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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
___________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 1996 Commission File No. 0-23596
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
___________________
C-CUBE MICROSYSTEMS INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0192108
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1778 McCarthy Boulevard
Milpitas, California 95035
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code: (408)944-6300
Securities registered pursuant to Section 12(b) of the Act: NONE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. [X]
The aggregate market value of the Registrant's common stock held by non-
affiliates on March 3, 1997 (based upon the average of the high and low
sales prices of such stock as of such date) was $903,572,187.
As of March 3, 1997, 36,332,320 shares of the Registrant's common stock
were outstanding.
The Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on April 22, 1997 (the "Proxy Statement") is
incorporated by reference in Part III of this Form 10-K to the extent
stated herein. Except with respect to information specifically incorporated
by reference in this Form 10-K, the Proxy Statement is not deemed to be
filed as a part hereof.
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C-CUBE MICROSYSTEMS INC.
Form 10-K
For the Year Ended December 31, 1996
Table of Contents
Part I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Executive Officers of the Registrant
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Part III
Item 10. Directors and Executive Officers of C-Cube Microsystems Inc.
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Exhibit Index
Signatures
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This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk factors
set forth in or incorporated by reference into this report. The registrant
has attempted to identify forward-looking statements in this report by
placing an asterisk (*) following each sentence containing such statements.
PART I
ITEM 1. Business
C-Cube Microsystems Inc. (referred to herein as "C-Cube" or the
"Company"), established as a California corporation in 1988 and
reincorporated in Delaware in 1994, is a provider of powerful, highly
integrated, standards-based digital video compression solutions. The
Company's innovative encoder, decoder and codec products enable high
quality video to be provided cost-effectively by a broad range of end user
systems. Digital video compression technology has enabled the development
of a significant number of new or enhanced applications in the consumer
electronics, communications and computer markets including video compact
disc ("VideoCD") and digital video disk ("DVD") players, desktop video
production equipment, Direct Broadcast Satellite ("DBS") systems, wireless
cable systems and distributed video networks.
In August 1996, C-Cube completed the acquisition of DiviCom Inc.
("DiviCom"). C-Cube paid $65.7 million in cash, issued 2.3 million shares
of its common stock, assumed options exercisable for 264,000 shares of its
common stock and incurred $1.35 million in other costs in exchange for the
outstanding shares of DiviCom stock that C-Cube did not already own. This
acquisition was accounted for as a purchase. DiviCom develops and
integrates products and systems that transmit and receive digital video,
audio and data over networks allowing its customers to create integrated
"end-to-end" digital video networks. Products include audio/video encoding
and decoding systems, and integration consulting and implementation
services. Based on the Moving Pictures Experts Group ("MPEG") 2 and Digital
Video Broadcasting ("DVB") international standards, DiviCom's products
enable digital video broadcasting over a variety of networks including
satellite, wireless, fiber, cable and twisted pair wiring.
Background
Since the 1930s, video images have been transmitted and stored almost
exclusively using analog formats. Digital video provides several
fundamental benefits over analog video. Unlike analog video, digital video
can be compressed, providing significant storage and transmission
efficiencies, and can be transmitted and reproduced without perceptible
image degradation. In the 1980s, the benefits of digital formats led the
U.S. consumer audio industry to convert from analog long playing records to
digital CDs, resulting in growth in the market for CD players. In the
1990s, the ongoing evolution from analog to digital is transforming the way
in which video is produced, stored, transmitted and viewed.
A significant barrier to the greater market acceptance of digital video
has been the large volume of data required to represent images and video in
a digital format, making storage or transmission economically impractical.
For example, storage of an hour long video program in uncompressed digital
form would require well over 100 CD-ROMs. Through emerging digital
compression techniques, a substantial number of the redundancies inherent
in video data can be detected and eliminated, significantly reducing the
overall amount of data which needs to be retained, without affecting
perceived image quality. These compression techniques allow the same hour
long video program which required 100 CD-ROMs for storage in uncompressed
format to be stored on a single CD-ROM. Similarly, a single uncompressed
digital video program requires as much bandwidth for effective transmission
as 50 compressed video programs, making uncompressed digital video
impractical for markets such as broadcast and cable. As a result of these
limitations, C-Cube believes that the design and deployment of cost-
effective and practical video compression technology is critical to the
development of mass market digital video applications.
The benefits provided by the combination of digital video and
compression technology are enabling the deployment of a large number of new
applications and improving or expanding existing applications. Existing and
potential applications in the consumer electronics, communications and
computer markets include VideoCD players, DVD players, video conferencing
equipment, video editing systems and video networks, including DBS,
wireless cable and switched digital systems.
Market development for C-Cube's new and expanded applications requires
communication of shared content among various products and across multiple
industries. This interoperability requires the widespread adoption of
international compression standards. In response to the need for standards,
industry leaders in consumer electronics, computers and communications
including AT&T, IBM, JVC, Matsushita, NTT, Philips, Scientific Atlanta and
Sony joined together with C-Cube in various committees sanctioned by the
International Standards Organization (the "ISO") to define standards for
the compression of still images and digital video for consumer electronics
and broadcast industries. The first standard ISO adopted was a
recommendation from the Joint Photographic Experts Group ("JPEG") committee
for the compression of still images. In 1991, the MPEG committee made a
recommendation for a standard for compression of audio and video to CD-ROM,
now commonly known as MPEG 1. MPEG 2, a compression standard used for audio
and video broadcast systems and high density disk formats (e.g. DVD), was
adopted by the ISO in 1994.
These ISO standards specify a data format or syntax in which the
compressed data stream must be presented in order to enable equipment from
multiple vendors to be tied together into a single system that can transmit
and display image or video content in a common format. These standards do
not, however, specify the actual compression methodology and, therefore, do
not determine image quality or compression efficiency. For example, poorly
compressed data may comply with the relevant standard but contain visual
artifacts which may result in poor image quality or loss in efficiency,
costing capacity or play time. As a result, there can be significant
differences in overall image quality between two solutions based on the
same standard. Therefore, system manufacturers can differentiate their
products by the quality of the compression solution which they select.
Applications utilizing compressed digital video require an encoder for
compression and a decoder for decompression. Encoding, the process of
compressing digital images using complex mathematical algorithms to
eliminate redundant information, determines the potential quality of the
resulting image and the achievable degree of compression. Decoding, the
process of reconstructing compressed video, restores a compressed digital
bitstream back into an uncompressed and viewable format. The design and
architecture of encoders and decoders are extremely complex, presenting
significant technical challenges.
C-Cube seeks to differentiate its products from competitors by offering
both encoding and decoding solutions that provide superior image quality
(enhancing the viewing experience), are fully compliant to the MPEG 1 or
MPEG 2 international standards (and therefore interoperable with equipment
from other suppliers) and fully cost effective. All C-Cube products are
programmable which allow the incorporation of sophisticated system-level
features, allowing the system integrator to lessen design time and system
cost. The Company also develops proprietary product extensions and features
such as WideSound(tm) home theater sound enhancement and ClearView(tm) error
concealment technology.
The technical challenges of developing real-time digital video
transmission systems is compounded by the complexities of acquiring,
integrating and using a wide variety of sophisticated new system and
network technologies. Because these new technologies are diverse and
complex, many of these companies can benefit from integration services
provided by companies that are experienced with these technologies. To meet
the often conflicting goals of interoperability, reliability and
efficiency, nearly all new systems for broadcasting digital video implement
new standards such as MPEG 2, DVB and (where applicable) Asynchronous
Transfer Mode ("ATM"). In some cases, companies that have previously
provided proprietary analog-based solutions have developed their own
proprietary digital-based solutions (or created proprietary solutions where
there are no standards, such as conditional access). Increasingly,
companies that broadcast video realize that they need to foster
interoperability and competition among their equipment vendors.
Accordingly, adherence to common standards is a key requirement for
suppliers in this market.
DiviCom offers open systems based on industry standards that allow
these companies to compress, transmit and receive large quantities of
digital audio and video information. DiviCom provides "end-to-end,"
standards-based solutions for its customers. This means that DiviCom's
systems products allow its customers to compress information, scramble the
transmission and remultiplex (i.e., add portions such as advertisements as
well as delete portions), then assist in transmitting the information. When
the information reaches its destination, DiviCom's decoder products assist
in receiving, descrambling and decompressing the information so that the
information can be viewed.
