<PAGE> 1
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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, 2000
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. 000-28695
-------------------
C-CUBE MICROSYSTEMS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0528024
(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) 490-8000
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST YEAR:
C-CUBE SEMICONDUCTOR INC.
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 AUGUST 1, 49,179,484 SHARES OF THE REGISTRANT'S COMMON STOCK WERE
OUTSTANDING.
================================================================================
<PAGE> 2
C-CUBE MICROSYSTEMS INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Part I. Financial Information
<S> <C> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 2000 (unaudited) and December 31, 1999 ..................... 3
Condensed Consolidated Statements of Income
Quarters and six months ended June 30, 2000 and 1999 (unaudited)..... 4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999 (unaudited).................. 5
Notes to Condensed Consolidated Financial Statements (unaudited)..... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................. 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk............ 17
Part II. Other Information
Item 1. Legal Proceedings ..................................................... 18
Item 2. Changes in Securities and Use of Proceeds ............................. 18
Item 3. Defaults Upon Senior Securities ....................................... 18
Item 4. Submission of Matters to a Vote of Security Holders ................... 18
Item 5. Other Information ..................................................... 18
Item 6. Exhibits and Reports on Form 8-K ...................................... 18
Signatures .......................................................................... 19
</TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
-2-
<PAGE> 3
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, DECEMBER 31,
2000 1999
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents ................................ $ 44,585 $ 123,145
Short-term investments .............................. 6,298 167,403
Receivables - net ................................... 15,772 12,516
Inventories ......................................... 17,798 8,966
Deferred income taxes and other current assets ...... 17,383 17,395
--------- ---------
Total current assets ........................ 101,836 329,425
Property and equipment - net .......................... 18,683 20,355
Production capacity rights ............................ 24,273 4,985
Distribution rights - net ............................. 1,236 1,318
Purchased technology - net ............................ 1,613 2,307
Deferred taxes and other assets ....................... 76,142 2,393
Net assets of discontinued operations ................. -- 101,157
--------- ---------
Total ....................................... $ 223,783 $ 461,940
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 21,471 $ 24,138
Accrued liabilities ................................. 37,410 20,780
Current portion of long-term obligations ............ 41,530 727
--------- ---------
Total current liabilities ................... 100,411 45,645
Long-term obligations ................................. 2,051 16,842
--------- ---------
Total liabilities ........................... 102,462 62,487
--------- ---------
Minority interest in subsidiary ....................... 735 471
Stockholders' equity:
Common stock ........................................ 132,833 323,756
Accumulated other comprehensive gain (loss) ......... 4,181 (2,014)
Accumulated earnings (deficit) ...................... (16,428) 77,240
--------- ---------
Total stockholders' equity .................. 120,586 398,982
--------- ---------
Total ....................................... $ 223,783 $ 461,940
========= =========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 4
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues ..................................................... $ 61,043 $ 47,507 $ 122,045 $ 105,794
--------- --------- --------- ---------
Costs and expenses:
Cost of revenues ............................................... 27,149 18,700 53,903 42,346
Research and development:
Research and development ..................................... 15,070 13,062 29,223 26,375
Warrant issuance (see note 7) ................................ 12,632 -- 12,632 --
Selling, general and administrative:
Selling, general and administrative .......................... 10,897 8,436 21,646 17,855
Stock-based compensation and merger/spin-off related
payroll taxes (see note 7) ................................... 17,414 -- 20,827 --
--------- --------- --------- ---------
Total ....................................................... 83,162 40,198 138,231 86,576
--------- --------- --------- ---------
Income (loss) from operations .................................... (22,119) 7,309 (16,186) 19,218
Other income, net ................................................ 101 1,937 3,876 3,662
--------- --------- --------- ---------
Income (loss) from continuing operations before income taxes
and minority interest ............................................ (22,018) 9,246 (12,310) 22,880
Income tax benefit (expense) for continuing operations ........... 5,847 (2,604) 3,226 (6,539)
--------- --------- --------- ---------
Income (loss) from continuing operations before minority
interest ......................................................... (16,171) 6,642 (9,084) 16,341
Minority interest in net income of subsidiary .................... 257 261 264 233
--------- --------- --------- ---------
Income (loss) from continuing operations ......................... (16,428) 6,381 (9,348) 16,108
Discontinued operations:
Income (loss) from operations of DiviCom business,
net of taxes ................................................. (11,639) 5,284 (10,087) 8,517
