the Chinese New Year,
which falls within the first calendar quarter, which would indicate
relatively lower product demand from mid-first quarter until mid-third
quarter.* If the future geographic mix of the Company's sales shifts
towards the U.S. and Europe, C-Cube would anticipate higher revenues and
net income in the fourth calendar quarter as system manufacturers in these
areas make purchases in preparation for their holiday season, and
comparatively less revenues and net income in the first and second calendar
quarters.*
As a result of the foregoing, the Company's operating results and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in net revenues or net income from levels expected by
securities analysts could have an immediate and significant adverse effect
on the trading price of the Company's common stock.
The market price of C-Cube's common stock has fluctuated significantly
since its initial public offering in April 1994. The market price of the
common stock could be subject to significant fluctuations in the future
based on factors such as announcements of new products by C-Cube or its
competitors, quarterly fluctuations in C-Cube's financial results or other
semiconductor companies' financial results, changes in analysts' estimates
of C-Cube's financial performance, general conditions in the semiconductor
and digital video networking industries, conditions in the financial
markets and general conditions in the global economy which might adversely
affect consumer purchasing. In addition, the stock market in general has
experienced extreme price and volume fluctuations, which have particularly
affected the market prices for many high technology companies and which
have often been unrelated to the operating performance of the specific
companies. The market price of C-Cube's common stock has declined
substantially from its historic highs, and may continue to experience
significant fluctuations in the future.
Net Revenues
Net revenues in the third quarter of 1997 were $81.7 million, a
decrease of 1.8% from the $83.2 million reported in the corresponding
quarter a year ago. Revenue from MPEG 1 decoder chips used in VideoCD
players, sold primarily in China, decreased from the third quarter of 1996
due to price reductions made in response to competition. A significant
increase in the volume of shipments of such products partially offset the
price reduction. Revenue from the Company's family of encoder products
increased primarily due to sales of encoder systems developed by the
Company's subsidiary, DiviCom Inc. ("DiviCom"), which was acquired in the
third quarter of 1996.
International revenues accounted for 65% of net revenues for the third
quarter, compared to 56% for the same period last year. The rise in
international sales as a percentage of total sales is primarily due to a
shift in encoder revenue from the U.S. market to Europe. The Company
expects that international revenues will continue to represent a
significant portion of net revenues. The Company's success will depend in
part upon its ability to manage international marketing and sales
operations and manufacturing relationships. In addition, C-Cube purchases a
substantial portion of its assembly services from foreign suppliers.
C-Cube's international manufacturing and sales are subject to changes in
foreign political and economic conditions and to other risks including
currency or export/import controls, changes in tax laws, tariffs and
freight rates and changes in the ownership and/or leadership of
international customers that may result in delayed or canceled orders. For
example, China and Taiwan comprise substantial markets for consumer
electronics products utilizing the Company's MPEG 1 decoder products, such
as VideoCD players. As a consequence, any political or economic instability
in such countries could significantly reduce demand for products from
certain of the Company's major customers. The Company has made a
significant investment in additional foundry capacity in Taiwan and is
subject to the risk of political instability in Taiwan, including but not
limited to the potential for conflict between Taiwan and the People's
Republic of China. The Company manufactures and sells product to customers
in Korea and is subject to the risk of economic and political instability
in Korea, including the potential for conflict between North and South
Korea. In addition, the Company sells certain of its products in
international markets and buys certain products from its foundries in
currencies other than the U.S. dollar and as a result, currency
fluctuations could have a material adverse effect on the Company's business
and results of operations. With respect to international sales that are
denominated in U.S. dollars, increases in the value of the U.S. dollar
relative to foreign currencies can increase the effective price of and
reduce demand for the Company's products relative to competitive products
priced in the local currency. The United States has considered trade
sanctions against Japan and has had disputes with China relating to trade
and human rights issues. If trade sanctions were imposed, Japan or China
could enact trade sanctions in response. Because a number of the Company's
current and prospective customers and suppliers are located in Japan and
China, trade sanctions, if imposed, could have a material adverse effect on
C-Cube's business and results of operations. Similarly, protectionist trade
legislation in either the United States or foreign countries could have a
material adverse effect on the Company's ability to manufacture or to sell
its products in foreign markets.
Gross Margin
C-Cube's gross margin percentage for the third quarter of 1997 was the
same as the prior year quarter at 55.0%. Although the average selling
prices of the Company's products have declined, this has been mostly offset
by lower product transition costs and reduced product costs. The Company
has been able to reduce product costs through the negotiation of lower
foundry wafer prices, the adoption of finer geometry fabrication processes
and the redesign of products to reduce die size. The negotiation of lower
wafer prices was facilitated by the surplus of foundry capacity during the
past year.
The markets into which C-Cube sells its products are subject to extreme
price competition. Thus, the Company expects to continue to experience
declines in the selling prices of its products over the life cycle of each
product.* In particular, C-Cube expects to continue to experience
significant price competition in the markets for decoder products.* Due to
an increasing percentage of sales represented by lower margin MPEG 1 and
MPEG 2 decoder products and to decreasing selling prices of certain
products, the Company anticipates that its gross margin percentages may
decrease in the future.* In order to offset or partially offset declines in
the selling prices of its products, C-Cube must continue to reduce the
costs of products through product design changes, manufacturing process
changes, volume discounts, yield improvements and other savings negotiated
with its manufacturing subcontractors. Since the Company does not believe
that it can continually achieve cost reductions which fully offset the
price declines of its products, it expects gross margin percentages to
decline for existing products over their life cycles.*
C-Cube does not operate its own manufacturing facilities and must make
volume commitments to subcontractors at prices that remain fixed over
certain periods of time. Therefore, the Company may not be able to reduce
its costs as rapidly as its competitors who perform their own
manufacturing. Failure of the Company to design and introduce, in a timely
manner, lower cost versions of existing products or higher gross margin new
products or to successfully manage its manufacturing subcontractor
relationships would have a material adverse effect on C-Cube's gross
margins.