DiviCom is focused on merging video and audio compression technologies
with network and communications technologies into innovative products for
producers, distributors and consumers of video and video-enhanced
information. Products include MPEG audio/video encoders, networking and
decoding systems, as well as integration services through its DiviSys(tm)
Integration Group. Based on the MPEG 2 international standard, DiviCom's
products enable digital video broadcasting over a variety of digital video
networks, including DBS, wireless cable, also known as Multichannel
Multipoint Distribution Systems ("MMDS"), and wired services, including
switched digital video services, digital cable, or Hybrid Fiber Coax
("HFC") and copper twisted pair wiring.
Markets and Applications
Products enabled by digital video compression technology can be divided
into three broad markets: video-based consumer electronics, video
communications and video-enabled computers.
Whereas C-Cube sells its products across these markets, DiviCom
currently sells its products and services into several market segments
within the video communications market, including DBS, broadcast, wireless
cable systems and wired digital video networks, such as switched digital
video, HFC and twisted pair.
Consumer Electronics
Through the use of MPEG compression, video can be stored, reproduced
and distributed on the same media currently in use for other types of
digital data such as 5-inch (12 cm) CDs that are commonly used for digital
audio. Emerging applications for digital video capture, playback and
distribution at the consumer level are being advanced by the rapid adoption
of new consumer-oriented media formats such as DVD, digital video
camcorders and digital video cassette machines.
VideoCD Players. A VideoCD player is essentially a CD audio player
with an MPEG 1 decoder and a video output. While adding this functionality
marginally increases the cost to manufacture a typical CD player, these
machines now have the ability to play movies, music videos and other titles
from MPEG 1 encoded CDs. The physical VideoCD disk format is identical to a
standard 12 cm audio CD and is limited to 72 minutes play time with video
quality generally perceived to be comparable to an analog VHS tape. Several
thousand VideoCD titles are now available, including movies, music videos
and karaoke titles. The VideoCD format has found its greatest success in
China but has also achieved popularity in other Asian countries including
Japan, Korea, Taiwan and India.
Digital Video Disk ("DVD") Players. Unlike the VideoCD standard which
is an adaptation of the audio CD, next generation Digital Video Disks have
recently been defined specifically for the very high quality playback of
feature length movies. This new format, which is now becoming commercially
available, provides 135 minutes average play time (270 minutes for a
double-sided disk) on a high density CD-ROM and provides four times the
image resolution of a standard VideoCD. The Company believes that this
format, which is based on the MPEG 2 standard, will achieve widespread use
worldwide.*
Consumer Digital Video Cameras. Digital video cameras (camcorders) can
offer advantages to today's analog-based home equipment in areas such as
image quality, cost and size. In addition, digital formats may provide
interoperability with other digital home consumer appliances such as DVD
players and home editing equipment. The first tape-based, consumer-grade
products using Discrete Cosine Transform ("DCT")-based formats called DV
and DVCpro have been introduced by companies including Sony, JVC and
Matsushita. Other formats which support recordable disk-based media are
currently being defined. C-Cube does not currently offer products
supporting DCT formats but may choose to do so in the future.
Communications
Digital video compression is currently enabling a number of new
applications and capabilities in the communications market, including
expanding the capacity and services of DBS systems, wireless cable and
telephone distribution systems.
DBS Networks. The first full-scale digital video transmission systems
to achieve full deployment were a series of DBS networks (often called
Direct to Home networks). By combining digital video compression technology
with high-power Ku-band satellites, DBS systems typically provide 100 or
more channels to a large geographical area (e.g. the continental U.S.) at a
relatively low cost per subscriber since the only incremental investment
needed is the purchase of a small dish and a decoder box-no need to upgrade
existing infrastructure, such as rewiring.
Wireless Cable or MMDS. MMDS is a local "line-of-sight" broadcast
system which broadcasts video over relatively short distances from a
stationary ground-based antenna directly to small receiving antennas which
are placed in each subscriber's home. Such systems are initially being
deployed in areas where there may not be an existing cable system or as an
alternative to existing cable services in high-density urban centers.
Wireless cable systems have comparatively low fixed costs and a moderate
cost per home. The advantages of MMDS over DBS include the support of local
content and moderate levels of interactivity, such as Internet support.
Wired Networks. Wired networks, which include such varied
architectures as switched digital video, fiber to the curb ("FTTC"), HFC
and twisted pair schemes such as ADSL and HDSL, are currently in early
trials and first stage deployments by leading telecommunications suppliers
and digital cable providers. Switched digital networks can provide a much
higher level of interactivity as compared to either DBS or MMDS including
the potential for full two-way video communication. However, because of the
high investment in new infrastructure, the cost per home is high.
Other Communications Applications. Such applications include equipment
which enables digital transmission from remote sites to a studio
(contribution), from studios to cable headends (distribution) and the use
of digital video and audio within businesses, educational facilities,
institutions (private networks) and data broadcasting applications.
Computer
The computer world has embraced digital video as an important data
type-particularly for educational, entertainment and training applications.
Increasingly, playback of video is performed using software decoders, which
greatly increases the number of video-capable computers. In addition,
computers are the primary platform for video editing and video encoding
through the addition of dedicated video-specific hardware.
Add-in Cards for Video Playback. Today's powerful CPUs can play MPEG 1
and soon will play MPEG 2 titles in software.* However, some applications
such as networked servers or less powerful machines benefit from a hardware-
based playback solution.
Video Production Systems. Through the addition of appropriate capture
and encoding hardware as well as application software, computers are
commonly used as digital video editing and/or content encoding equipment.
Several manufacturers have introduced MPEG content encoding equipment in
the form of PC or Macintosh add-in boards or complete systems based on
C-Cube solutions.
Dependence on Emerging Markets
To date, C-Cube has derived a majority of its product revenues from
sales of products for linear video playback (e.g. movies) and karaoke as
well as DBS applications. The Company expects that VideoCD and digital
video networking applications will continue to account for a significant
portion of C-Cube's revenues for the near future.* Over the longer term,
the Company's ability to generate increased revenues will be dependent on
the development of new opportunities for compressed digital video in the
consumer electronics, communications and computer markets.* The potential
size of these new market opportunities and the timing of their development
is uncertain. Substantially all of the growth in the sales of C-Cube's
decoder products over the last year has occurred in the Asia-Pacific
region. There can be no assurance that such growth will continue or that
other markets for C-Cube's products will emerge. Further, C-Cube's success
in such markets will depend upon whether system manufacturers select the
Company's products for incorporation into the system manufacturers'
products, and upon the successful introduction of such products. There can
be no assurance that demand for VideoCD players or other existing
applications will be sustained or that new markets will develop as expected
by the Company, or at all, or that system manufacturers developing products
for any such markets will design C-Cube's products into their system
products and successfully introduce such system products. The failure of
existing and new markets to develop as expected by the Company or to be
receptive to C-Cube's products would have a material adverse effect on the
Company's business and results of operations.
The emergence of markets for certain digital video applications will be
affected by a variety of factors beyond C-Cube's control. In particular,
certain sectors of the communications market will require the development
and deployment of an extensive and expensive communications
infrastructure.* There can be no assurance that communications providers
will make the necessary investment in such infrastructure or that the
creation of this infrastructure will occur in a timely manner. In addition,
the deployment of such infrastructure will be subject to governmental
regulatory policies, taxes and tariffs.* For example, the U.S. Federal
Communications Commission currently restricts the number of new frequencies
available for deployment of new digital video broadcast networks, such as
wireless cable. In addition, other countries have similar governmental
restrictions. The development of such markets could be delayed or otherwise
adversely affected by new governmental regulations or changes in taxes, or
tariffs, or by the failure of government agencies to adopt changes to
existing regulations necessary to permit new technologies to enter the
market. The emergence of these and other markets is also dependent in part
upon third-party content providers developing and marketing content for end
user products such as VideoCD and DVD players, interactive game consoles,
desktop computers and set-top decoders in a format compatible with the
Company's products.* There can be no assurance that these third parties
will develop and introduce such content in a timely fashion, or at all, or
that other factors beyond C-Cube's control will not adversely affect the
development of the digital video applications for which the Company's
products are developed.