Gain (loss) on disposal of DiviCom business, net of taxes .... 1,158 -- (6,190) --
--------- --------- --------- ---------
Net income (loss) ................................................ (26,909) 11,665 (25,625) 24,625
========= ========= ========= =========
Basic earnings per share amounts:
Income (loss) from continuing operations ..................... $ (0.35) $ 0.16 $ (0.21) $ 0.41
Income (loss) from discontinued operations ................... (0.22) 0.13 (0.36) 0.22
--------- --------- --------- ---------
Net income (loss) ............................................ (0.57) 0.30 (0.56) 0.63
========= ========= ========= =========
Diluted earnings per share amounts:
Income (loss) from continuing operations ..................... $ (0.35) $ 0.15 $ (0.21) $ 0.38
Income (loss) from discontinued operations ................... (0.22) 0.12 (0.36) 0.20
--------- --------- --------- ---------
Net income (loss) ............................................ (0.57) 0.28 (0.56) 0.59
========= ========= ========= =========
Basic shares used in computation ................................. 47,203 39,338 45,543 39,003
========= ========= ========= =========
Diluted shares used in computation ............................... 47,203 42,925 45,543 42,144
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 5
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................................... $ (25,625) $ 24,625
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary gain on repurchase of convertible notes,
net of taxes ..................................................... -- (33)
Minority interest in subsidiary ................................... 264 233
Depreciation and amortization ..................................... 6,442 5,336
Deferred income taxes ............................................. (24,076) (5,037)
Changes in assets and liabilities:
Receivables .................................................... (3,256) (3,606)
Inventories .................................................... (8,832) 4,564
Other current assets ........................................... 2,028 (5,419)
Accounts payable ............................................... (2,667) 8,225
Accrued liabilities ............................................ 17,792 5,339
Income taxes payable ........................................... (1,058) 551
Deferred revenue ............................................... -- (1,462)
Production capacity rights ..................................... (19,442) 11,700
--------- ---------
Net cash provided by (used in) continuing operations ................. (58,430) 45,016
Net cash provided by (used in) discontinued operations ............... 17,515 (40,836)
--------- ---------
Net cash provided by (used in) operations ............................ (40,915) 4,180
--------- ---------
Cash flows from investing activities:
Sales and maturities of short-term investments ....................... 171,970 130,368
Purchases of short-term investments .................................. (3,941) (127,617)
Capital expenditures ................................................. (2,549) (4,561)
Other assets ......................................................... 582 (2,085)
--------- ---------
Net cash provided by (used in) investing activities .................. 166,062 (3,895)
--------- ---------
Cash flows from financing activities:
Cash transferred in connection with merger/spin-off .................. (338,093) --
Loan from Harmonic ................................................... 117,980 --
Repayment of Harmonic loan ........................................... (117,980) --
Bank loan ............................................................ 40,000 --
Repayments of capital lease obligations .............................. (26) (117)
Sale of common stock ................................................. 94,655 20,785
Repurchase of convertible subordinated notes ......................... (10) (3,271)
--------- ---------
Net cash provided by (used in) financing activities .................. (203,474) 17,397
--------- ---------
Exchange rate impact on cash and equivalents ........................... (233) (19)
--------- ---------
Net increase (decrease) in cash and equivalents ........................ (78,560) 17,663
Cash and equivalents, beginning of period .............................. 123,145 93,180
--------- ---------
Cash and equivalents, end of period .................................... 44,585 110,843
========= =========
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on investments ................................ 6,428 (284)
Equipment acquired under lease ....................................... 1,500 --
Conversion of convertible debt into common stock ..................... 17,570 --
Net assets transferred to Harmonic ................................... (71,267) --
Deferred tax asset from step-up in basis ............................. 58,544 --
Supplemental schedule of cash flow information: Cash paid during
the period for:
Interest ........................................................... 191 739
Income taxes ....................................................... 32,695 19,632
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE> 6
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 June 30, 2000, and the results of operations for the
quarters and six months ended June 30, 2000 and 1999 and cash flows for
the six months ended June 30, 2000 and 1999. 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 C-Cube
Semiconductor Inc.'s Amended Form S-1 filed with the Securities and
Exchange Commission on March 22, 2000 and C-Cube Microsystems Inc.'s
Form 10-K for the year ended December 31, 1999.
2. Merger/spin-off
C-Cube entered into an Amended and Restated Agreement and Plan of
Merger and Reorganization with Harmonic Inc. on December 9, 1999. In
accordance with this agreement, on May 2, 2000 C-Cube's semiconductor
division was spun-off into an independent company, and on May 3, 2000
C-Cube's DiviCom division was merged with and into Harmonic Inc.