Research and Development Expenses
In the third quarter of 1997, research and development expenses were
$16.8 million, or 21% of net revenues, as compared with $12.6 million, or
15% of net revenues in the third quarter of 1996. Excluding the DiviCom
acquisition-related charges, research and development expenses would have
been $11.2 million or 14% of net revenues in the third quarter of 1996. The
increase in research and development expenses primarily represents
additional employee-related costs associated with increases in product
engineering staff, reflecting the Company's continuing efforts to provide
digital video solutions at the chip and systems levels.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $13.6
million, or 17% of net revenues, in the third quarter of 1997, as compared
to $10.8 million, or 13% of net revenues, for the same quarter last year.
Excluding the DiviCom acquisition-related charges, selling, general and
administrative expenses would have been $10.0 million or 12% of net
revenues in the third quarter of 1996. The increase in spending was
primarily due to increased headcount and related expenses, increased travel
costs and higher advertising and sales promotion costs.
Other Income (Expense)
Other expense, net of other income, was $33,000 for the third quarter
of 1997, a decrease from the net other expense amount of $59,000 for the
third quarter of 1996. The improvement over the prior year quarter is
primarily due to higher interest income earned on higher average cash and
investment balances.
Income Tax Expense
The Company's effective tax rate for the third quarter of 1997 was 34%.
The Company's effective tax rate is less than the combined federal and
state statutory rate primarily due to tax credits and foreign taxes.
Nine Months Ended September 30, 1997
The following table sets forth certain operating data as a percentage
of net revenues for the nine months ended September 30, 1997 and 1996:
Nine months Ended September 30,
-------------------------------
1997 1996
-------- --------
Net revenues 100.0% 100.0%
Costs and expenses:
Cost of revenues 44.1 45.9
Research and development 19.4 12.9
Selling, general and administrative 15.8 12.0
Purchased in-process technology 0.0 58.6
----- -----
Total 79.3 129.3
----- -----
Income (loss) from operations 20.7 (29.3)
Interest income (expense), net (0.7) 0.3
----- -----
Income (loss) before income taxes
and minority interest 20.0 (29.1)
Income tax expense 6.8 10.9
----- -----
Income (loss) before minority interest 13.2 (40.0)
Minority interest in net income
(loss) of subsidiary (0.0) 0.3
----- -----
Net income (loss) 13.3% (40.3)%
===== =====
Net Revenues
Net revenues for the nine months ending September 30, 1997 were $246.9
million, a 10.1% increase from $224.2 million in revenues during the
corresponding period in 1996. Revenue from the Company's family of encoder
products increased primarily due to sales of encoder systems developed by
DiviCom, which was acquired in the third quarter of 1996. The Company also
began volume shipments of its MPEG 2 decoder chips used in DVD systems.
Revenue from MPEG 1 decoder chips used in VideoCD players decreased from
the comparable nine month period of 1996 due to price reductions made in
response to competition. The decreased prices were partially offset by a
significant increase in volume shipments of such products.
Gross Margin
C-Cube's gross margin percentage increased to 55.9% in the first nine
months of 1997 from 54.1% in the prior year period. The improvement in the
gross margin percentage is due primarily to lower product transition costs,
reduced product costs and a shift in product mix to the higher margin
family of encoder products. These changes were partially offset by
decreases in average selling prices for the Company's products.
Research and Development Expenses
In the first nine months of 1997, research and development expenses
were $47.9 million or 19% of net revenues, as compared to $28.9 million, or
13% of net revenues, in the comparable prior year period. Excluding the
DiviCom acquisition-related charges, research and development expenses
would have been $27.5 million or 12% of net revenues in the first nine
months of 1996. The increase in research and development expenses primarily
represents additional employee-related costs associated with increases in
product engineering staff, reflecting the Company's continuing efforts to
provide digital video solutions at the chip and systems levels.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $39.0
million, or 16% of net revenues in the first nine months of 1997, as
compared to $26.9 million, or 12% of net revenues for the same period last
year. Excluding the DiviCom acquisition-related charges, selling, general
and administrative expenses would have been $26.1 million or 12% of net
revenues in the first nine months of 1996. The increase was primarily due
to increased headcount and related expenses, increased travel costs and
higher advertising and sales promotion costs.
Other Income (Expense)
Other expense, net of other income, was $1.6 million for the first nine
months of 1997, a decrease from the net other income amount of $0.6 million
for the nine months ending September 30, 1996. The decrease is primarily
due to lower average cash and investment balances during the first nine
months of 1997 compared to the same period last year, due to the $65.7
million paid in conjunction with the acquisition of DiviCom in August 1996,
and foreign exchange losses on the Company's yen denominated assets.
Income Tax Expense
The Company's effective tax rate for the first nine months of 1997 was
34%. The Company's effective tax rate is less than the combined federal and
state statutory rate primarily due to tax credits and foreign taxes.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments were $141.7 million
at September 30, 1997 as compared to $82.2 million at the end of 1996.
Working capital increased to $194.0 million at September 30, 1997 from
$124.5 million at the end of 1996.
The Company's operating activities generated cash of $62.5 million in
the first nine months of 1997, mainly from operating income, reduced
prepaid expenses and increased accrued liabilities, partially offset by an
increase in accounts receivable. Accounts receivable increased as a
substantial portion of the Company's shipments were made on letters of
credit in December 1996 and collected before the quarter end. Shipments
made in September 1997 followed a more normal pattern and thus days
outstanding increased from an abnormally low 38 days at year-end 1996 to 50
days at the end of the third quarter of 1997.
C-Cube's investing activities, exclusive of the sales and maturities of
$12.1 million and purchases of $10.8 million of short-term investments used
cash of $10.9 million primarily for capital expenditures.
Cash provided by financing activities was $7.9 million, consisting of
proceeds from sales of stock pursuant to employee stock plans and the
collection of stockholder notes receivable, partially offset by payments of
debt.
C-Cube Japan has yen denominated credit lines with a group of Japanese
banks. At September 30, 1997 there were no borrowings under these lines.
The Company has an available bank line of credit of $30 million. The
line of credit expires May 1, 1999. The line of credit agreement requires
the Company, among other things, to maintain a minimum tangible net worth,
quarterly net income (no more than one quarterly loss per fiscal year), and
certain financial ratios. In addition, this agreement prohibits the payment
of cash dividends. Borrowings bear interest at LIBOR plus 1.25% or the
bank's prime rate. At September 30, 1997, the Company was in compliance
with these covenants, and there were no borrowings under this line.