Products
C-Cube is focused on providing powerful, highly integrated, standards-
based, programmable digital compression solutions that are cost-effective
and deliver high image quality. The Company has developed extensive
expertise in programmable architectures, algorithms, microcode development
and VLSI circuit design. This expertise has enabled C-Cube to be a leading
innovator in the development of digital video compression solutions for
customers in the consumer electronics, communications and computer markets.
Consumer Electronics
C-Cube is a world leader in the supply of MPEG 1 decoders which are
primarily used as the key enabling component for VideoCD players. In 1992,
C-Cube introduced the CL450 MPEG 1 Video Decoder which the Company believes
was the first commercially available MPEG 1 video decoder. The CL450 was
used as the core enabling technology for commercial and professional
digital karaoke players which offered significant capabilities versus
larger, more expensive analog laser disk based systems.
In 1994, C-Cube introduced the CL480 Family of VCD MPEG 1 System
Decoders which enabled the development of high-volume, consumer grade
VideoCD players. Currently the family includes the CL480 and CL484 which
all offer full VideoCD 1.1 and 2.0 compliance. By utilizing the
programmability of the CL480 family of products, the Company has added
features to enhance the product line over time. The CL484 added "ClearView"
error concealment technology and "FlexView" NTSC to PAL conversion as well
as karaoke features such as key control and on-screen status displays
without significantly increasing system cost. The CL484 also added the very
popular "DiscView" menuing feature and CD-G decoding capability for
complete CD standard support.
In 1996, C-Cube introduced the CL680 Advanced VideoCD Decoder, which
the Company believes is the first VideoCD system decoder to integrate an
NTSC/PAL encoder. In addition to full CL484 compliance, the CL680 also
provides improvements to C-Cube's "ClearView" error concealment technology
and delivers "WideSound" (a two channel home theater surround sound
environment), stereo key control, vocal fade and other features previously
provided through the use of expensive external components.
In February 1997, C-Cube introduced the ZiVA family of DVD products
including encoders, decoders and system-level solutions for consumer and
multimedia OEMs. The Company believes the availability of the ZiVA family
can accelerate the development of the upcoming DVD market since they
provide a total end-to-end solution.*
Consumer Encoders
In order to create MPEG 1 content for the VideoCD market, sophisticated
encoder systems are required. C-Cube provides the core enabling technology
to OEMs which facilitates the development of low-cost, high quality content
encoding equipment. In 1993, C-Cube announced the VideoRISC architecture,
believed to be the industry's first highly integrated real-time video
encoding engine. This architecture has been improved through three
successive generations, reducing power, cost and chip count. The engine is
fully programmable and supports multiple algorithms including MPEG 1,
MPEG 2 and H.261 for video teleconferencing.
In 1993, C-Cube introduced the CLM4500 MPEG 1 Video Encoder. The
CLM4500 consists of two VideoRISC processors and associated MPEG encoding
microcode incorporating C-Cube's proprietary rate control and masking
algorithms, enabling the encoders to deliver consumer grade video quality
at low bit rates. In 1996, the Company began shipping an improved version
of its MPEG 1 encoder, the CLM4550 Advanced MPEG 1 Video Encoder. The
CLM4550 is a four chip encoder designed to provide extra filtering
capability to offset noise, graininess or other video artifacts in original
material which often adversely affects the quality of MPEG 1 encoded
bitstreams, particularly important in professional applications such as
VideoCD mastering which demand very high quality video encoding.
Communications
MPEG 2 decoders are volume-oriented products which are placed into a
variety of communication equipment such as set-top decoders for DBS, cable
and telephone company services. The MPEG 2 standard is partitioned into
three separate documents for audio, video and transport decoding. C-Cube
provides products which support all common variants of the MPEG 2 standard
including audio, video and transport decoding.
In 1994, C-Cube introduced the CL9100 MPEG 2 video decoder, a single
chip MPEG 2 broadcast video decoder for MPEG 1 and MPEG 2 formats
containing system level features such as error concealment and advanced on-
screen display. In 1995, C-Cube introduced the CL9110 Transport
Demultiplexer which was licensed from DiviCom, a private company at that
time. The CL9110 separates MPEG 2 transport streams into video and audio
components and implements a number of broadcast-specific features,
including a descrambler interface and conditional access functions.
In 1996, the Company introduced the AViA family of MPEG 2 set-top
decoder chipsets comprised of two set-top solutions:
The AViA-502 Advanced Audio/Video Set-top Decoder with Dolby AC-3
audio, along with the AViA-GTX Advanced Graphics Transport I/O (GTIO) are
designed for use in highly functional "value-added" set-tops including high
performance graphics capabilities, interoperability across both wired and
wireless broadcast networks and Dolby AC-3 audio decoding to deliver a
complete home theater experience to consumers.
The AViA-500 MPEG 2 Audio/Video Set-top Decoder and the AViA-DMX
Transport Demultiplexer are designed for use in "basic" set-tops such as
those typically deployed in DBS applications. This chipset offers advanced
2D graphics display, advanced electronic program guide support as well as
infrared remote control and smart card interfaces.
The two chipsets are pin-for-pin compatible and API upgradable,
allowing one design to be used to provide both a high-end solution as well
as a low-cost solution. This allows OEMs to develop a single set-top design
that can be successfully deployed for multiple applications including MMDS,
DBS, switched digital video and HFC networks.
Communication Encoders
The VideoRISC architecture is available in various configurations of
chips and microcode to offer price/performance and feature sets to service
the wide range of requirements prevalent in the broadcast marketplace.
In 1993, C-Cube introduced the CLM4700 MPEG 2 Encoder Family which the
Company believes was the first component-level real-time broadcast
resolution product available. The CLM4700 family consists of multiple
VideoRISC processors and associated microcode. An 8 or 9 chip set serves to
encode material as individual frames and a 12 or 13 chip set to adaptively
encode material as either fields or frames. The CLM4700 has been through
three generations, based upon successive versions of the VideoRISC
processor with new designers being encouraged to use VRP-3-based chipsets,
such as the CLM4740 and CLM4720.
C-Cube currently offers two "full-resolution" encoders, the CLM4740
MPEG 2 Broadcast Encoder and the CLM4720 Storage Encoder which are seven
and five chips respectively. The former encodes broadcast-resolution video
into MPEG 2 Main Level/Main Profile format in real time using adaptive
field/frame encoding techniques and performs statistical multiplexing,
closed captioning and external reference rate control. The latter performs
frame-based encoding using either real time constant bit rate or variable
bit rate ("VBR") encoding for improved storage capacity in video servers
and other applications.
The CLM4440 Half D1 Resolution MPEG 2 Video Encoder is a low-cost 2-
chip implementation of the MPEG 2 standard which encodes video at half the
horizontal resolution of the full CCIR-601 broadcast standard and is used
in applications such as distance learning, local video networks and ADSL
deployments which benefit from lower data rates or smaller form-factors.
The CLM4200 H.261 Video Conferencing Codec is a two-chip 15 frame per
second full duplex video codec conforming to the H.261 video compression
subset of the H.320 ITU video conferencing standard. The CLM4200 was
developed in cooperation with PictureTel and provides a high quality
solution complete with features such as picture-in-picture and high
resolution still pictures.
Computer
Computers serve as platforms for creation, editing, compression and
playback of digital video. To achieve the many tasks which can be performed
on such video-enabled platforms, C-Cube offers a wide variety of products
tailored to the computer market
Computer Decoders and Scalers
Much of the early implementations of MPEG 1 decoders were PC-based
demonstration systems. The CL450SWA MPEG 1 Video Decoder, while initially
designed for consumer applications, has been used in a variety of add-in
cards for the PC and Macintosh platforms to enable the playback of VideoCDs
and high quality interactive games. The CL450SWA (Software Audio) includes
device drivers that utilize the host CPU to decode the MPEG audio bitstream
in software. The CL480PC MPEG 1 System Decoder is a microcode-based variant
of the consumer-grade CL480 ideally suited for notebook platforms.