Accordingly, as required by Accounting Principles Board Opinion No. 30
and Emerging Issues Task Force Issue No. 95-18, the results of
operations of the Semiconductor division (the continuing entity) are
reported separately from the results of operations of the DiviCom
division (the discontinued entity). The results of operations in prior
periods have been restated and certain prior period amounts have been
reclassified to conform to the current period presentation. These
restatements and reclassifications had no effect on net income or
stockholders' equity.
The results of discontinued operations are broken out into two
line items on the face of the Condensed Consolidated Statements of
Income included herein. Income (loss) from operations of DiviCom
represents the net income (loss) of DiviCom operations for the quarter
to date and year to date through the date of merger and includes
revenues of $1.2 million and $46.6 million, and tax benefit of $7.6
million and $6.8 million, respectively. Revenues and taxes for the three
months ended June 30, 1999 were $46.6 million and ($2.5) million and for
the six months ended June 30, 1999 were $84.8 million and $4.1 million,
respectively. Loss on disposal of DiviCom includes direct costs, net of
taxes, associated with the merger/spin-off transaction which were
incurred by the Company.
In connection with the merger, the Company transferred the net
assets of DiviCom to Harmonic, incurred a tax liability in connection
with the spin-off of the semiconductor business and recorded a deferred
tax asset relating to and increase in the tax basis of the Company's
assets. The transfer of the net assets and the tax liability has been
reflected as a return of capital to the stockholders. The following
table represents the changes to stockholders' equity for the six-month
period ended June 30, 2000:
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE ACCUMULATED
COMMON GAIN EARNINGS
STOCK (LOSS) (DEFICIT) TOTAL
------ ------ --------- -----
<S> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1999..... $323,756 $(2,014) $ 77,240 $ 398,982
Net loss........................ (25,625) (25,625)
Accumulated translation
adjustments.................... (233) (233)
Unrealized gain on investments.. 6,428 6,428
Common stock issued under stock
plans.......................... 94,655 94,655
Tax benefit from employee stock
transactions.................. 92,457 92,457
Conversion of convertible debt
into common stock.............. 17,560 17,560
Tax liability resulting from
spin-off of semiconductor
business....................... (421,025) (421,025)
Transfer of net assets and
additional cash of DiviCom to
Harmonic...................... (33,114) (68,043) (101,157)
Deferred taxes relating to
increased tax basis of
semiconductor assets.......... 58,544 58,544
-------- ------- --------- ---------
BALANCES, JUNE 30, 2000........ $132,833 $ 4,181 $(16,428) $ 120,586
======== ======= ========= =========
</TABLE>
-6-
<PAGE> 7
3. Inventories
Inventories are stated at the lower of cost (first-in, first-out)
or market. Cost is computed using standard costs which approximate
actual cost on a first-in, first-out basis. Inventories consist of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Finished goods .......... $ 5,289 $ 4,165
Work-in-process ......... 3,630 3,564
Raw materials ........... 8,879 1,237
------- -------
Total ......... $17,798 $ 8,966
======= =======
</TABLE>
4. Bank line of credit
At June 30, 2000, the Company had a $40.0 million bank line of
credit ($40.0 million outstanding at June 30, 2000) that expires on May
31, 2002. Under terms of the commitment, the bank line will be reduced
by $4.0 million each quarter, beginning with the September 30, 2000
quarter, until the outstanding balance is reduced to $25.0 million.
Borrowings bear interest at LIBOR plus 2.0% or the bank's prime rate
(9.5% at June 30, 2000). The line of credit agreement requires that the
Company, among other things, maintain a minimum tangible net worth and
certain financial ratios and is collateralized by the current assets of
the Company. At June 30, 2000, the Company was in compliance with the
covenants.
5. Earnings per share
The following table sets forth the computation of basic and
diluted earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Income (loss) from continuing operations ............ $(16,428) $ 6,381 $ (9,348) $ 16,108
Income (loss) from discontinued DiviCom business .... (11,639) 5,284 (10,087) 8,517
Loss on disposal of DiviCom business ................ 1,158 -- (6,190) --
-------- -------- -------- --------
Numerator for basic earnings per share .............. (26,909) 11,665 (25,625) 24,625
Add back interest income after tax related to
convertible shares ............................... -- 186 -- 391
-------- -------- -------- --------
Numerator for diluted earnings per share ............ (26,909) 11,851 (25,625) 25,016
======== ======== ======== ========
Denominator:
Weighted-average shares - denominator for basic
earnings per share ............................... 47,203 39,338 45,543 39,003
Convertible shares .................................. -- 633 -- 675
Dilutive common stock equivalents, using treasury
stock method ..................................... -- 2,954 -- 2,466
-------- -------- -------- --------
Denominator for diluted earnings per share .......... 47,203 42,925 45,543 42,144
======== ======== ======== ========
Basic earnings (loss) per share ..................... $ (0.57) $ 0.30 $ (0.56) $ 0.63
======== ======== ======== ========
Diluted earnings (loss) per share ................... $ (0.57) $ 0.28 $ (0.56) $ 0.59
======== ======== ======== ========
</TABLE>
Dilutive common stock equivalents for the quarter and six months ended
June 30, 2000 were 5,409 and 8,352, respectively.
