<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 SEPTEMBER 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)
<TABLE>
<S> <C>
DELAWARE 77-0528024
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
1778 MCCARTHY BOULEVARD
MILPITAS, CALIFORNIA 95035
(Address and zip code of principal executive offices)
(408) 490-8000
(Registrant's telephone number, including area code)
C-CUBE SEMICONDUCTOR INC.
(Former name, former address and former fiscal year, if changed since last year)
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, 49,462,996 SHARES OF THE
REGISTRANT'S COMMON STOCK WERE OUTSTANDING.
================================================================================
<PAGE> 2
C-CUBE MICROSYSTEMS INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 2000 (unaudited) and December 31, 1999 ................... 3
Condensed Consolidated Statements of Income
Quarters and nine months ended September 30, 2000 and 1999 (unaudited).. 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999 (unaudited)............... 5
Notes to Condensed Consolidated Financial Statements (unaudited)........ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk ............ 18
Part II. Other Information
Item 1. Legal Proceedings ..................................................... 19
Item 2. Changes in Securities and Use of Proceeds ............................. 19
Item 3. Defaults Upon Senior Securities ....................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ................... 19
Item 5. Other Information ..................................................... 19
Item 6. Exhibits and Reports on Form 8-K ...................................... 19
Signatures ..................................................................... 20
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999(1)
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents ................................... $ 40,118 $ 123,145
Short-term investments ................................. 7,956 167,403
Receivables - net ...................................... 20,073 12,516
Inventories ............................................ 18,877 8,966
Deferred income taxes and other current assets ......... 21,972 17,395
--------- ---------
Total current assets ........................... 108,996 329,425
Property and equipment - net ............................. 17,981 20,355
Production capacity rights ............................... 23,916 4,985
Distribution rights - net ................................ 1,195 1,318
Purchased technology - net ............................... 1,540 2,307
Deferred taxes and other assets .......................... 64,058 2,393
Net assets of discontinued operations .................... -- 101,157
--------- ---------
Total .......................................... $ 217,686 $ 461,940
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................... $ 18,834 $ 24,138
Accrued liabilities .................................... 28,375 17,925
Income taxes payable ................................... -- 2,855
Current portion of long-term obligations ............... 37,349 727
--------- ---------
Total current liabilities ...................... 84,558 45,645
Long-term obligations .................................... 1,868 16,842
--------- ---------
Total liabilities .............................. 86,426 62,487
--------- ---------
Minority interest in subsidiary .......................... 639 471
Stockholders' equity:
Common stock ........................................... 137,794 323,756
Accumulated other comprehensive loss ................... (1,147) (2,014)
Accumulated earnings (deficit) ......................... (6,026) 77,240
--------- ---------
Total stockholders' equity ..................... 130,621 398,982
--------- ---------
Total .......................................... $ 217,686 $ 461,940
========= =========
</TABLE>
--------------
(1) Derived from audited consolidated balance sheet.
See notes to condensed consolidated financial statements.