In the second quarter of 1996, the Company expanded and formalized its
relationship with Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC") to
provide additional wafer production capacity in the years 1996 to 2001. The
agreement with TSMC provided that TSMC would produce and ship wafers to C-
Cube at specified prices and required C-Cube to make two advance payments
totaling $49 million. An advance payment of $24.5 million was made in June
1996.
In May 1997, the Company amended its agreement with TSMC which resulted
in a reduction of the Company's future wafer purchase commitments and the
elimination of the remaining prepayment of $24.5 million. TSMC will apply
the original prepayment against a portion of the wafer cost as product is
delivered to C-Cube. Accordingly, the prepaid amount, which has been
allocated between current and long-term assets, will be amortized to
inventory as wafers are received. At September 30, 1997, $4.6 million of
the remaining $24.1 million production capacity rights is included in other
current assets.
Based on current plans and business conditions, C-Cube expects that its
cash, cash equivalents and short-term investments together with any amounts
generated from operations and available borrowings will be sufficient to
meet the Company's cash requirements for at least the next 12 months.
However, there can be no assurance that the Company will not be required to
seek other financing sooner or that such financing, if required, will be
available on terms satisfactory to the Company. In addition, the Company
has considered and will continue to consider various possible transactions
to secure additional foundry capacity, which could include, without
limitation, equity investments in, prepayments to, deposits with or loans
to foundries in exchange for guaranteed capacity, "take or pay" contracts
that commit the Company to purchase specified quantities of wafers over
extended periods or joint ventures or other partnership relationships with
foundries.
<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 and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------- -------------
10.39 Amendment to Lease Agreement with APT-IND/APTS
Realty, Inc. dated September 2, 1997.
10.40 Amendment to Loan Agreement with Comerica Bank-
California dated October 10, 1997.
11.1 Statement regarding computation of net income per
share.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
<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: November 14, 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
------- -------------
10.39 Amendment to Lease Agreement with APT-IND/APTS
Realty, Inc. dated September 2, 1997.
10.40 Amendment to Loan Agreement with Comerica Bank-
California dated October 10, 1997.
11.1 Statement regarding computation of net income per
share.
27.1 Financial Data Schedule
<PAGE>
Exhibit 11.1
C-CUBE MICROSYSTEMS INC.
COMPUTATION OF NET INCOME PER SHARE
Quarter and Nine Months Ended September 30, 1997 and 1996
(in thousands, except per share amounts)
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- --------------------
1997 1996 1997 1996
--------- --------- -------- --------
Net income (loss) $ 9,663 $(117,757) $ 32,742 $(90,330)
========= ========= ======== ========
Weighted average common
shares outstanding 36,606 34,078 36,417 33,297
Common share equivalents
related to stock options 2,640 n/a 2,023 n/a
--------- --------- -------- --------
Weighted average common and
equivalent shares 39,246 34,078 38,440 33,297
========= ========= ======== ========
Net income (loss) per share $ 0.25 $ (3.46) $ 0.85 $ (2.71)
========= ========= ======== ========
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 136,911
<SECURITIES> 4,835
<RECEIVABLES> 45,004
<ALLOWANCES> 0
<INVENTORY> 26,912
<CURRENT-ASSETS> 242,517
<PP&E> 53,554
<DEPRECIATION> 29,166
<TOTAL-ASSETS> 304,502
<CURRENT-LIABILITIES> 48,508
<BONDS> 0
0
0
<COMMON> 202,105
<OTHER-SE> (39,445)
<TOTAL-LIABILITY-AND-EQUITY> 304,502
<SALES> 246,947
<TOTAL-REVENUES> 246,947
<CGS> 109,003
<TOTAL-COSTS> 109,003
<OTHER-EXPENSES> 86,825
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,635
<INCOME-PRETAX> 49,484
<INCOME-TAX> 16,865
<INCOME-CONTINUING> 32,742
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,742
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.85
</TABLE>
<PAGE>
AMENDMENT No. 6 TO LEASE AGREEMENT
This Amendment No. 6 to Lease Agreement (the "Sixth Amendment") is made
and entered into as of September 2, 1997 by and between APT-IND/APTS
REALTY, INC., a Delaware corporation, successor in interest to San
Bernardino County Employees Retirement Association ("Landlord"), and
C-Cube Microsystems Inc., a Delaware corporation ("Tenant"), with
reference to the following facts:
RECITALS
A. WHEREAS, San Bernardino County Employees Retirement Association ("San
Bernardino County"), Landlord's predecessor-in-interest, and Tenant
have entered into that certain Lease Agreement dated as of an
unspecified date in August, 1991, and that certain Lease Amendment
dated October 19, 1992, and that certain Amendment No. 2 to Lease
dated January 8, 1993, and that certain Amendment No. 3 to Lease
dated June 15, 1993, and that certain Amendment No. 4 to Lease dated
December 9, 1993, and that certain Amendment No. 5 to Lease dated
July 21, 1994 (collectively the "Lease"), for the premises consisting
or 48,384 rentable square feet located at 580 Cottonwood, Milpitas,
California ("Oak Creek I") and 32,832 rentable square feet located at
1778 McCarthy Boulevard ("Oak Creek II"), Milpitas, California (the
"Premises") as such Premises are more fully described in the Lease.
B. WHEREAS, San Bernardino County has assigned its interest in the Lease
to Landlord.
C. WHEREAS, the Lease provided for two (2) consecutive options to extend
the Term of the Lease (the "First Option to Extend" and the "Second
Option To Extend") for a period of two (2) years each (the "First
Extension Period" and the "Second Extension Period"). The Lease also
provided for a specified monthly Base Rent for the First Extension
Period and the Second Extension Period.
D. WHEREAS, Tenant has exercised its First Option To Extend the Lease in
accordance with Section 5 of Addendum No. 1 to the Lease, and Section
10 of the Lease Amendment to the Lease.
E. WHEREAS, Landlord and Tenant have agreed to extend the Term of the
Lease accordingly, subject to the terms and conditions set forth in
this Sixth Amendment.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, and other good and valuable consideration. the receipt
and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. Recitals: Landlord and Tenant hereby agree that the herein above
recitals are true and correct.