-7-
<PAGE> 8
6. Comprehensive income
For the quarters ended June 30, 2000 and 1999, comprehensive
income (loss), which was comprised of the Company's net income for the
periods, changes in accumulated translation adjustments and unrealized
gains (losses) on investments, was ($20.6) million and $11.4 million,
respectively. For the six months ended June 30, 2000 and 1999,
comprehensive income (loss) was ($19.4) million and $24.2 million,
respectively.
7. Significant transactions
Securities purchase agreement and warrant
On February 10, 2000, C-Cube entered into a Securities Purchase
Agreement ("Agreement") with Thomson Multimedia S.A., a French societe
anonyme, whereby, on May 8, 2000, C-Cube issued and sold to Thomson
474,747 shares of non-voting common stock at a price of $19.78 per share
and issued to Thomson a warrant to purchase 949,494 shares of common
stock. The warrants were fully vested upon issuance and will become
exercisable at a price of $19.78 per share one week prior to the
expiration date of May 8, 2007, or in part prior to the expiration date
upon the achievement of certain milestones. The Company calculated the
fair value of the warrants using the Black-Scholes model and recorded a
charge, within research and development, of $12.6 million in the second
quarter of 2000. Readers are referenced to C-Cube Semiconductor's
Amended Form S-1 filed with the Securities and Exchange Commission on
March 22, 2000 for more information regarding the Agreement.
Stock-based compensation
In connection with the merger and spin-off, the Company recorded
stock-based compensation expense, within selling, general and
administrative, of $15.5 million related to the accelerated vesting of
options for certain employees of the Company.
Merger/spin-off related payroll taxes
As a condition of the Amended and Restated Agreement and Plan of
Merger and Reorganization with Harmonic Inc., all vested employee stock
options were to be exercised before the merger date or they would be
forfeited. The resulting exercises generated an additional payroll tax
expense, within selling, general and administrative, of $1.9 million
dollars.
8. Recently issued accounting standards
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-5, "Reporting on the
Costs of Start-up Activities," which requires costs of start-up
activities and organization costs to be expensed as incurred. As
required under SOP 98-5, the Company has expensed organizational costs
associated with the merger/spin-off as incurred.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position
and measure those instruments at fair value. Adoption of this statement
is not expected to materially
-8-
<PAGE> 9
impact the Company's consolidated financial position, results of
operations or cash flows. The Company is required to adopt this
statement in the first quarter of fiscal year 2001, with early adoption
permitted.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition,"
which provides guidance on the recognition, presentation and disclosure
of revenue in financial statements filed with the Securities and
Exchange Commission. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosures related
to revenue recognition policies. SAB 101 is effective for the fiscal
quarter beginning October 1, 1000, however earlier adoption is
permitted. The Company has not yet determined the impact, if any, that
adoption will have on the consolidated financial statements.
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. The forward-looking statements involve risks and
uncertainties. 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, those described elsewhere in this report and those
described in C-Cube Semiconductor Inc.'s Amended Form S-1 filed with the
Securities and Exchange Commission on March 22, 2000, C-Cube Microsystems Inc.'s
Form 10-K for the year ended December 31, 1999, other Form 10-Qs and other
reports under the Securities Exchange Act of 1934. Such forward-looking
statements include, but are not limited to, those statements marked with an
asterisk (*) in this report. The Company assumes no obligation to update any
forward-looking statements.