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<PAGE> 4
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues ............................................ $ 69,022 $ 52,307 $ 191,067 $ 158,101
--------- --------- --------- ---------
Costs and expenses:
Cost of revenues ...................................... 31,051 20,749 84,954 63,095
Research and development:
Research and development ............................ 15,453 13,464 44,676 39,839
Warrant issuance .................................... -- -- 12,632 --
Selling, general and administrative:
Selling, general and administrative ................. 12,568 9,139 34,214 26,994
Stock-based compensation and merger/spin-off
related payroll taxes .............................. -- -- 20,827 --
--------- --------- --------- ---------
Total .............................................. 59,072 43,352 197,303 129,928
--------- --------- --------- ---------
Income (loss) from operations ........................... 9,950 8,955 (6,236) 28,173
Other income, net ....................................... 4,020 2,488 7,897 6,150
--------- --------- --------- ---------
Income from continuing operations before income
taxes and minority interest ........................... 13,970 11,443 1,661 34,323
Income tax expense for continuing operations ............ (3,664) (3,090) (438) (9,629)
--------- --------- --------- ---------
Income from continuing operations before minority
interest ............................................. 10,306 8,353 1,223 24,694
Minority interest in net income (loss) of subsidiary .... (96) 148 168 381
--------- --------- --------- ---------
Income from continuing operations ....................... 10,402 8,205 1,055 24,313
Discontinued operations:
Income (loss) from operations of DiviCom business,
net of taxes ...................................... -- 5,828 (10,087) 14,345
Loss on disposal of DiviCom business, net of taxes... -- -- (6,190) --
--------- --------- --------- ---------
Net income (loss) ....................................... 10,402 14,033 (15,222) 38,658
========= ========= ========= =========
Basic earnings per share amounts:
Income from continuing operations ................... $ 0.21 $ 0.20 $ 0.02 $ 0.62
Income (loss) from discontinued operations .......... -- 0.15 (0.35) 0.36
--------- --------- --------- ---------
Net income (loss) ................................... $ 0.21 $ 0.35 $ (0.33) $ 0.98
========= ========= ========= =========
Diluted earnings per share amounts:
Income from continuing operations ................... $ 0.19 $ 0.19 $ 0.02 $ 0.58
Income (loss) from discontinued operations .......... -- 0.13 (0.35) 0.33
========= ========= ========= =========
Net income (loss) ....................................... $ 0.19 $ 0.32 $ (0.33) $ 0.91
========= ========= ========= =========
Basic shares used in computation ........................ 49,328 40,097 46,805 39,368
========= ========= ========= =========
Diluted shares used in computation ...................... 53,528 45,021 46,805 43,224
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 5
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS), (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .......................................... $ (15,222) $ 38,658
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain from sale of marketable securities and repurchase of
convertible notes, net of taxes ...................... (4,607) (33)
Minority interest in subsidiary ......................... 168 381
Depreciation and amortization ........................... 7,263 14,397
Deferred income taxes ................................... (10,669) (1,973)
Changes in assets and liabilities:
Receivables .......................................... (7,557) (23,758)
Inventories .......................................... (9,911) 3,749
Other current assets ................................. (6,566) 858
Accounts payable ..................................... (5,304) 3,926
Accrued liabilities .................................. 9,315 7,089
Income taxes payable ................................. (1,615) (3,412)
Deferred revenue ..................................... -- (1,169)
Production capacity rights ........................... (19,085) 11,800
--------- ---------
Net cash provided by (used in) continuing operations ....... (63,790) 50,513
Net cash provided by (used in) discontinued operations ..... 17,515 5,912
--------- ---------
Net cash provided by (used in) operations .................. (46,275) 56,425
--------- ---------
Cash flows from investing activities:
Sales and maturities of short-term investments ............. 177,027 188,565
Purchases of short-term investments ........................ (11,275) (247,989)
Capital expenditures ....................................... (2,549) (17,051)
Other assets ............................................... 212 (2,780)
--------- ---------
Net cash provided by (used in) investing activities ........ 163,415 (79,255)
--------- ---------
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 --
Repayment of bank loan ..................................... (4,000) --
Repayments of capital lease obligations .................... (392) (4)
Sale of common stock ....................................... 102,668 40,562
Repurchase of convertible subordinated notes ............... (10) (3,271)
--------- ---------
Net cash provided by (used in) financing activities ........ (199,827) 37,295
--------- ---------
Exchange rate impact on cash and equivalents ................. (340) 391
--------- ---------
Net increase (decrease) in cash and equivalents .............. $ (83,027) $ 14,856
Cash and equivalents, beginning of period .................... 123,145 68,342
--------- ---------
Cash and equivalents, end of period ............................. 40,118 83,198
========= =========
</TABLE>
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<PAGE> 6
<TABLE>
<S> <C> <C>
Supplemental schedule of non-cash investing and
financing activities:
Unrealized gain (loss) on investments.......................... $ 1,206 $ (235)
Equipment acquired under lease................................. 1,500 --
Conversion of convertible debt into common stock............... 17,560 78
Net assets transferred to Harmonic............................. (71,267) --
Deferred tax asset from step-up in basis....................... 50,962 --
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest..................................................... 997 814
Income taxes................................................. 41,413 13,853
</TABLE>
See notes to condensed consolidated financial statements
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<PAGE> 7
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, 2000, and the results of
operations for the quarters and nine months ended September 30, 2000 and 1999
and cash flows for the nine months ended September 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 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 presented on two line items
on the face of the Condensed Consolidated Statements of Income included herein.