To display video on a VGA screen, some form of graphics overlay is
required. This capability may be contained in newer generations of graphics
processors or be added separately in the form of scalers such as the MVM121
and MVP131 Multimedia Video Processors, products which were added to the C-
Cube product line with the acquisition of Media Computer Technologies
("MCT") in November 1995.
Computer Encoders and Codecs
The CL550 JPEG Codec was the first commercially available codec
implementing the JPEG image compression standard. The CL550 has been used
in a variety of products including digital cameras, security and LAN-based
video conferencing. The CL560 Advanced JPEG Codec compresses and
decompresses video at full broadcast resolution and is used in digital
video editing systems as well as high quality color page production
systems.
In 1996, the Company introduced the CLM41xx family of MPEG 1 encoders
which consist of the CLM4111 Consumer PC Video Encoder, the CLM4110 Desktop
Editing Encoder and the CLM4120 Professional Authoring Encoder. Like the
consumer and communications encoders, these products are based on the
Company's programmable VideoRISC encoder and are used for applications such
as VideoCD production, video editing for desktop computers and high quality
encoding of video for the Internet.
Application Production
Market Product Name and Function Examples Release
- ----------------------------------------------------------------------------
CL450 MPEG 1 Video Decoder VideoCD players 2Q 92
CL480VCD MPEG 1 Decoder 3Q 94
CL484VCD MPEG 1 Decoder 1Q 96
CL680VCD MPEG 1 Decoder 1Q 97
------------------------------------------------------------
ZiVA DS System Decoder DVD players 1Q 97
Consumer ZiVA D6 System Decoder w/
Electronics 5.1 Channel Dolby Audio
------------------------------------------------------------
CLM4500 MPEG 1 Video Encoder Content encoding 4Q 93
CLM4550 Advanced MPEG 1 equipment 1Q 96
Video Encoder
CLM4730Z Authoring Encoder DVD content encoding 1Q 97
- ----------------------------------------------------------------------------
CL9100 MPEG 2 Video Decoder Cable set-top decoders 2Q 94
CL9110 MPEG 2 Transport DBS receivers 2Q 94
Demultiplexer Ad insertion equipment
AViA-502 Advanced Audio/ +
Video Set-top Decoder
with Dolby AC-3 Audio
Communications AViA-500 Advanced Audio/ +
Video Set-top Decoder
AViA-GTX Advanced Graphics +
Transport I/O
AViA-DMC Transport Demultiplexer +
------------------------------------------------------------
CLM4400 Half D1 Resolution Satellite news 1Q 96
MPEG 2 Encoder gathering
Distance learning
------------------------------------------------------------
CLM4700 Broadcast Resolution Cable headends 4Q 94
MPEG 2 Encoders Satellite uplinks
Video servers
Ad insertion equipment
- ----------------------------------------------------------------------------
CL450 MPEG 1 Video Decoder Computer add-in cards 2Q 92
CL480PC MPEG 1 System Decoder 3Q 94
------------------------------------------------------------
CL550 JPEG Codec Video editing 1Q 90
CL560 Advanced JPEG Codec equipment 4Q 93
Computer add-in cards
Computer Color laser printers,
facsimiles and copiers
------------------------------------------------------------
MVM121 Multimedia Video Computer add-in cards 2Q 94
Manager 1Q 95
MVP131 Multimedia Video
Processor
------------------------------------------------------------
CLM4100 Multistandard Codec Computer add-in cards 4Q 93
------------------------------------------------------------
CLM4200 H.261 Video Video conferencing 4Q 94
Conferencing Codec equipment
- ----------------------------------------------------------------------------
+ Announced but not yet commercially available
DiviCom Products
DiviCom applies its unique compression algorithms and techniques to
obtain optimal performance from its family of MPEG 2/DVB system-level
products. These products include encoding systems, networking products (for
multiplexing and the injection, manipulation and management of compressed
media), and decoders and set-top box technology, including licensing to
major consumer electronics manufacturers.
Program Encoders
DiviCom's MediaView line of program encoders provide compression of
video, audio and data channels into MPEG 2 compliant formats. Using
sophisticated signal pre-processing, noise reduction and encoding
algorithms, the Company's encoders produce high quality video and audio at
the lowest possible data rate. Interoperability with other products and
systems is ensured through compliance with MPEG 2 and DVB standards.
The MediaView(tm) MV20 was the first DiviCom program encoder and the first
to integrate the VideoRISC VRP-2 components, C-Cube's first MPEG 2
compliant encoders. The MV20 achieved industry notoriety and the early
knowledge gained contributed to the specification effort of the cost-
effective MV5 and MV10 product lines as well as the fully featured,
modular, high quality MV25 product line. The MV20 was designed to support a
wide variety of applications, including direct-to-home/DBS, business
television/private networks, cable & telephone company services MMDS,
switched digital and digital cable, contribution and back-haul links and
satellite distribution to cable headends.
The MediaView(tm) MV25 offers unprecedented video quality at low bit
rates, and is also the first encoder in the industry to integrate the pre-
processor and an advanced video compressor within the same unit. The MV25
is especially suited to PAL applications and for satellite broadcasting
applications where getting as many signals as possible on a satellite
transponder or cable channel is critical.
The MediaView(tm) MV10 is targeted for use in cable headends, in MMDS
direct-to-home and switched digital video applications as well as mobile
encoding applications such as digital satellite news gathering and back-
haul from sporting and field events-programming that does not always
require the advanced adaptive preprocessing and input/output adapters
offered by the MV25.
The MediaView(tm) MV5 is designed specifically for applications including
corporate television and Intranet networks, distance learning, training,
local access programs and other types of programming distributed by
corporations, universities, government complexes and similar types of
organizations. The MV5 offers a fixed horizontal resolution of 352 pixels
per line, which provides more resolution than most TV sets display.
Networking Products
The Company's MediaNode(tm) MN20 Remultiplexer combines the outputs of a
number of DiviCom program encoders, remultiplexing and grooming the signals
into a single MPEG 2 transport stream. The device is especially effective
at handling compression applications where multiple video, audio and data
signals are required, or multichannel audio needs must be met. It also acts
as a gateway to ATM networks and can be used to inject local data inputs
directly into an existing MPEG 2 transport stream.
DiviCom's MediaView System Controller(tm) SC20 is a network control system
that can be used to configure and monitor any collection of DiviCom
networked components. The SC20 offers an easy-to-use graphical user
interface which includes status, interconnection maps and context sensitive
help. The SC20 is used for system configuration, encoding and multiplexing
control, system backup control, monitoring and control at system,
component, and module levels and detection, display, and logging of system
faults.
The MediaNode Platform MP100(tm) is a Windows NT-based, real-time
insertion and decoding system. It allows a user to decode, record and
playback MPEG 2 transport streams through a graphical interface. The MP100
comes pre-installed with an MPEG 2 decoder card and media spooler control
software.
Decoder Products and Technology
DiviCom offers system, software and ASIC solutions for commercial
decoders as well as high volume set-top boxes. These set-top boxes, similar
to today's cable box, decompress video, audio and data signals, enabling
consumers to receive many more stations of programming than most
traditional cable programmers can offer as well as receive advanced
services such as home shopping, video on demand, interactive games and
Internet access.
Digital Set-Top Designs
DiviCom's advanced set-top design (called FLARE(tm), flexible architecture
for set-top boxes) enables consumer electronics manufacturers to rapidly
develop high performance, low-cost decoders using proven technology based
on international standards. DiviCom offers a broad spectrum of designs to
support various applications including DBS, MMDS, cable, ATM/switched
digital video and HFC network interfaces. DiviCom provides all schematics,
software (object code) and documentation to implement high quality, full-
featured decoders. Decoder designs incorporate a CPU with high performance
graphics, an expansion slot, MPEG 2 stream processing and software download
functions. Various levels of interactivity are available depending on the
specific memory, graphics and networking options chosen.
Professional Services and Customer Support
DiviSys(tm): DiviCom's DiviSys technology integration group provides
consulting and implementation services to DiviCom customers worldwide.
DiviSys draws upon its expertise in the areas of broadcast television,
networking and compression technology to define, integrate and install
complete solutions for customers.