QUARTER ENDED JUNE 30, 2000
The following table sets forth certain operating data as a percentage of
net revenues for the quarters ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30,
2000 1999
------ ------
<S> <C> <C>
Net revenues ............................................ 100.0% 100.0%
Costs and expenses:
Cost of revenues ...................................... 44.5 39.4
Research and development
Research and development ........................... 24.7 27.5
Warrant issuance ................................... 20.7 --
Selling, general and administrative
Selling, general and administrative ................ 17.9 17.7
Stock-based compensation and merger/spin-off
related payroll taxes ......................... 28.5 --
------ ------
Total ......................................... 136.3 84.6
------ ------
Income (loss) from operations ........................... (36.3) 15.4
Other income, net ....................................... 0.2 4.1
------ ------
Income (loss) from continuing operations before income
taxes and minority interest .......................... (36.1) 19.5
Income tax benefit (expense) for continuing operations .. 9.6 (5.5)
------ ------
Income (loss) from continuing operations before
interest minority .................................... (26.5) 14.0
Minority interest in net income of subsidiary ........... 0.4 0.5
------ ------
Income (loss) from continuing operations ................ (26.9) 13.5
Discontinued operations:
Income (loss) from operations of DiviCom
business, net of taxes .............................. (9.9) 11.1
Loss on disposal of DiviCom business, net of taxes .... (7.3) --
------ ------
Net income (loss) ....................................... (44.1)% 24.6%
</TABLE>
-9-
<PAGE> 10
MERGER/SPIN-OFF
C-Cube entered into an Agreement and Plan of Merger and Reorganization
with Harmonic Inc. on December 9, 1999. In accordance with this agreement, on
May 2, 2000 C-Cube's semiconductor division was spun-off into an independent
company, and on May 3, 2000 C-Cube's DiviCom division was merged with and into
Harmonic Inc. Accordingly, as required by Accounting Principles Board Opinion
No. 30 and Emerging Issues Task Force Issue No. 95-18, the results of operations
of the Semiconductor division (the continuing entity) are reported separately
from the results of operations of the DiviCom division (the discontinued
entity). For more information on the merger/spin-off transaction, readers are
referenced to C-Cube Semiconductor's Amended Form S-1 filed with the SEC on
March 22, 2000 and Harmonic's Amended Form S-4 filed with the SEC on March 24,
2000.
SECURITIES PURCHASE AGREEMENT AND WARRANT
On February 10, 2000, C-Cube entered into a Securities Purchase
Agreement ("Agreement") with Thomson Multimedia S.A., a French societe anonyme,
whereby, on May 8, 2000, C-Cube issued and sold to Thomson 474,747 shares of
non-voting common stock at a price of $19.78 per share and issued to Thomson a
warrant to purchase 949,494 shares of common stock. The warrants were fully
vested upon issuance and will become exercisable at a price of $19.78 per share
one week prior to the expiration date of May 8, 2007, or in part prior to the
expiration date upon the achievement of certain milestones. The Company recorded
a charge of $12.6 million in the second quarter of 2000 for the issuance of the
warrants. Readers are referenced to C-Cube Semiconductor's Amended Form S-1
filed with the Securities and Exchange Commission on March 22, 2000 for more
information regarding the Agreement.
NET REVENUES
Net revenues in the second quarter of 2000 were $61.0 million, an
increase of 28.5% over the $47.5 million reported in the corresponding quarter a
year ago. The increase came in three product areas, the largest increase coming
from chips used in digital set-top boxes. The Company believes the markets for
codecs (single chip encoder/decoder), chips used in DVD players and chips used
in digital set-top boxes will continue to grow, while the market for decoder
chips used in VideoCD and Chaoji VCD applications will gradually decline as the
market becomes saturated and as consumers adopt DVD applications in their
place.*
GROSS MARGIN
C-Cube's gross margin for the second quarter of 2000 was 55.5% compared
to a gross margin of 60.6% for the same quarter last year. This decrease was
primarily the result of an increase in product costs due to tight production
capacity at our wafer suppliers, and due to reductions in the average selling
prices of many of the Company's products due to competitive pricing pressures.
These negative pressures on gross margin were partially offset by changes in
product mix, as sales of products with higher gross margins, such as codecs and
digital set-top boxes, contributed more to revenues in the second quarter of
2000 than the second quarter of 1999.
RESEARCH AND DEVELOPMENT EXPENSES
In the second quarter of 2000, research and development expenses,
excluding warrant charges of $12.6 million, were $15.1 million, or 24.7% of net
revenues, compared with $13.1 million, or 27.5% of net revenues in the second
quarter of 1999. The increase in research and development expenses primarily
represents additional employee-related costs associated with increases in
engineering staff, reflecting the
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<PAGE> 11
Company's continuing efforts to provide industry leading digital video
solutions. The Company anticipates that research and development expenses will
continue to increase in future periods.*
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, excluding the charges
stated below, increased to $10.9 million, or 17.9% of net revenues, in the
second quarter of 2000, compared to $8.4 million, or 17.7% of net revenues, for
the second quarter of 1999. The increase was primarily due to increased
headcount and related expenses, as the Company continues to increase its
international coverage in sales and marketing.
In the second quarter of 2000, the Company recorded $15.5 million of
stock based compensation and $1.9 million of taxes related to stock option
exercises as a condition of the merger/spin-off within selling, general and
administrative expense.