For the current year, income (loss) from operations of DiviCom represents the
net income (loss) of DiviCom operations through the date of merger and includes
revenues of $46.6 million, and tax benefit of $6.8 million. Revenues and taxes
for the three months ended September 30, 1999 were $49.1 million and $3.0
million and for the nine months ended September 30, 1999 were $133.8 million and
$7.1 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.
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<PAGE> 8
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 an
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 nine-month period ended September 30, 2000:
<TABLE>
<CAPTION>
ACCUMULATED
OTHER ACCUMULATED
COMPREHENSIVE EARNINGS
COMMON STOCK GAIN (LOSS) (DEFICIT) TOTAL
------------ ------------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1999 ........................ $ 323,756 $ (2,014) $ 77,240 $ 398,982
Net loss ........................................... -- -- (15,222) (15,222)
Accumulated translation adjustments ................ -- (340) -- (340)
Unrealized gain on investments ..................... -- 1,207 -- 1,207
Common stock issued under stock plans .............. 99,488 -- -- 99,488
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 the
semiconductor business ........................... (413,315) -- -- (413,315)
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 ............................ 50,962 -- -- 50,962
--------- --------- --------- ---------
BALANCES, SEPTEMBER 30, 2000 ....................... $ 137,794 $ (1,147) $ (6,026) $ 130,621
========= ========= ========= =========
</TABLE>
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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods............. $ 6,366 $ 4,165
Work-in-process............ 3,096 3,564
Raw materials.............. 9,415 1,237
--------- ---------
Total............ $ 18,877 $ 8,966
========= =========
</TABLE>
4. Bank line of credit
At September 30, 2000, the Company had a $36.0 million bank line of credit
($36.0 million outstanding at September 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, until the outstanding balance is reduced to $25.0 million.
The first $6.0 million of borrowed funds bear interest at LIBOR plus 2.0% (9.5%
at September 30, 2000), with additional borrowings bearing interest at the
bank's prime rate (8.8% at September 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
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<PAGE> 9
current assets of the Company. At September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Income from continuing operations .................. $ 10,402 $ 8,205 $ 1,055 $ 24,313
Income (loss) from discontinued DiviCom business ... -- 5,828 (10,087) 14,345
Loss on disposal of DiviCom business ............... -- -- (6,190) --
-------- -------- -------- --------
Numerator for basic earnings per share ............. 10,402 14,033 (15,222) 38,658
Add back interest income after tax related to
convertible shares .............................. -- 186 -- 577
-------- -------- -------- --------
Numerator for diluted earnings per share ........... 10,402 14,219 (15,222) 39,235
======== ======== ======== ========
Denominator:
Weighted-average shares - denominator for basic
earnings per share .............................. 49,328 40,097 46,805 39,368
Convertible shares ................................. -- 633 -- 660
Dilutive common stock equivalents, using treasury
stock method .................................... 4,200 4,291 -- 3,196
-------- -------- -------- --------
Denominator for diluted earnings per share ......... 53,528 45,021 46,805 43,224
======== ======== ======== ========
Basic earnings (loss) per share .................... $ 0.21 $ 0.35 $ (0.33) $ 0.98
======== ======== ======== ========
Diluted earnings (loss) per share .................. $ 0.19 $ 0.32 $ (0.33) $ 0.91
======== ======== ======== ========
</TABLE>
Options to purchase 5,058 shares of common stock were outstanding during
the nine months ended September 30, 2000 but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares.