2. Definitions: Unless defined otherwise in this Sixth Amendment,
all definitions used in this Sixth Amendment, shall have the same
meaning and definition as given them in the Lease.
3. Term: The Term of the Lease shall be extended from December 31, 1997
to December 31, 1999 (the "Extended Term").
4. Base Rent: The monthly Base Rent payable by Tenant shall be set forth
below commencing on January 1, 1998:
Monthly Periods Monthly Rate/NNN Monthly Base Rent
01/1/98-12/31/99 $0.65 $52,790.40
5. Tenant has hereby exercised its First Option to Extend, and Tenant
shall have only one further option to extend the Lease. Such
option is referred to herein as the Second Option to Extend.
6. Effect of Amendment: Except as modified herein, the terms and
conditions of the Lease shall remain unmodified and continue in
full force and effect. In the event of any conflict between the
terms and conditions of the Lease and this Sixth Amendment, the
terms and conditions of this Sixth Amendment shall prevail.
7. Authority: Subject to the provisions of the Lease, this Sixth
Amendment shall be binding upon and inure to the benefit of the
parties hereto, their respective heirs, legal representatives,
successors and assigns. Each party hereto and the persons signing
below warrant that person signing below on such party's behalf is
authorized to do so and to bind such party to the terms of this
Sixth Amendment.
8. The terms and provisions of the Lease are hereby incorporated in
this Sixth Amendment.
IN WITNESS WHEREOF, the parties have executed this Sixth Amendment as of
the date and year first above written.
LANDLORD:
APT-IND/APTS REALTY, INC.,
a Delaware corporation
By: /s/ Gene Reilly
------------------
Gene Reilly
Vice President
Date: 9/29/97
------------------
TENANT:
C-Cube Microsystems, Inc.,
a Delaware corporation
By: /s/ Mark Allen
---------------------
Printed Name: Mark Allen
-------------
Title: VP Operations
-------------------
Date: 9/10/97
-------------------
FIRST AMENDMENT
TO
AMENDED AND RESTATED LOAN AGREEMENT
This First Amendment to Amended and Restated Loan Agreement (this
"Amendment") is entered into as of October 10, 1997, by and between
Comerica Bank-California ("Bank") and C-Cube Microsystems, Inc.
("Borrower").
RECITALS
Borrower and Bank are parties to that certain Amended and
Restated Loan Agreement dated as of September 27, 1996 (the
"Agreement"). Borrower and Bank desire to amend the terms of the
Agreement in accordance with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. Amendments to Agreement. The Agreement is amended as
follows:
a. The following defined terms in Section 1.1 are amended
in their entirety to read as follows:
"Committed Line" means Thirty Million Dollars
($30,000,000).
"Maturity Date" means May 1, 1999.
b. Subsection (a) of Section 2.1.1 is amended in its
entirety to read as follows:
"(a) Subject to the terms and conditions of this
Agreement, Bank agrees to issue or cause to be issued Letters of
Credit for the account of Borrower in an aggregate outstanding
face amount not to exceed (i) the Committed Line minus (ii) the
then outstanding principal balance of the Advances, provided that
the face amount of outstanding Letters of Credit (including drawn
but unreimbursed Letters of Credit and any Letter of Credit
Reserve) shall not in any case exceed Fifteen Million Dollars
($15,000,000). Each Letter of Credit shall have an expiry date no
later than one hundred eighty (180) days after the Maturity Date,
provided that Borrower's Letter of Credit reimbursement
obligation shall be secured by cash on terms acceptable to Bank
at any time after the Maturity Date. All Letters of Credit shall
be, in form and substance, acceptable to Bank in its sole
discretion and shall be subject to the terms and conditions of
Bank's form of standard Application and Letter of Credit
Agreement. All amounts actually paid by Bank in respect of a
Letter of Credit shall, when paid, constitute an Advance under
this Agreement."
c. Clause (a) of Section 5.3 is amended to read as
follows:
"(a) as soon as available, but in any event within
forty-five (45) days after the end of each fiscal quarter, a
company prepared consolidated balance sheet and income statement
covering Borrower's consolidated operations during such period,
certified by a Responsible Officer;"
d. Section 6.3 is amended in its entirety to read as
follows:
"6.3 Mergers or Acquisitions. Merge or consolidate, or
permit any of its Subsidiaries to merge or consolidate, with or
into any other business organization, or acquire, or permit any
of its Subsidiaries to acquire, all or substantially all of the
capital stock or property of another Person, provided Borrower
may enter into mergers, consolidations or acquisitions if no
Event of Default has occurred and is continuing or would exist
immediately after the consummation of such transaction (i)
between any Subsidiaries or between Borrower and any Subsidiary
or (ii) in which the consideration is stock (in any amount) or in
cash in an amount less than Sixty Million Dollars ($60,000,000)
provided that, in any such transaction Borrower is the surviving
entity following the consummation of such transaction."
e. Exhibit A to the Agreement is replaced with Exhibit A
attached hereto.
f. The Agreement shall be and hereby is supplemented by
the Libor Supplement to Agreement (the "Supplement") attached
hereto as Appendix 1, which shall form a part of and is
incorporated into the Agreement.
2. Fees and Expenses. Borrower agrees to pay to Bank a fee
equal to Seventy-Five Thousand Dollars ($75,000), which fee shall be
deemed to be fully earned and nonrefundable as of the date hereof,
provided that Bank, in its sole discretion, may waive such fee or any
portion thereof if Borrower maintains sufficient reserves in its
depository accounts with Bank. Any portion of such fee not waived by
Bank shall be payable on demand, or if no demand is made, then
quarterly in arrears. In addition, as a condition to the effectiveness
of this Amendment, Borrower shall pay to Bank all Bank Expenses
incurred in connection with the preparation and negotiation of this
Amendment.
3. Other Defined Terms. Unless otherwise defined, all
capitalized terms in this Amendment shall be as defined in the
Agreement. Except as amended, the Agreement remains in full force and
effect and is hereby ratified and confirmed.