OTHER INCOME (EXPENSE)
Other income, net of other expense, decreased to $0.1 million for the
second quarter of 2000, compared to $1.9 million for the second quarter of 1999.
The decrease from the prior-year quarter is primarily due to less interest
income earned on lower average cash and investment balances due to
merger-related payments made by the Company and interest paid on borrowings made
during the quarter.
INCOME TAX EXPENSE
The Company's effective tax rate for continuing operations in the second
quarter of 2000 was 26.6%. The Company's effective tax rate is less than the
combined federal and state statutory rate primarily due to tax credits and lower
foreign tax rates.
SIX MONTHS ENDED JUNE 30, 2000
The following table sets forth certain operating data as a percentage of
net revenues for the six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
------ ------
<S> <C> <C>
Net revenues .................................................... 100.0% 100.0%
Costs and expenses:
Cost of revenues .............................................. 44.2 40.0
Research and development
Research and development ................................... 23.9 24.9
Warrant issuance ........................................... 10.3 --
Selling, general and administrative
Selling, general and administrative ........................ 17.7 16.9
Stock-based compensation and merger/spin-off
related payroll taxes ................................. 17.1 --
------ ------
Total ................................................. 113.2 81.8
------ ------
Income (loss) from operations ................................... (13.2) 18.2
Other income, net ............................................... 3.2 3.5
------ ------
Income (loss) from continuing operations before
income taxes and minority interest ............................ (10.0) 21.7
Income tax benefit (expense) for continuing operations .......... 2.6 (6.2)
------ ------
Income (loss) from continuing operations before
minority interest ............................................. (7.4) 15.5
Minority interest in net income of subsidiary ................... 0.2 0.2
------ ------
Income (loss) from continuing operations ........................ (7.6) 15.3
Discontinued operations:
Income (loss) from operations of DiviCom business,
net of taxes .......................................... (3.7) 8.0
Loss on disposal of DiviCom business, net of taxes .... (9.7) --
------ ------
Net income (loss) ....................................... (21.0)% 23.3%
</TABLE>
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<PAGE> 12
NET REVENUES
Net revenues for the six months ended June 30, 2000 were $122.0 million,
an increase of 15.4% over the $105.8 million reported in the corresponding
six-month period a year ago. This increase was primarily due to higher volume
sales of chips used in digital set-top boxes. The increase was partially offset
by decreased sales of decoder chips used in VideoCD and Chaoji VCD players, due
to a reduction in shipments and increased price competition. The Company
believes the markets for codecs (single chip encoder/decoder), chips used in DVD
players and chips used in digital set-top boxes will continue to grow, while the
market for decoder chips used in VideoCD and Chaoji VCD applications will
gradually decline as the market becomes saturated and as consumers adopt DVD
applications in their place.*
GROSS MARGIN
C-Cube's gross margin for the six months ended June 30, 2000 was 55.8%
compared to a gross margin of 60.0% for the same six-month period last year.
This decrease was primarily the result of an increase in product costs due to
tight production capacity at our wafer suppliers, and due to reductions in the
average selling prices of many of the Company's products due to competitive
pricing pressures. These negative pressures on gross margin were partially
offset by changes in product mix, as sales of products with higher gross
margins, such as codecs and digital set-top boxes, contributed more to revenues
in the first six months of 2000 than 1999.
RESEARCH AND DEVELOPMENT EXPENSES
In the first six months of 2000, research and development expenses,
excluding $12.6 million of warrant charges, were $29.2 million, or 23.9% of net
revenues, compared with $26.4 million, or 24.9% of net revenues in the first six
months of 1999. The increase in research and development expenses primarily
represents additional employee-related costs associated with increases in
engineering staff, reflecting the Company's continuing efforts to provide
industry leading digital video solutions. The Company anticipates that research
and development expenses will continue to increase in future periods.*
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, excluding the charges
stated below, increased to $21.6 million, or 17.7% of net revenues, in the first
six months of 2000, compared to $17.9 million, or 16.9% of net revenues, for the
first six months of 1999. The increase reflects increased headcount and related
expenses, as the Company continues to increase its international coverage in
sales and marketing.
In the first six months of 2000, the Company recorded $15.5 million of
stock-based compensation and $5.3 million of taxes related to stock options
exercises as a condition of the merger/spin-off within selling, general and
administrative expense.
OTHER INCOME (EXPENSE)
Other income, net of other expense, increased to $3.9 million for the
first six months of 2000, compared to $3.7 million for the first six months of
1999. The improvement over the prior year period is
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<PAGE> 13
primarily due to higher interest income earned on higher average cash and
investment balances and lower interest expense on lower average outstanding debt
balances.