DiviSys offers a broad range of services necessary to build a digital
broadcast system, including program management, budget analysis for any
type of network, building and site preparation, technical design and
planning, parts inventory and management, equipment installation, signal
reception and transmission integration and end-to-end system testing. In
addition, the DiviSys team works closely with DiviCom's service and support
group-DiviTec(tm)-to ensure that systems remain up and running with a minimum
of difficulties.
The DiviSys group integrates DiviCom products with third-party products
and services. The group's personnel have experience in procuring and
integrating dozens of products and systems, such as encoders, multiplexers,
system/network controllers, modulators, conditional access systems for pay-
per-view, near video-on-demand servers, transmitters, antennas, downlink
systems, satellite dishes/IRDs (integrated receivers/decoders), ATM network
equipment, subscriber management systems, electronic program guides and
diagnostics/quality assurance tools.
DiviTec(tm) is DiviCom's service-on-demand support program. The DiviTec
Service Agreement is a combination of services, training and software
designed to meet each customer's particular maintenance and upgrade needs
to maximize the benefits they receive from DiviCom products and systems.
Changing Product Mix; Dependence on Decoder Products
While C-Cube offers a number of products for a variety of applications,
beginning in the second quarter of 1995, sales of the Company's CL480
family of products have represented a significant percentage of the
Company's total net revenues and accounted for a majority of the growth of
the Company's total net revenues beginning in the second quarter of 1995.
The Company expects that revenues from its MPEG 1 decoder products
including the CL480 and CL680 families of products will decrease as a
percentage of total revenues, but continue to account for a significant
portion of its product revenues in 1997.* Over time, C-Cube expects that
price competition will result in declining average selling prices for this
family of products.* The Company has implemented several programs that have
reduced costs associated with these families of products. In the event that
increases in unit sales and other manufacturing efficiencies of these
families of products do not offset decreasing sales prices in the future,
the Company's business and results of operations would be materially and
adversely affected. C-Cube anticipates that overall product gross margin
may decrease as a result of a number of factors including anticipated
declines in average selling prices over time.* The timing of volume
shipments and the life cycles of the Company's products are difficult to
predict due in large measure to the emerging nature of the markets for
C-Cube's products, the future effect of product enhancements by the Company
and its current and future competitors. Declines in demand for the
Company's products, particularly the CL480 and CL680 families of products,
whether as a result of competition, technological change or otherwise,
would have a material adverse effect on C-Cube's business and results of
operations.
Customers
The following table lists certain of the Company's customers:
Market Customers
- --------------------------------------------------------------
Consumer Sinorex Serial Systems
Electronics Samsung Idall
Kanematsu Semiconductor Malata
- --------------------------------------------------------------
Thomson Consumer Insight Electronics
Electronics
Communications Echostar Scientific Atlanta
Celestica TV/Com
Nokia Satellite Systems
- --------------------------------------------------------------
During 1996 one customer accounted for 12% of the Company's net
revenues. During 1995 two customers accounted for 14% and 10% of the
Company's net revenues, respectively. There can be no assurance that such
customers will continue to account for a significant percentage of the
Company's revenues in the future. During 1994 no individual customer
represented 10% or more of net revenues.
Research and Development
C-Cube believes that the continued introduction of new products in its
target markets is essential to its growth. As of December 31, 1996, the
Company had 344 full-time employees engaged in research and development.
Expenditures for research and development in 1996, 1995 and 1994 were
approximately $44.2 million, $14.3 million and $9.8 million, respectively.
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The markets for the Company's products are characterized by rapidly
changing technology and evolving industry standards. In addition, markets
for C-Cube's products are characterized by intense price competition. As
the markets for the Company's products develop and competition increases,
C-Cube anticipates that product life cycles will shorten and average
selling prices will decline.* In particular, average selling price and
product gross margin for each of the Company's products will decline as
such products mature and as per order unit volumes for such products
increase.* The Company's operating results will depend to a significant
extent on its ability to continue to successfully introduce new products on
a timely basis and to reduce costs of existing products.* In particular,
C-Cube currently intends to announce several new products over the next
year, including next generation MPEG 2 decoders and encoders.* There can be
no assurance that these products will be successfully developed or will
achieve market acceptance, and these products are not expected to
contribute significantly to revenues in the first half of 1997. The failure
of any of these products to be successfully introduced and achieve market
acceptance could have a material adverse effect on the Company's business
and results of operations. In addition, the Company continues to sell a
number of earlier generation products; any failure to manage the transition
to new products effectively would have a material adverse effect on the
Company's business and results of operations. The success of new product
introductions is dependent on several factors, including proper new product
definition, product cost, timely completion and introduction of new product
designs, quality of new products, differentiation of new products from
those of the Company's competitors and market acceptance of C-Cube's and
its customers' products. As a result, the Company believes that continued
significant expenditures for research and development will be required in
the future.* Because of the complexity of its products, C-Cube has
experienced delays from time to time in completing development and
introduction of new products, and, as a result, has from time to time not
achieved the market share anticipated for such products. There can be no
assurance that such delays will not be encountered in the development and
introduction of future products, including the products currently expected
to be announced over the next year. There can be no assurance that the
Company will successfully identify new product opportunities and develop
and bring new products to market in a timely manner, that products or
technologies developed by others will not render C-Cube's products or
technologies obsolete or noncompetitive, or that the Company's products
will be selected for design into the products of its targeted customers.
The failure of any of the Company's new product development efforts could
have a material adverse effect on C-Cube's business and results of
operations.
Sales and Marketing
C-Cube's sales and marketing strategy targets markets for which digital
video compression is an enabling technology in order to achieve key design
wins with industry leaders as well as early adopters of digital video
technology. To implement its strategy, the Company has established a direct
sales force and a worldwide network of independent sales representatives
and distributors. In addition, C-Cube has a team of application engineers
who assist customers in designing in the Company's products.
In the United States, the Company sells its products through the direct
sales channel, independent representatives and a distributor. The Company
records revenues from product sales to customers at the time of shipment.
Generally, the Company pays its independent sales representatives on a
fixed commission basis. As of December 1996, C-Cube had North American
regional sales offices in California, Georgia, and Quebec and international
sales offices in the United Kingdom, Korea, China, Hong Kong, Singapore,
Taiwan and Japan. In Japan, C-Cube sells products through the direct sales
force of C-Cube Japan, Inc. ("CCJ") and a distributor. CCJ was formed by
the Company and Kubota Corporation in 1988 and is owned 65% by C-Cube and
35% by Kubota. The primary business of CCJ is the marketing, sales and
support of the Company's products in Japan. Internationally, the Company
has commissioned sales representatives or distributors in Australia,
Canada, France, Germany, Great Britain, Hong Kong, Italy, Korea, Malaysia,
Scandinavia, Singapore and Taiwan. Certain of the Company's agreements with
its distributors permit limited stock rotation and provide for price
protection. Allowances for returns and adjustments, including price
protection, are provided at the time revenues from product sales are
recorded.
International Business Activities
During 1996, 1995 and 1994, international revenues accounted for
approximately 67%, 70% and 38% of the Company's net revenues, respectively,
and C-Cube believes that international revenues will continue to account
for a significant portion of net revenues.* The significant portion of
international revenues in 1996 and 1995 is due primarily to the increase in
the sales of MPEG 1 decoder products in Asia. The Company's success will
depend in part upon its ability to manage international marketing and sales
operations and manufacturing relationships. In addition, C-Cube purchases a
substantial portion of its assembly services from foreign suppliers.