4. Representations and Warranties. Borrower represents and
warrants that the Representations and Warranties contained in the
Agreement are true and correct as of the date of this Amendment
(except such representations and warranties to be expressly true as of
a specific date), and that no Event of Default has occurred.
5. Promissory Note. As a condition to the effectiveness of
this Amendment, Borrower shall execute and deliver to Bank a Revolving
Promissory Note in the form of Exhibit A hereto. Upon receipt by Bank
of such Revolving Promissory Note, duly executed and delivered by
Borrower, Bank shall cancel and return to Borrower the previously
existing Revolving Promissory Note.
6. Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment
as of the first date above written.
C-CUBE MICROSYSTEMS, INC.
By: /s/ John J. Hagedorn
---------------------------------
Title: VP / CFO
---------------------------------
COMERICA BANK-CALIFORNIA
By: /s/ Alan Jepsen
---------------------------------
Title: VP and Assistant Manager
---------------------------------
EXHIBIT A
REVOLVING PROMISSORY NOTE
$30,000,000 San Jose, California
Date: October 10, 1997
C-CUBE MICROSYSTEMS, INC., ("Borrower"), for value received,
hereby promises to pay to the order of COMERICA BANK-CALIFORNlA
("Bank"), in lawful money of the United States of America, pursuant to
that certain Loan Agreement dated as of September 27, 1996, by and
between Borrower and Bank, as amended (the "Loan Agreement"), (i) the
principal amount of $30,000,000 or, if lesser, (ii) the principal
amount of all Advances outstanding as of the maturity date hereof.
This Note is the promissory note referred to in the Loan
Agreement. All terms defined in the Loan Agreement shall have the same
definitions when used herein, unless otherwise defined herein.
Borrower further promises to pay interest on each Advance
hereunder in like funds on the principal amount hereof from time to
time outstanding from the date hereof until paid in full, at a rate or
rates per annum and payable on the dates determined pursuant to the
Loan Agreement.
Payment on this Note shall be applied in the manner set forth in
the Loan Agreement. The Loan Agreement contains provisions for
acceleration of the maturity of Advances hereunder upon the occurrence
of certain stated events and also provides for optional and mandatory
prepayments of principal hereof prior to any stated maturity upon the
terms and conditions therein specified.
All Advances made by Bank to Borrower pursuant to the Loan
Agreement shall be recorded by Bank on the books and records of Bank.
The failure of Bank to record any Advance or any prepayment or payment
made on account of the principal balance hereof shall not limit or
otherwise affect the obligation of Borrower under this Note and under
the Loan Agreement to pay the principal, interest and other amounts
due and payable under the Advances.
Any principal or interest payments on this Note not paid when
due, whether at stated maturity, by acceleration or otherwise, shall
bear interest at the Default Rate.
Upon the occurrence of a default hereunder or an Event of Default
under the Loan Agreement, all unpaid principal, accrued interest and
other amounts owing hereunder shall, at the option of Bank, be
immediately collectible by or on behalf of Bank pursuant to the Loan
Agreement and applicable law.
Borrower waives presentment and demand for payment, notice of
dishonor, protest and notice of protest of this Note, and shall pay
all costs of collection when incurred, including reasonable attorneys'
fees, costs and expenses. The right to plead any and all statutes of
limitations as a defense to any demand hereunder is hereby waived to
the full extent permitted by law.
This Note shall be governed by, and construed and enforced in
accordance with, the laws of the State of California, excluding
conflict of laws principles that would cause the application of the
laws of any other jurisdiction.
The provisions of this Note shall inure to the benefit of and be
binding upon any successor to Borrower and shall extend to any holder
hereof.
C-CUBE MICROSYSTEMS, INC.
By: /s/ John J. Hagedorn
--------------------------------------
Printed Name: John J. Hagedorn
--------------------------------------
Title: VP / CFO
--------------------------------------
APPENDIX 1
LIBOR SUPPLEMENT TO AGREEMENT
This LIBOR Supplement to Agreement (the "Supplement") is a
supplement to the Amended and Restated Loan Agreement dated as of
September 27, 1996, between Comerica Bank-California ("Bank") and
C-Cube Microsystems, Inc. ("Borrower"), as amended (the "Agreement")
and forms a part of and is incorporated into the Agreement. Except as
otherwise defined in this Supplement, capitalized terms shall have the
meanings assigned in the Agreement.
1. Definitions.
"Base Rate Advances" means any Advances made or a portion thereof
on which interest is payable based on the Base Rate in accordance with
the terms hereof.
"Business Day" means a day of the year (a) that is not a
Saturday, Sunday or other day on which banks in the State of
California or the City of London are authorized or required to close
and (b) on which dealings are carried on in the interbank market in
which Bank customarily participates.
"Interest Period" means for each LIBOR Rate Advance, a period of
approximately one, two or three months as the Borrower may elect,
provided that the last day of an Interest Period for a LIBOR Rate
Advance shall be determined in accordance with the practices of the
LIBOR interbank market as from time to time in effect, provided
further in all cases such period shall expire not later than the
applicable Maturity Date.
"Interest Rate" shall mean as to: (a) Base Rate Advances, a rate
equal to the Base Rate; and (b) LIBOR Rate Advances, a rate of 1.25%
per annum in excess of the LIBOR Rate (based on the LIBOR Rate
applicable for the Interest Period selected by the Borrower).
"LIBOR Base Rate" means, for any Interest Period for a LIBOR Rate
Advance, the rate of interest per annum determined by Bank to be the
per annum rate of interest at which deposits in United States Dollars
are offered to Bank in the London interbank market in which Bank
customarily participates at 11:00 A.M. (local time in such interbank
market) two (2) Business Days before the first day of such Interest
Period for a period approximately equal to such Interest Period and in
an amount approximately equal to the amount of such Advance.
"LIBOR Rate" shall mean, for any Interest Period for a LIBOR Rate
Advance, a rate per annum (rounded upwards, if necessary, to the
nearest 1/16 of 1%) equal to (i) the LIBOR Base Rate for such Interest
Period divided by (ii) 1 minus the Reserve Requirement for such
Interest Period.
"LIBOR Rate Advances" means any Advances made or a portion
thereof on which interest is payable based on the LIBOR Rate in
accordance with the terms hereof.