INCOME TAX EXPENSE
The Company's effective tax rate for continuing operations in the first
six months of 2000 was 26.2%. The Company's effective tax rate is less than the
combined federal and state statutory rate primarily due to tax credits and lower
foreign tax rates.
FACTORS THAT MAY AFFECT FUTURE RESULTS
International revenues accounted for 85.0% of net revenues for the
second quarter of 2000, compared to 75.6% for the second quarter of 1999. For
the first half of 2000 and 1999, international revenues accounted for 86.2% and
79.6% of net revenues, respectively. 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. In addition, C-Cube purchases a substantial
portion of its manufacturing 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.
The Asian consumer electronics markets accounted for approximately 60.6%
and 62.2% of total Company sales in the second quarters of 2000 and 1999,
respectively, and 61.3% and 68.8% of total Company sales in first half of 2000
and 1999, respectively and are expected to continue to account for a
substantial, though declining, percentage of sales in the future.* Asia has
experienced economic instability in the past few years, that has resulted in
currency devaluation, falling consumer spending and domestic price deflation.
Any of these factors could significantly reduce the demand for the end user
goods in which the Company's products are incorporated. A significant portion of
the Company's second quarter 2000 sales in Asia were of decoder chips, which are
used in DVD, VideoCD and Chaoji VCD players. The Company believes purchases of
these products are not as likely to be deferred as are purchases of higher
priced consumer durables and production equipment, which have dramatically
impacted U.S. export sales.* However, there can be no assurance that the Company
will not experience reduced sales of its semiconductor products into Asia
because of declining consumer spending or because of its customers' increasing
difficulty in obtaining letters of credit, which the Company generally requires
prior to shipment.
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 chips.* 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
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<PAGE> 14
relationships, would have a material adverse effect on C-Cube's gross margins.
The Company anticipates production capacity at its foundries will continue to be
constrained during the third quarter of 2000 due to higher projected industry
demand for semiconductor products causing a reduction of available capacity.* As
a result, product costs may continue to increase at a rate faster than C-Cube
can offset those increases with other cost-saving measures, which could
adversely effect gross margin during that period.*
The Company's foundry capacity is in Taiwan and is subject to the risk
of political instability and natural disasters in Taiwan, including but not
limited to the potential for conflict between Taiwan and the People's Republic
of China.
In addition, the Company sells certain of its products in international
markets and, as a result, currency fluctuations could have a material adverse
effect on the Company's business and results of operations. The Company
mitigates this risk through the used of foreign currency hedges for transactions
denominated in foreign currencies. However, 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 sell its products in foreign markets.
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,
compatibility of new products with emerging digital video standards, supply
constraints for other components incorporated into its customers' products,
credit risk for international customers not using letters of credit,
fluctuations in foreign currency exchange rates to the U.S. dollar, the level of
expenditures in manufacturing, research and development, and sales, general and
administrative functions, and a recent trend of mergers and acquisitions
creating larger competitors which may have established market share or greater
financial or technical resources than the Company.*
In addition, C-Cube's operating results are subject to fluctuations in
the markets for its customers' products, particularly the consumer electronics
and personal computer markets, which have been extremely volatile in the past.
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 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
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<PAGE> 15
to levels appropriate to actual revenues, which could have a material adverse
effect on the Company's business and results of operations.
The Company's dependence on the Asian consumer electronics market has
started to decline, and the Company believes it will either remain stable or
continue to decline in the future, as growth in the digital set-top and codec
markets generate larger contributions to revenues.* Nevertheless, the
substantial seasonality of sales in the consumer electronics market could impact
the Company's revenues and net income. In particular, C-Cube believes that there
may be seasonality in the Asia-Pacific region related to the Chinese New Year,
which falls within the first calendar quarter, which could result in relatively
lower product demand during the second and third quarters of each year.* If in
the future the 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 regions make purchases
in preparation for the 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 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 the perception of the spin-off of the semiconductor business
into an independent company, announcements of new products by C-Cube or its
competitors, quarterly fluctuations in C-Cube's financial results, quarterly
fluctuations in other semiconductor or digital video networking companies'
financial results, 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.
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<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $50.9 million at
June 30, 2000 compared to $290.5 million at the end of 1999. Working capital
decreased to $1.4 million at June 30, 2000 from $283.8 million at the end of
1999.
The Company's operating activities, exclusive of cash provided by
discontinued operations of $17.5 million, used cash of $58.4 million in the
first half of 2000, primarily from the operating loss of $25.6 million, an
increase in deferred income taxes of $24.1 and an increase in production
capacity right payments of $19.4 million, partially offset by an increase in
accrueds of $17.8 million.