6. Comprehensive income
For the quarters ended September 30, 2000 and 1999, comprehensive income,
which was comprised of the Company's net income for the periods, changes in
accumulated translation adjustments and unrealized gains/loss on investments,
was $5.1 million and $14.3 million, respectively. For the nine months ended
September 30, 2000 and 1999, comprehensive income (loss) was ($14.4) million and
$38.8 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 a warrant to purchase
949,494 shares of common stock to Thomson. 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
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<PAGE> 10
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.
Please see the Company's Amendment No. 2 to its Registration Statement on 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 $5.3 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 ("SFAS 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.
SFAS 133 is effective for fiscal years beginning after June 15, 2000. The
Company is evaluating the impact of the adoption of this statement, which is not
expected to materially 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, 2000, however earlier adoption is
permitted. The Company is in the process of determining the impact, if any, that
adoption will have on the consolidated financial statements.
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<PAGE> 11
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 the Company's Amendment No. 2 to its Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on March 22, 2000, the
Company's Form 10-K for the year ended December 31, 1999, other Form 10-Qs and
other reports submitted under the Securities Exchange Act of 1933 and 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 SEPTEMBER 30, 2000
The following table sets forth certain operating data as a percentage of
net revenues for the quarters ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
QUARTER ENDED
SEPTEMBER 30,
------------------
2000 1999
----- -----
<S> <C> <C>
Net revenues ................................................ 100.0% 100.0%
Costs and expenses:
Cost of revenues .......................................... 45.0 39.7
Research and development .................................. 22.4 25.7
Selling, general and administrative ...................... 18.2 17.5
Total ............................................. 85.6 82.9
----- -----
Income from operations ...................................... 14.4 17.1
Other income, net ........................................... 5.8 4.8
----- -----
Income from continuing operations before income taxes and
minority interest .................................... 20.2 21.9
Income tax expense for continuing operations ............. (5.3) (5.9)
----- -----
Income from continuing operations before minority interest... 14.9 16.0
Minority interest in net income (loss) of subsidiary ........ (0.1) 0.3
----- -----
Income from continuing operations ........................... 15.0 15.7
Discontinued operations:
Income from operations of DiviCom business,
net of taxes ............................................ -- 11.1
----- -----
Net income .................................................. 15.0% 26.8%
</TABLE>
NET REVENUES
Net revenues increased 32.0% from $52.3 million in the third quarter of
1999 to $69.0 million in the third quarter of 2000. The increase resulted from
three product areas, but primarily from chips used in digital set-top boxes and
DVD players. 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 VCD and
Chaoji VCD applications will gradually decline as the market becomes saturated
and as consumers choose DVD players over VCD players.*
GROSS MARGIN
The Company's gross margin percentage for the third quarter of 2000 was
55.0% compared to a gross margin percentage of 60.3% for the same quarter last
year. This decrease was primarily due to an increase in product costs resulting
from restricted production capacity of 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 third quarter of 2000 than the third quarter of 1999.
-11-
<PAGE> 12
RESEARCH AND DEVELOPMENT EXPENSES
In the third quarter of 2000, research and development expenses increased
14.8% from $13.5 million in the third quarter of 1999 to $15.5 million in the
third quarter of 2000. The increase in research and development expenses was
primarily attributable to additional employee-related costs associated with
increases in engineering staff and contractors. 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 increased 38.5% from $9.1
million for the third quarter of 1999 to $12.6 million for the third quarter of
2000. The increase was primarily due to increased headcount and related
expenses, in connection with the Company's increased international coverage in
sales and marketing.
OTHER INCOME
Other income, net of other expense, increased to $4.0 million for the third
quarter of 2000, compared to $2.5 million for the third quarter of 1999. The
increase from the prior-year quarter is primarily due to the sale of marketable
securities.
INCOME TAX EXPENSE
The Company's effective tax rate for continuing operations in the third
quarter 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.