"Regulatory Change" means, with respect to Bank, any change on or
after the date of this Agreement in United States federal, state or
foreign laws or regulations, including Regulation D, or the adoption
or making on or after such date of any interpretations, directives or
requests applying to a class of lenders including Bank of or under any
United States federal or state, or any foreign, laws or regulations
(whether or not having the force of law) by any court or governmental
or monetary authority charged with the interpretation or
administration thereof.
"Reserve Requirement" means, for any Interest Period, the average
maximum rate at which reserves (including any marginal, supplemental
or emergency reserves) are required to be maintained during such
Interest Period under Regulation D against "Eurocurrency liabilities"
(as such term is used in Regulation D) by member banks of the Federal
Reserve System. Without limiting the effect of the foregoing, the
Reserve Requirement shall reflect any other reserves required to be
maintained by Bank by reason of any Regulatory Change against (i) any
category of liabilities which includes deposits by reference to which
the LIBOR Rate is to be determined as provided in the definition of
"LIBOR Base Rate" or (ii) any category of extensions of credit or
other assets which include Advances.
2. Requests for Advances; Confirmation of Initial Advances.
Each LIBOR Rate Advance shall be made upon the irrevocable written
request of Borrower received by Bank not later than 11:00 a.m. (San
Jose, California time) on the Business Day three (3) Business Days
prior to the date such Advance is to be made. Each such notice shall
specify the date such Advance is to be made, which day shall be a
Business Day; the amount of such Advance, the Interest Period for such
Advance, and comply with such other requirements as Bank determines
are reasonable or desirable in connection therewith.
Each written request for a LIBOR Rate Advance shall be in the
form of a LIBOR Rate Advance Form as set forth on Exhibit 1, which
shall be duly executed by a Responsible Officer.
3. Conversion/Continuation of Advances.
(a) Borrower may from time to time submit in writing a
request that Base Rate Advances be converted to LIBOR Rate Advances or
that any existing LIBOR Rate Advances continue for an additional
Interest Period. Such request shall specify the amount of the Base
Rate Advances which will constitute LIBOR Rate Advances (subject to
the limits set forth below) and the Interest Period to be applicable
to such LIBOR Rate Advances. Each written request for a conversion to
a LIBOR Rate Advance or a continuation of a LIBOR Rate Advance shall
be substantially in the form of a LIBOR Rate Conversion/Continuation
Certificate as set forth on Exhibit 2, which shall be duly executed by
a Responsible Officer. Subject to the terms and conditions contained
herein, three (3) Business Days after Bank's receipt of such a request
from Borrower, such Base Rate Advances shall be converted to LIBOR
Rate Advances or such LIBOR Rate Advances shall continue, as the case
may be provided that:
(i) no Event of Default or event which with notice or
passage of time or both would constitute an Event of Default exists;
(ii) no party hereto shall have sent any notice of
termination of this Supplement or of the Agreement.
(iii) Borrower shall have complied with such
customary procedures as Bank has established from time to time for
Borrower's requests for LIBOR Rate Advances;
(iv) the amount of a LIBOR Rate Advance shall be
$1,000,000 or such greater amount which is an integral multiple of
$100,000; and
(v) Bank shall have determined that the Interest
Period or LIBOR Rate is available to Bank which can be readily
determined as of the date of the request for such LIBOR Rate Advance.
Any request by Borrower to convert Base Rate Advances to LIBOR
Rate Advances or continue any existing LIBOR Rate Advances shall be
irrevocable. Notwithstanding anything to the contrary contained
herein, Bank shall not be required to purchase United States Dollar
deposits in the London interbank market or other applicable LIBOR Rate
market to fund any LIBOR Rate Advances, but the provisions hereof
shall be deemed to apply as if Bank had purchased such deposits to
fund the LIBOR Rate Advances.
(b) Any LIBOR Rate Advances shall automatically convert to
Base Rate Advances upon the last day of the applicable Interest
Period, unless Bank has received and approved a complete and proper
request to continue such LIBOR Rate Advance at least three (3)
Business Days prior to such last day in accordance with the terms
hereof. Any LIBOR Rate Advances shall, at Bank's option, convert to
Base Rate Advances in the event that (i) an Event of Default, or event
which with the notice or passage of time or both would constitute an
Event of Default, shall exist, (ii) this Supplement or the Agreement
shall terminate, or (iii) the aggregate principal amount of the Base
Rate Advances which have previously been converted to LIBOR Rate
Advances, or the aggregate principal amount of existing LIBOR Rate
Advances continued, as the case may be, at the beginning of an
Interest Period shall at any time during such Interest Period exceeds
the Committed Line. Borrower agrees to pay to Bank, upon demand by
Bank (or Bank may, at its option, charge Borrower's deposit account)
any amounts required to compensate Bank for any loss (including loss
of anticipated profits), cost or expense incurred by such person, as a
result of the conversion of LIBOR Rate Advances to Base Rate Advances
pursuant to any of the foregoing.
(c) On all Advances, Interest shall be payable by Borrower
to Bank monthly in arrears not later than the last day of each
calendar month at the applicable Interest Rate.
4. Additional Requirements/Provisions Regarding LIBOR Rate
Advances; Etc.
(a) If for any reason (including voluntary or mandatory
prepayment or acceleration), Bank receives all or part of the
principal amount of a LIBOR Rate Advance prior to the last day of the
Interest Period for such Advance, Borrower shall immediately notify
Borrower's account officer at Bank and, on demand by Bank, pay Bank
the amount (if any) by which (i) the additional interest which would
have been payable on the amount so received had it not been received
until the last day of such Interest Period exceeds (ii) the interest
which would have been recoverable by Bank by placing the amount so
received on deposit in the certificate of deposit markets or the
offshore currency interbank markets or United States Treasury
investment products, as the case may be, for a period starting on the
date on which it was so received and ending on the last day of such
Interest Period at the interest rate determined by Bank in its
reasonable discretion. Bank's determination as to such amount shall
be conclusive absent manifest error.