C-Cube's international manufacturing and sales are subject to changes in
foreign political and economic conditions and to other risks including
currency or export/import controls, changes in tax laws, tariffs and
freight rates and changes in the ownership and/or leadership of
international customers that may result in delayed or canceled orders. For
example, China and Taiwan comprise substantial markets for consumer
electronics products utilizing the Company's MPEG 1 decoder products, such
as VideoCD players. As a consequence, any political or economic instability
in such countries could significantly reduce demand for products from
certain of the Company's major customers. The Company has made a
significant investment in additional foundry capacity in Taiwan and is
subject to the risk of political instability in Taiwan, including but not
limited to the potential for conflict between Taiwan and the People's
Republic of China. The Company manufactures and sells product to customers
in Korea and is subject to the risk of political instability in Korea,
including the potential for conflict between North and South Korea. In
addition, the Company sells certain of its products in international
markets and buys certain products from its foundries in currencies other
than the U.S. dollar and as a result, currency fluctuations could have a
material adverse effect on the Company's business and results of
operations. With respect to international sales that are denominated in
U.S. dollars, increases in the value of the U.S. dollar relative to foreign
currencies can increase the effective price of and reduce demand for the
Company's products relative to competitive products priced in the local
currency. The United States has considered trade sanctions against Japan
and has had disputes with China relating to trade and human rights issues.
If trade sanctions were imposed, Japan or China could enact trade sanctions
in response. Because a number of the Company's current and prospective
customers and suppliers are located in Japan and China, trade sanctions, if
imposed, could have a material adverse effect on C-Cube's business and
results of operations. Similarly, protectionist trade legislation in either
the United States or foreign countries could have a material adverse effect
on the Company's ability to manufacture or to sell its products in foreign
markets.
Manufacturing
C-Cube has chosen to use independent silicon foundries to fabricate its
integrated circuits, and assembly, test and packaging are subcontracted to
third parties. This approach enables the Company to concentrate its
resources on product design and development, where C-Cube believes it has
greater competitive advantages. The Company, however, continues to evaluate
other sources for wafer capacity in 1997 and beyond.
The Company's devices are currently fabricated using complementary
metal oxide semiconductor ("CMOS") process technology with 0.65 micron, 0.5
micron and the Matsushita Electronics Corporation ("MEC") 0.35 micron
process feature sizes, using either two or three layers of metal
interconnect. Certain of C-Cube's new products are being designed for 0.35
micron feature sizes. Fabricated wafers are either tested by the
fabrication facility to C-Cube specifications or the Company takes receipt
of untested wafers and works with subcontractor testing facilities. Once
the fully tested and accepted wafers are received by C-Cube, the die are
assembled into packages by subcontractors, primarily located in Japan,
Korea and the United States. The Company utilizes multiple assembly
subcontractors for its products.
In the second quarter of 1996, the Company expanded and formalized its
relationship with Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC") to
provide additional wafer production capacity in the years 1996 to 2001. The
agreement with TSMC provides that TSMC will produce and ship wafers to C-
Cube at specified prices and requires C-Cube to make two advance payments
totaling $49 million. TSMC will apply this prepayment against a portion of
the wafer cost as product is delivered to C-Cube. Accordingly, the prepaid
amount will be amortized to inventory as wafers are received. The first
advance payment of $24.5 million was made in June 1996, and the final
payment, which is evidenced by an unsecured promissory note, is due June
1997. At December 31, 1996, $2.8 million of the $49 million production
capacity rights is included in other current assets.
The Company believes that foundry capacity in the semiconductor
industry, particularly for smaller geometries and more advanced processes
may become increasingly limited over the next several years, resulting in
greater difficulty in obtaining adequate capacity, increased prices and
increased lead times.* Any increase in the demand for semiconductor wafers
over currently expected levels, or any failure of foundry capacity in the
industry to grow at anticipated rates would magnify these shortages.* The
Company's future operating results will depend in substantial part on its
ability to increase the capacity available to it from its existing or new
foundries. In order to secure such capacity, the Company has considered and
will continue to consider various possible transactions, which could
include, without limitation, equity investments in, prepayments to, non-
refundable deposits with or loans to foundries in exchange for guaranteed
capacity, "take or pay" contracts that commit the Company to purchase
specified quantities of wafers over extended periods, joint ventures or
other partnership relationships with foundries.* There can be no assurance
that the Company will be able to make any such arrangement in a timely
fashion or at all, that the Company will not require additional issuances
of equity or debt in order to raise capital for any such arrangements or
that any such financing would be available to the Company on acceptable
terms or at all. If the Company were not able on a timely basis to obtain
additional foundry capacity, its business and results of operations would
be materially and adversely affected.
The Company has entered into an agreement with MEC, JVC and Sharp
whereby they provided assistance in the development of the CL480 family of
products, the CL9100 and the CL680 and currently provide C-Cube with
preferential access to MEC's 0.5 and 0.35 micron manufacturing processes.
As part of the agreement C-Cube provides MEC the right to sell the CL480
family of products and the CL680 to its internal divisions and to a limited
group of VideoCD manufacturers. MEC's right to sell the CL480 has certain
volume limitations and is subject to royalty payments to C-Cube.
C-Cube sources its integrated circuit products from MEC, TSMC, Yamaha
and Samsung and is in the process of qualifying additional foundries. This
dependence on a small number of foundries subjects the Company to risks
associated with an interruption in supply from these foundries. In
connection with the manufacture of its newer products, C-Cube needs to
continue to evaluate and qualify new foundries that employ advanced
manufacturing and process technologies, which are currently available from
a limited number of foundries. For example, certain of the new products
that the Company intends to introduce require advanced CMOS processes. The
Company has in the past experienced increased costs and delays in
connection with the qualification of new foundries. There can be no
assurance that any delays, cost increases or quality problems resulting
from the qualification of new foundries will not have a material adverse
effect on C-Cube's business and results of operations.
The Company's reliance on subcontractors to manufacture and assemble
its products involves significant risks, including: reduced control over
delivery schedules, quality assurance, manufacturing yields and cost; the
potential lack of adequate capacity; and potential misappropriation of
C-Cube intellectual property. The Company obtains foundry capacity through
forecasts that are generated in advance of expected delivery dates and are
binding on the Company. For example, certain of the Company's suppliers
require the Company to make binding forecasts as much as eight months in
advance of expected delivery dates. The Company's ability to obtain the
foundry capacity necessary to meet the future demand for its products is
based on its ability to accurately forecast such future demand. If the
Company fails to accurately forecast such future demand, the Company may be
unable to timely obtain an adequate supply of wafers necessary to
manufacture the number of products required to satisfy the actual demand.
There can be no assurance that the Company will continue to accurately
forecast the future demand for its products and obtain sufficient foundry
capacity in the future. The Company's obligation to make binding forecasts
far in advance of delivery subjects the Company to inventory risks,
including the risk of obsolescence. With respect to C-Cube's principal
foundries, these forecasts are also binding on the foundries upon
acceptance by the foundry, subject to minor adjustments. The Company's
subcontractors generally do not have firm supply obligations to C-Cube.
C-Cube has from time to time experienced disruptions in supply,
although none of those disruptions have to date materially adversely
affected results. There can be no assurance that manufacturing or assembly
problems will not occur in the future or that any such disruptions will not
have a material adverse effect upon the Company's results of operations.
Further, there can be no assurance that suppliers who have committed to
provide product will do so, or that the Company will meet all conditions
imposed by such suppliers. Failure to obtain an adequate supply of products
on a timely basis would delay product delivery to C-Cube's customers, which
would have a material adverse effect on the Company's business and results
of operations. In addition, C-Cube's business could also be materially and
adversely affected if the operations of any supplier are interrupted for a
substantial period of time, or if the Company is required, as a result of
capacity constraints in the semiconductor industry or otherwise, to
increase the proportion of wafers or finished goods purchased from higher
cost suppliers in order to obtain adequate product volumes.
The markets into which C-Cube sells its products are characterized by
extreme price competition, and the Company expects the average selling
prices of its products and the gross margin for such products will decrease
over the life of each product. In order to partially offset declines in the
selling price of its products, C-Cube will need to reduce the cost of its
products by implementing cost reduction design changes, obtaining costs
reductions as and if volumes increase and successfully managing
manufacturing and subcontracting relationships. Since the Company does not
operate its own manufacturing facilities and must make binding commitments
to purchase products, it may not be able to reduce its costs as rapidly as
companies that operate their own manufacturing facilities. The failure of
the Company to design and introduce lower cost versions of the Company's
products in a timely manner or to successfully manage its manufacturing
relationships would have a material adverse effect on C-Cube's business and
results of operations.