NINE MONTHS ENDED SEPTEMBER 30, 2000
The following table sets forth certain operating data as a percentage of
net revenues for the nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
2000 1999
----- -----
<S> <C> <C>
Net revenues ................................................ 100.0% 100.0%
Costs and expenses:
Cost of revenues .......................................... 44.5 39.9
Research and development
Research and development ............................... 23.4 25.2
Warrant issuance ....................................... 6.6 --
Selling, general and administrative
Selling, general and administrative .................... 17.9 17.1
Stock-based compensation and merger/spin-off
related payroll taxes ................................ 10.9 --
----- -----
Total ............................................. 103.3 82.2
----- -----
Income (loss) from operations ............................... (3.3) 17.8
Other income, net ........................................... 4.1 3.9
----- -----
Income from continuing operations before income taxes and
minority interest ........................................ 0.8 21.7
Income tax expense for continuing operations ................ (0.2) (6.1)
----- -----
Income from continuing operations before minority interest .. 0.6 15.6
Minority interest in net income of subsidiary ............... 0.0 0.2
----- -----
Income from continuing operations ........................... 0.6 15.4
Discontinued operations:
Income (loss) from operations of DiviCom business,
net of taxes ............................................. (5.3) 9.1
Loss on disposal of DiviCom business, net of taxes ........ (3.2) --
----- -----
Net income (loss) ........................................... (7.9)% 24.5%
</TABLE>
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<PAGE> 13
MERGER/SPIN-OFF
The Company 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, the Company's semiconductor division was
spun-off into an independent company, and on May 3, 2000, the Company's DiviCom
division was merged with 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, please see the Company's Amendment No. 2 to its Registration
Statement on Form S-1 filed with the SEC on March 22, 2000 and Harmonic's
Amended S-4 filed with the SEC on March 23, 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 a warrant to purchase
949,494 shares of common stock to Thomson. 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.
Please see the Company's Amendment No. 2 to its Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on March 22, 2000 for more
information regarding the Agreement.
NET REVENUES
Net revenue increased 20.9% from $158.1 million for the nine months ended
September 30, 1999 to $191.1 million for the nine months ended September
30,2000. This increase was primarily attributable 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
Gross margin for the nine months ended September 30, 2000 was 55.5%
compared to a gross margin of 60.1% for the same nine-month period last year.
This decrease was primarily attributable to an increase in product costs due to
restricted production by wafer suppliers, and due to reductions in the average
selling prices of many of the Company's products. 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 nine months.
RESEARCH AND DEVELOPMENT EXPENSES
In the nine months of 2000, research and development expenses increased
12.3%, excluding $12.6 million of warrant charges, from $39.8 million in the
nine months ended September 30, 1999 to $44.7
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<PAGE> 14
million in the nine months ended September 30, 2000. The increase in research
and development expenses was primarily attributable to additional
employee-related costs associated with increases in engineering staff. 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 increased 26.7% from $27.0
million in the nine months ended September 30, 1999 to $34.2 million for the
nine months ended September 30, 2000, excluding charges stated below. The
increase reflects increased headcount and related expenses, as the Company
continues to increase its international coverage in sales and marketing. The
Company recorded $15.5 million of stock-based compensation and $5.3 million of
taxes related to stock option exercises as a condition of the merger/spin-off
within selling, general and administrative expense in the first six months of
2000.
OTHER INCOME
Other income, net of other expense, increased 27.4% from $6.2 million for
the nine months ended September 30,1999 to $7.9 million for the nine months
ended September 30, 2000. The improvement over the prior year period is due
primarily to gains on the sale of marketable securities.
INCOME TAX EXPENSE
The Company's effective tax rate for continuing operations in the nine
months ended September 30, 2000 was 26.4%. The Company's effective tax rate is
less than the combined federal and state statutory rate due primarily to tax
credits and lower foreign tax rates.