(b) Borrower shall pay to Bank, upon demand by Bank, from
time to time such amounts as Bank may determine to be necessary to
compensate it for any costs incurred by Bank that Bank determines are
attributable to its making or maintaining of any amount receivable by
Bank hereunder in respect of any Advances relating thereto (such
increases in costs and reductions in amounts receivable being herein
called "Additional Costs"), in each case resulting from any Regulatory
Change which:
(i) changes the basis of taxation of any amounts
payable to Bank under this Supplement in respect of any Advances
(other than changes which affect taxes measured by or imposed on the
overall net income of Bank by the jurisdiction in which such Bank has
its principal office); or
(ii) imposes or modifies any reserve, special deposit
or similar requirements relating to any extensions of credit or other
assets of, or any deposits with or other liabilities of Bank
(including any Advances or any deposits referred to in the definition
of "LIBOR Base Rate"); or
(iii) imposes any other condition affecting this
Supplement (or any of such extensions of credit or liabilities).
Bank will notify Borrower of any event occurring after the date of the
Agreement which will entitle Bank to compensation pursuant to this
section as promptly as practicable after it obtains knowledge thereof
and determines to request such compensation. Bank will furnish
Borrower with a statement setting forth the basis and amount of each
request by Bank for compensation under this Section 4. Determinations
and allocations by Bank for purposes of this Section 4 of the effect
of any Regulatory Change on its costs of maintaining its obligations
to make Advances or of making or maintaining Advances or on amounts
receivable by it in respect of Advances, and of the additional amounts
required to compensate Bank in respect of any Additional Costs, shall
be conclusive absent manifest error.
(c) Borrower shall pay to Bank, upon the request of Bank,
such amount or amounts as shall be sufficient (in the sole good faith
opinion of such Bank) to compensate it for any loss, costs or expense
incurred by it as a result of any failure by Borrower to borrow a
LIBOR Rate Advance on the date for such borrowing specified in the
relevant notice of borrowing hereunder.
(d) If Bank shall determine that the adoption or
implementation of any applicable law, rule, regulation or treaty
regarding capital adequacy, or any change therein, or any change in
the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by Bank (or
its applicable lending office) with any respect or directive regarding
capital adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency, has or would have the
effect of reducing the rate of return on capital of Bank or any person
or entity controlling Bank (a "Parent") as a consequence of its
obligations hereunder to a level below that which Bank (or its Parent)
could have achieved but for such adoption, change or compliance
(taking into consideration its policies with respect to capital
adequacy) by an amount deemed by Bank to be material, then from time
to time, within 15 days after demand by Bank, Borrower shall pay to
Bank such additional amount or amounts as will compensate Bank for
such reduction. A statement of Bank claiming compensation under this
Section and setting forth the additional amount or amounts to be paid
to it hereunder shall be conclusive absent manifest error.
(e) If at any time Bank, in its sole and absolute
discretion, determines that: (i) the amount of the LIBOR Rate Advances
for periods equal to the corresponding Interest Periods are not
available to Bank in the offshore currency interbank markets, or (ii)
the LIBOR Rate does not accurately reflect the cost to Bank of lending
the LIBOR Rate Advance, then Bank shall promptly give notice thereof
to Borrower, and upon the giving of such notice Bank's obligation to
make the LIBOR Rate Advances shall terminate, unless Bank and the
Borrower agree in writing to a different interest rate Advances shall
terminate, unless Bank and the Borrower agree in writing to a
different interest rate applicable to LIBOR Rate Advances. If it
shall become unlawful for Bank to continue to fund or maintain any
Advances, or to perform its obligations hereunder, upon demand by
Bank, Borrower shall prepay the Advances in full with accrued interest
thereon and all other amounts payable by Borrower hereunder
(including, without limitation, any amount payable in connection with
such prepayment pursuant to Section 4(a)).
IN WITNESS WHEREOF, the undersigned have executed this LIBOR
Supplement to Agreement as of the first date above written.
C-CUBE MICROSYSTEMS, INC.
By: /s/ John J. Hagedorn
------------------------------------
Title: VP / CFO
------------------------------------
COMERICA BANK-CALIFORNIA
By: /s/ Alan Jepsen
------------------------------------
Title: VP and Assistant Manager
------------------------------------
EXHIBIT 1
LIBOR RATE ADVANCE FORM
The undersigned hereby certifies as follows:
I, _______________________, am the duly elected and acting
_______________________ of C-Cube Microsystems, Inc. ("Borrower").
This certificate is delivered pursuant to Section 2 of that
certain LIBOR Supplement to Agreement together with the Loan
Agreement by and between Borrower and Comerica Bank-California
("Bank") (the "Agreement"). The terms used in this Borrowing
Certificate which are defined in the Agreement have the same
meaning herein as ascribed to them therein.
Borrower hereby requests on ______________, 19__ a LIBOR Rate
Advance (the "Advance") as follows:
(a) The date on which the Advance is to be made is
______________, 19___.
(b) The amount of the Advance is to be _____________
($___________), for an Interest Period of month(s).
All representations and warranties of Borrower stated in the
Agreement are true, correct and complete in all material respects
as of the date of this request for a loan; provided, however, that
those representations and warranties expressly referring to
another date shall be true, correct and complete in all material
respects as of such date.
IN WITNESS WHEREOF, this LIBOR Rate Advance Form is executed by
the undersigned as of this ______ day of ______________, 19__.
C-CUBE MICROSYSTEMS, INC.
By:
---------------------------------
Title:
---------------------------------
For Internal Bank Use Only
LIBOR Pricing Date LIBOR Rate LIBOR Rate Variance Maturity Date
EXHIBIT 2
LIBOR RATE CONVERSION/CONTINUATION CERTIFICATE
The undersigned hereby certifies as follows:
I, _____________, am the duly elected and acting ________________
of C-Cube Microsystems, Inc. ("Borrower").
This certificate is delivered pursuant to Section 2 of that
certain LIBOR Supplement to Agreement together with the Loan Agreement
by and between Borrower and Comerica Bank-California ("Bank") (the
"Agreement"). The terms used in this LIBOR RateConversion/Continuation
Certificate which are defined in the Agreement have the same meaning
herein as ascribed to them therein.