DiviCom's manufacturing strategy is focused on the rapid transition of
products from engineering development to production. DiviCom makes
extensive use of the services of electronic component suppliers, referred
to as manufacturing distributors, and subcontract assembly houses in order
to minimize inventory risks, gain competitive pricing and increase supply
flexibility.
DiviCom's manufacturing group establishes relationships with key supply
and subcontract partners. Electronic component distributors are responsible
for the procurement and "kitting" of components in preparation for contract
assembly.
Once a product or subsystem has demonstrated design stability, it is
transitioned from the DiviCom engineering group to full turnkey assembly
and managed by the manufacturing distributor. The manufacturing distributor
purchases components to DiviCom specifications, contracts with the assembly
facility to perform product builds and ships completed subsystems to
DiviCom. DiviCom conducts final integration, system testing, reliability
and quality assurance testing and configuration per customer requirements.
Competition
The markets in which C-Cube competes are intensely competitive and are
characterized by declining average selling prices and rapid technology
change. C-Cube believes that it competes favorably in the areas of product
definition, system cost, functionality, time-to-market, reliability and
reputation. C-Cube competes with major domestic and international
companies, most of which have substantially greater financial and other
resources than C-Cube with which to pursue engineering, manufacturing,
marketing and distribution of their products. Some of these companies own
proprietary video compression technology competitive with C-Cube's
standards-based systems. In the consumer electronics market, principal
competitors include Philips, SGS-Thomson, Oak Technology and ESS
Technology, Inc. as well as several large, integrated Japanese and Korean
consumer electronics companies, such as Sony, Hyundai, Toshiba, NEC,
Samsung and MEI, which have their own semiconductor design and
manufacturing capacity. In the communications market, C-Cube's principal
competitors include SGS-Thomson, LSI Logic, Texas Instruments, Hyundai,
VLSI Technologies and IBM. In the computer market, principal C-Cube
competitors include the increasingly powerful CPUs that are now available
from, among others, Intel and Motorola, as well as specialized companies
such as Zoran and 8x8, and graphics chip manufacturers such as S3
Incorporated and Trident Microsystems, Inc.
Recently, competition among suppliers of decoder chips for the
communications market has intensified significantly. C-Cube believes the
scale-up from limited trials to wide deployment of set-top decoders will
occur only gradually over time.* Therefore, success in this market may be
dependent upon future design wins rather than upon design wins for trials
or early deployment. In the MPEG 2 encoder market IBM is the principal
competitor, but is not currently participating in the broadcast
communications market, where picture quality and reliability are critical.
C-Cube expects that other companies will introduce competing encoder
products in the near future.* Although the timing of the production
availability of such encoders is uncertain, their availability could have
an adverse impact on C-Cube's encoder product revenues and margins. C-Cube
may also face increased competition in the future from new entrants into
its markets. In particular, as the markets for C-Cube's products develop,
competition from large semiconductor companies, such as SGS-Thomson, and
from fabless semiconductor companies may increase significantly.
Furthermore, as part of C-Cube's foundry relationships, C-Cube has granted
certain foundries the rights to develop and manufacture derivative products
based on its technology, subject to royalty obligations and certain
limitations, which may facilitate direct competition from those larger
semiconductor companies. The ability of C-Cube to compete successfully in
the rapidly evolving markets for high performance video compression
technology depends on factors both within and outside of its control,
including success in designing and subcontracting the manufacture of new
products that implement new technologies, adequate sources of raw
materials, protection of Company products by effective utilization of
intellectual property laws, product quality, reliability, price and the
efficiency of production, the pace at which customers incorporate C-Cube's
integrated circuits into their products or technologies, success of
competitors' products and general economic conditions. There can be no
assurance that C-Cube will be able to compete successfully in the future.
A variety of other approaches to digital video compression have been
introduced, including wavelets, fractal image compression, proprietary
compression algorithms and software only solutions, and other companies are
designing products around these or alternative approaches. In addition,
manufacturers of general purpose microprocessors, such as Intel and
graphics chip manufacturers such as Chromatics, are positioning their
products as offering digital video compression capability, and there can be
no assurance that system manufacturers will not use such processors for
video compression applications. In the event that any of these other
approaches, individually or collectively, are adopted in the emerging video
compression market on a widespread basis, C-Cube's business and results of
operations would be materially and adversely affected.
In the video networking system business, DiviCom competes with
vertically integrated system suppliers including General Instrument,
Scientific Atlanta and Philips, as well as more specialized suppliers
including the DMV division of News Corp., Nuko and the TV/Com subsidiary of
Hyundai. DiviCom believes that it competes favorably based on its expertise
and focus in the area of digital video network systems and its constituent
components such as digital video compression, digital network and
transmission technology. In addition, DiviCom possesses the practical
knowledge and experience required to design, manufacture, integrate and
support such systems in real-world deployments.
Several of these competitors, including General Instruments, Scientific
Atlanta, TV/Com, DMV (formerly NTL), Philips and Wegener have been
established in the analog technology market for many years. Others, such as
Nuko, Tadiran/Scopus and Tiernan, have come into the market in recent years
as the early stages of digital technology emerged. The only competitor to
emerge early with an MPEG 2 product with a discrete design was DMV.
DiviCom and DiviCom's consumer set-top box technology licensees compete
with traditional cable industry set-top box suppliers, such as General
Instruments and Scientific Atlanta, as well as consumer electronics
companies (which may choose to license DiviCom technology or compete with
DiviCom and its licensees) such as Thomson Consumer Electronics, Philips,
Sony, Matsushita, Mitsubishi, Zenith, Hyundai and Samsung. DiviCom competes
by providing software and system designs that provide more advanced
features more economically than are typically available elsewhere.
DiviCom expects that successful companies in this industry will be
those that provide the deployable, affordable end-to-end solutions that
support open-standards and industry-accepted architectures.* Delivering a
low-cost digital set-top or other highly integrated solution as well as the
broadcast video, audio and data systems, is a key factor for successful
participation in the digital television market.*
Intellectual Property and Licenses
The Company attempts to protect its technology through a combination of
patents, copyrights, trade secret laws, confidentiality procedures and
licensing arrangements. The Company has 10 issued United States patents and
59 U.S. patent applications pending and has filed certain corresponding
applications in certain foreign jurisdictions. These patents expire at
various times from 2010 to 2014. The Company intends to continue to seek
patents on its technology where appropriate. Notwithstanding its patent
position, the Company believes that, in view of the rapid pace of
technological change in the semiconductor industry, the technical
experience and creative skills of its engineers and other personnel are the
most important factors in determining the Company's future technological
success.
There can be no assurance that patents will issue from any pending
applications or that any claims allowed from existing or pending patents
will be sufficiently broad to protect the Company's technology. While the
Company intends to protect its intellectual property rights vigorously,
there can be no assurance that any patents held by the Company will not be
challenged, invalidated or circumvented, or that the rights granted
thereunder will provide competitive advantages to the Company. Moreover,
while the Company holds or has applied for patents relating to the design
of its products, the Company's products are based in part on standards,
including MPEG 1, MPEG 2 and JPEG, and the Company does not hold patents or
other intellectual property rights for such standards. The semiconductor
industry is characterized by frequent litigation regarding patent and other
intellectual property rights. While there is currently no pending
intellectual property litigation against the Company, the Company receives
from time to time notices of potential infringement of third-party rights
and there can be no assurance that third parties will not assert claims
against the Company with respect to existing or future products or that
licenses will be available on reasonable terms, or at all, with respect to
any third-party technology including third-party technology which is or may
be embodied in standards. In the event of litigation to determine the
validity of any third-party claims, such litigation could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not such litigation is
determined in favor of the Company. In the event of an adverse result in
any such litigation, the Company could be required to pay substantial
amounts in damages and to cease selling the infringing product unless and
until the Company is able to develop non-infringing technology or to obtain
licenses to the technology which was the subject of the litigation. There
can be no assurance that the Company would be successful in such
development or that such licenses would be available, and any such
development or license could require expenditure of substantial time and
other resources.
The Company has entered into an agreement with MEC, JVC and Sharp
whereby they provided assistance in the development of the CL480 family of
products, the CL9100 and the CL680 and currently provide C-Cube with
preferential access to MEC's 0.5 and 0.35 micron manufacturing processes.