FACTORS THAT MAY AFFECT FUTURE RESULTS
International revenues accounted for 79.7% of net revenues for the third
quarter of 1999, as compared to 88.0% for the third quarter of 2000. For the
nine months of 1999 and 2000, international revenues accounted for 79.6% and
86.9% of net revenues, respectively. The Company expects that international
revenues will continue to represent a significant portion of net revenues. * The
Company believes that its success will depend in part upon its ability to manage
international marketing and sales operations. In addition, the Company purchases
a substantial portion of its manufacturing services from foreign suppliers. The
Company'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 64.6%
and 57.6% of total sales in the third quarters of 1999 and 2000, respectively,
and 67.4% and 60.0% of total sales in the nine months of 1999 and 2000,
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, which has resulted in currency devaluation,
falling consumer spending and domestic price deflation. The company believes
that 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 third 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
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<PAGE> 15
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 the Company 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, the Company 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, the
Company believes that it 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.*
The Company 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 the Company's gross margins. The Company anticipates production
capacity at its foundries will continue to be constrained during the fourth
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 the Company 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
and earthquakes.
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 use 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 of America 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 the Company's business and results of
operations. Similarly, protectionist trade legislation in either the United
States of America 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,
-15-
<PAGE> 16
fluctuations in yield, loss of any strategic relationships, the Company'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 the Company 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, the Company'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 the Company's expenses are fixed in the short term, and
the timing of increases in expenses is based in large part on the Company's
forecast of future revenues. As a result, if revenues do not meet the Company's
expectations, it may be unable to quickly adjust expenses to levels appropriate
to actual revenues, which could have a material adverse effect on the Company's
business and results of operations.
The 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, the Company 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, the Company 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 the Company's common stock has fluctuated significantly
since its spin-off from the DiviCom business earlier this year. 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 the Company or its
competitors, quarterly fluctuations in the Company'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> 17
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $290.5 million at
the end of 1999, as compared to $48.1 million at September 30, 2000. Working
capital decreased from $283.8 million at the end of 1999 to $24.4 million at
September 30, 2000.
The Company's operating activities, exclusive of cash provided by
discontinued operations of $17.5 million, used cash of $63.8 million in the nine
months of 2000, primarily from the operating loss of $15.2 million, an increase
of production capacity rights of $19.1 million, an increase of deferred income
taxes of $10.7 million and an increase in inventory of $9.9 million, partially
offset by an increase in accruals of $9.3 million.
The Company's investing activities, exclusive of sales and maturities of
$177.0 million and purchases of $11.3 million of short-term investments, used
cash of $2.3 million, primarily for capital expenditures.
Cash used in financing activities in 2000 was $199.8 million, primarily
from cash transferred in the merger/spin-off of $338.1 million, partially offset
by the sale of common stock of $102.7 million and net bank line of credit
proceeds of $36.0 million.
At September 30, 2000, the Company had a $36.0 million bank line of credit
($36.0 million outstanding at September 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, until the outstanding balance is reduced to $25.0 million.
The first $6.0 million of borrowed funds bear interest at LIBOR plus 2.0% (9.5%
at September 30, 2000), with additional borrowings bearing interest at the
bank's prime rate (8.8% at September 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 September 30, 2000, the Company was in compliance with the
covenants.
The spin-off on May 2, 2000 created a tax obligation of approximately
$413.3 million as calculated under the tax-sharing agreement between the Company
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
company share - $21.81 - on the first day after the distribution. Under the
tax-sharing agreement, the Company 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 $40.0 million bank line of credit and the receipt
of $9.4 million by Thomson Multimedia S.A. in May, 2000, the Company settled the
promissory note. Please see the Company's Amendment No. 2 to its Registration
Statement on 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, the Company 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> 18
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 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 September 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 September 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.
Interest Rate Risk. The Company has a variable-rate line of credit of $36.0
million outstanding at September 30, 2000 and a hypothetical ten percent
increase or decrease in interest rates would not have a material impact on the
fair market value of this debt. The fair value of the Company's line of credit
may be lower than the recorded value, but the Company's line of credit may be
lower than the recorded value, but the Company is unable to estimate the fair
value at this time. The Company does not hedge any interest rate exposures.
All of the potential changes noted above are based on sensitivity analyses
performed on the Company's financial positions at September 30, 2000. Actual
results may differ materially.
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<PAGE> 19
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
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> 20
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 08, 2000 By: /s/ HOWARD BAILEY
-------------------------------------
Howard Bailey
Vice President of Finance
and Chief Financial Officer
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<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