Borrower hereby requests on _________________, 19___ a LIBOR Rate
Advance (the "Advance") as follows:
(a) --- (i) A rate conversion of an existing Base Rate Advance
from a Base Rate Advance to a LIBOR Rate Advance; or
--- (ii) A continuation of an existing LIBOR Rate Advance
as a LIBOR Rate Advance;
[Check (i) or (ii) above]
(b) The date on which the Advance is to be made is ______, 19___.
(c) The amount of the Advance is to be _________($_______), for an
Interest Period of _________ month(s).
All representations and warranties of Borrower stated in the
Agreement are true, correct and complete in all material respects as
of the date of this request for a loan; provided, however, that those
representations and warranties expressly referring to another date
shall be true, correct and complete in all material respects as of
such date.
IN WITNESS WHEREOF, this LIBOR Rate Conversion/Continuation
Certificate is executed by the undersigned as of this _________ day of
_________________ 19___.
C-CUBE MICROSYSTEMS, INC.
By:
---------------------------------
Title:
---------------------------------
For Internal Bank Use Only
LIBOR Pricing Date LIBOR Rate LIBOR Rate Variance Maturity Date
SECOND AMENDMENT
TO
AMENDED AND RESTATED LOAN AGREEMENT
This Second Amendment to Amended and Restated Loan Agreement
(this "Amendment") is entered into as of October 10, 1997, by and
between Comerica Bank-California ("Bank") and C-Cube Microsystems,
Inc. ("Borrower").
RECITALS
Borrower and Bank are parties to that certain Amended and
Restated Loan Agreement dated as of September 27, 1996, as amended
(the "Agreement"). Borrower and Bank desire to amend the terms of the
Agreement in accordance with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. Amendments to Agreement. The Agreement is amended as
follows:
a. Section 5.8 is amended in its entirety to read as
follows:
"5.8 Quick Ratio. Borrower shall maintain, as of the
last day of each calendar quarter, a ratio of Quick Assets to
Current Liabilities of at least 1.75 to 1.0."
b. Section 5.9 is amended in its entirety to read as
follows:
"5.9 Debt-Net Worth Ratio. Borrower shall maintain, as
of the last day of each calendar quarter, a ratio of Total
Liabilities less Subordinated Debt to Tangible Net Worth plus
Subordinated Debt of not more than 0.75 to 1.0."
c. Section 5.10 is amended in its entirety to read as
follows:
"5.10 Tangible Net Worth. Borrower shall maintain, as
of the last day of each calendar quarter, a Tangible Net Worth of
not less than the sum of (i) One Hundred Eighty Million Dollars
($180,000,000), plus (ii) 75% of Borrower's quarterly profits
commencing with the quarter ending September 30, 1997, plus (iii)
100% of the proceeds of the sale or issuance of Borrower's equity
securities or Subordinated Debt from and after September 30,
1997, minus (iv) any in-process research and development expense
write-offs in connection with acquisitions permitted by the terms
of this Agreement, up to a maximum of $50,000,000 during the term
of this Agreement."
d. Section 5.11 is amended in its entirety to read as
follows:
"5.11 Profitability. Borrower shall be profitable on an
operating and after tax basis for each fiscal quarter, except
that Borrower may incur a loss for one fiscal quarter in any
fiscal year of not more than $3,000,000."
e. Exhibit C to the Agreement is replaced with Exhibit C
attached hereto.
2. Fees and Expenses. As a condition to the effectiveness of
this Amendment, Borrower shall pay to Bank all Bank Expenses
incurred in connection with the preparation and negotiation of
this Amendment.
3. Other Defined Terms. Unless otherwise defined, all
capitalized terms in this Amendment shall be as defined in the
Agreement. Except as amended, the Agreement remains in full force
and effect and is hereby ratified and confirmed.
4. Representations and Warranties. Borrower represents
and warrants that the Representations and Warranties contained in
the Agreement are true and correct as of the date of this
Amendment (except such representations and warranties to be
expressly true as of a specific date), and that no Event of
Default has occurred.
5. Counterparts. This Amendment may be executed in two or
more counterparts, each of which shall be deemed an original, but
all of which together shall constitute one instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment
as of the first date above written.
C-CUBE MICROSYSTEMS, INC.
By: /s/ John J. Hagedorn
----------------------------------------------
Title: VP / CFO
----------------------------------------------
COMERICA BANK-CALIFORNIA
By: /s/ Alan Jepsen
----------------------------------------------
Title: VP & Assistant Manager
----------------------------------------------
EXHIBIT C
COMPLIANCE CERTIFICATE
TO: COMERICA BANK-CALIFORNIA
FROM: C-CUBE MICROSYSTEMS, INC.
The undersigned authorized officer of C-Cube Microsystems, Inc.
("Borrower") hereby certifies that in accordance with the terms and
conditions of the Loan Agreement between Borrower and Bank (the
"Agreement"), (i) Borrower is in complete compliance for the period
ending ______________ with all required covenants except as noted
below and (ii) all representations and warranties of Borrower stated
in the Agreement are true and correct in all material respects as of
the date hereof. Attached herewith are the required documents
supporting the above certification. The Officer further certifies that
these are prepared in accordance with Generally Accepted Accounting
Principles (GAAP) and are consistently applied from one period to the
next except as explained in an accompanying letter or footnotes. The
Officer expressly acknowledges that no borrowings may be requested by
Borrower at any time or date of determination that Borrower is not in
compliance with any of the terms of the Agreement, and that such
compliance is determined not just at the date this certificate is
delivered.
Please indicate compliance status by circling Yes/No under "Complies"
column.
Reporting Covenant Required Complies
Quarterly financial statements Quarterly within 45 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
Financial Covenant Required Actual Complies
Maintain on a Quarterly Basis:
Minimum Quick Ratio 1.75:1.0 ____:1.0 Yes No
Maximum Debt/Tangible Net Worth 0.75:1.0 ____:1.0 Yes No
Minimum Tangible Net Worth $180,000,000* $______ Yes No
Profitability: Quarterly $1.00** $______ Yes No
* plus 75% of quarterly profits, plus 100% of proceeds of new equity
or Subordinated Debt.
** Borrower may incur a loss in one quarter in any fiscal year of no
more than $3,000,000.
Comments Regarding Exceptions: See Attached.
Sincerely, ------------------------------
SIGNATURE
------------------------------
TITLE
------------------------------
DATE