C-Cube's investing activities, exclusive of sales and maturities of
$172.0 million and purchases of $3.9 million of short-term investments, used
cash of $2.0 million, primarily for capital expenditures.
Cash used in financing activities was $203.5 million, primarily from
cash transferred in the merger/spin-off of $338.1 million, partially offset by
the sale of common stock of $94.7 million and bank line of credit proceeds of
$40.0 million.
At June 30, 2000, the Company had a $40.0 million bank line of credit
($40.0 million outstanding at June 30, 2000) that expires on May 31, 2002. Under
terms of the commitment, the bank line will be reduced by $4.0 million each
quarter, beginning with the September 30, 2000 quarter, until the outstanding
balance is reduced to $25.0 million. Borrowings bear interest at LIBOR plus 2.0%
or the bank's prime rate (9.5% at June 30, 2000). The line of credit agreement
requires that the Company, among other things, maintain a minimum tangible net
worth and certain financial ratios and is collateralized by the current assets
of the Company. At June 30, 2000, the Company was in compliance with the
covenants.
The spin-off on May 2, 2000 created a tax obligation of approximately
$421.0 million as calculated under the tax-sharing agreement between C-Cube and
Harmonic that was partially offset by tax benefits totaling $100.4 million. The
tax was determined by the volume weighted-average trading price of each C-Cube
share - $21.74 - on the first day after the distribution. Under the tax-sharing
agreement, C-Cube issued to Harmonic a promissory note of $118.0 million, due
and payable on June 29, 2000 at 15% interest per annum. Subsequent to the
receipt of a $40 million bank line of credit and the receipt of $9.4 million by
Thomson Multimedia S.A. in May, 2000, C-Cube settled the promissory note.
Readers are referenced to C-Cube Semiconductor Inc.'s Amended Form S-1 filed
with the Securities and Exchange Commission on March 22, 2000 and the Company's
Form 8-K filed with the Securities and Exchange Commission on May 3, 2000 for
further details of the tax-sharing agreement and promissory note with Harmonic.
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 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, or at all. In addition, the Company has considered and will
continue to consider various possible transactions with foundries to secure
additional foundry capacity, which could include, without limitation, equity
investments, prepayments, non-refundable deposits or loans in exchange for
guaranteed capacity, "take or pay" contracts that commit the Company to purchase
specified quantities of wafers over extended periods, joint ventures or other
partnership relationships.
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<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosures
involves forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company is exposed to
market risk related to changes in foreign currency exchange rates. The Company
does not use derivative financial instruments for speculative or trading
purposes.
Foreign Currency Exchange Risk. The Company enters into foreign exchange
forward contracts and foreign currency options to hedge certain economic
exposures, balance sheet exposures and inter-company balances against future
movements in the dollar/yen and dollar/pound exchange rates. Gains and losses on
the forward contracts are largely offset by gains and losses on the underlying
exposure. A hypothetical 10% appreciation of the U.S. dollar from June 30, 2000
market rates would increase the unrealized value of the Company's forward
contracts by $0.3 million. Conversely, a hypothetical 10% depreciation of the
U.S. dollar from June 30, 2000 market rates would decrease the unrealized value
of the Company's forward contracts by $0.3 million. In either scenario, the
gains or losses on the forward contracts are largely offset by the gains or
losses on the underlying transactions and consequently a sudden or significant
change in foreign exchange rates would not be expected to have a material impact
on future net income or cash flows.
All of the potential changes noted above are based on sensitivity analyses
performed on the Company's financial positions at June 30, 2000. Actual results
may differ materially.
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<PAGE> 18
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
------- -----------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On May 2, 2000, C-Cube Microsystems Inc. ("C-Cube") entered into
a Promissory Note, a Pledge Agreement and a Parent Guaranty (the
"Financing Agreements") with C-Cube Semiconductor Inc. ("Semi")
and C-Cube Semiconductor II Inc. ("Semi II") The Promissory Note
has been executed by Semi II in favor of C-Cube and is guaranteed
by Semi pursuant to the Parent Guaranty which is secured by the
pledge of the stock of Semi II owned by Semi.
Readers are referenced to C-Cube's Form 8-K filed with the
Securities and Exchange Commission on May 3, 2000 and to the
"Liquidity and Capital Resources" discussion included herein for
further information on the promissory note and the amounts
secured thereunder.
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<PAGE> 19
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 14, 2000 By: /s/ Howard Bailey
------------------------- -------------------------------------
Howard Bailey
Vice President of Finance
and Chief Financial Officer
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<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<S> <C>
27.1 Financial Data Schedule
</TABLE>