As part of the agreement C-Cube provides MEC the right to sell the CL480
family of products and the CL680 to its internal divisions and to a limited
group of VideoCD manufacturers. MEC's right to sell the CL480 has certain
volume limitations and is subject to royalty payments to C-Cube.
In 1992, certain license agreements between C-Cube, Kubota and CCJ
originally entered into in 1988 were amended to provide in part that
Kubota's license to technology would be limited to a perpetual, royalty-
free license to sell derivatives of the Company's CL550 product provided
that such derivatives are not pin-compatible or competitive with C-Cube's
or CCJ's products. In addition, Kubota has a right to develop system level
products based on the Company's board designs provided those products are
not competitive with C-Cube's products. Kubota also has the right to
purchase certain products at most favored customer pricing for use in
Kubota's products.
In February 1992, the Company entered into an agreement providing that
it would deposit into escrow certain technology relating to the CL450,
CL950 and CL4000 to be released to JVC in the event of bankruptcy or
failure to perform development obligations. In the event of such release,
JVC may manufacture such products for its own use, subject to certain
royalties. In June 1993, C-Cube entered into a joint development agreement
with JVC regarding the development of the CL480 pursuant to which JVC paid
the Company a development fee and which provides for payment of royalties
to JVC based on sales of the product.
In order to defray the cost of developing its products and to develop
products with specifications meeting customer requirements, C-Cube
established development relationships with JVC, Philips and Thomson
Consumer Electronics. Under these arrangements, these customers provided
the Company with significant development funding and development assistance
for the CL450, CL950, CLM4500 and CLM4600. In addition, these customers
participated with C-Cube in determining the specifications for the
performance requirements of these products. As a result of these
relationships, the Company believes it has been able to more rapidly
introduce products meeting the demands of these as well as other customers
for similar applications. As consideration for development funding, C-Cube
has agreed to pay certain royalties to such customers and generally retains
ownership of such products.
Employees
As of December 31, 1996, the Company had approximately 669 employees,
344 of whom are engaged in, or directly support, the Company's research and
development, 147 of whom are in sales and marketing, 115 of whom are in
manufacturing and 63 of whom are in administration. C-Cube's employees are
not represented by any collective bargaining agreement, and the Company has
never experienced a work stoppage. C-Cube believes its employee relations
are good.
C-Cube's future success is heavily dependent upon its ability to hire
and retain qualified technical, marketing and management personnel. The
loss of the services of key personnel could have a material adverse effect
on the Company's business. C-Cube has recently added a number of new key
people to its management team and is currently seeking certain additional
engineering, marketing and management personnel. The Company's success in
the future will depend in part on the successful assimilation of such new
personnel. C-Cube also obtains assistance from customers whose engineers
participate in development programs at the Company. The continuing
availability of such support is dependent upon a number of factors,
including relationships with customers and the ability of such engineers,
many of whom are foreign residents, to obtain immigration visas. The
competition for such personnel, particularly for engineering personnel, is
intense and the loss of such personnel could have a material adverse effect
on C-Cube.
Acquisitions
On August 28, 1996, the Company acquired DiviCom Inc. a digital video
networking company. C-Cube paid $65.7 million in cash, issued 2.3 million
shares of its common stock, assumed options exercisable for 264,000 shares
of its common stock and incurred $1.35 million in other costs in exchange
for the outstanding shares of DiviCom stock that C-Cube did not already
own.
On November 17, 1995, C-Cube completed the acquisition of MCT, a
privately-held supplier of digital video processing and video windowing
technology for the personal computer market based in Santa Clara, CA. The
primary motivation behind the acquisition was to have MCT personnel
supplement the Company's capabilities in the area of reference designs,
application software and the development of highly integrated video
solutions that optimize C-Cube's existing product lines.
ITEM 2. Properties
C-Cube's principal facilities consist of approximately 263,000 square
feet of space in six buildings located in Milpitas, California. This space
is leased pursuant to five agreements that expire on various dates through
April 14, 2005. The Company believes its existing facilities and other
available facilities will be adequate to meet its requirements for at least
the next 12 months.
ITEM 3. 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 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
The following table lists the names, ages and positions held with the
Registrant of all executive officers of the Registrant as of March 3, 1997.
There are no family relationships between any director or executive officer
and any other director or executive officer of the Registrant. Executive
officers serve at the discretion of the Board of Directors.
Name Age Position
---- --- --------
Alexandre A. Balkanski, Ph.D. 36 President, Chief Executive Officer and
Director
James G. Burke 53 Vice President of Finance and
Administration, Chief Financial Officer
and Secretary
Nolan Daines. 37 President and Chief Executive Officer -
DiviCom
Brian T. Connors 42 Vice President of Sales
Alex Daly 35 Vice President of Marketing
Richard Foreman 42 Vice President and Chief Information
Officer
Mark K. Allen 41 Vice President of Operations
Dr. Balkanski co-founded the Company in July 1988 as Vice President and
was named Senior Vice President in August 1989. From February 1993 to
February 1994 Dr. Balkanski was Vice President of Worldwide Sales and
Marketing. He became an Executive Vice President in February 1994 and from
October 1994 to July 1995 served as Chief Operating Officer. He has served
as President and Chief Executive Officer since July 1995. He was elected to
the Board of Directors in April 1993. Prior to founding C-Cube, Dr.
Balkanski was the founder and the President of Diamond Devices Inc., a
semiconductor company which was formed to develop fast algorithms and VLSI
architectures for digital signal processing. Dr. Balkanski currently serves
on the board of directors of Sierra Semiconductor, Inc. and CKS/Group. Dr.
Balkanski holds a B.A. in physics from Harvard College and an M.S. in
physics and a Ph.D. in business economics from Harvard University.
Mr. Burke joined the Company in November 1992 as Vice President of
Finance and Administration, Chief Financial Officer and Secretary. From
April 1992 to October 1992, he was Chief Operating Officer and a Director
of Advanced Network Solutions Corporation, a start-up company focusing on
standards-based electronic messaging. From April 1990 to April 1992, Mr.
Burke was self-employed as a consultant to start-up businesses. He was
previously the founding Chief Financial Officer for both Insite Peripherals
and Vertex Peripherals, and from November 1986 to April 1990 served as
Executive Vice President, Operations of Insite Peripherals. He holds B.S.
degrees in electrical engineering and naval science from the University of
Wisconsin and an M.B.A. from the Harvard University Graduate School of
Business Administration. In March 1997, the C-Cube announced that Mr. Burke
will be leaving the Company.
Mr. Daines has been the President and Chief Executive Officer of
DiviCom since its inception in April 1993. Prior to founding DiviCom,
Mr. Daines served for nearly two years as Executive Director of Engineering
and System Architecture at Compression Labs, Inc., a company specializing
in digital compressed video for broadcast and videoconferencing. Before
joining Compression Labs, Inc., Mr. Daines co-founded Tidewater Associates
where he spent ten years developing a wide range of computer products from
workstations to local area networks.
Mr. Connors joined the Company in January 1994 as a consultant and was
named Vice President of Sales in February 1994. From December 1990 until
February 1994, he served as Vice President of North American Sales of
Synopsys, Inc., an electronic design automation software company. From
August 1983 to December 1990, Mr. Connors was with LSI Logic, Inc. ("LSI
Logic"), a semiconductor company, most recently serving as Vice President,
Strategic Marketing and Sales. He holds a B.S. degree in engineering from
Northern Arizona University.
Mr. Daly joined the Company in June 1995 as Vice President of
Marketing. From 1990 to 1995, he served at Intel Corporation, a
semiconductor company ("Intel"), most recently as director of marketing for
the mobile computing group. He holds a B.S. degree, cum laude, in
electrical engineering from the University of Miami and an M.B.A. from the
University of Dallas.
Mr. Foreman joined the Company in November 1994 as Director of
Information Technology. In January 1996 he was appointed Vice President and
Chief Information Officer. During 1994, Mr. Foreman was Vice President of
the Intouch Group and an information systems consultant to Sybase
Corporation. From April 1983 to January 1994, Mr. Foreman held management
positions at Cypress Semiconductor, a semiconductor company, including
Corporate Controller and Director of Information Systems. Mr. Foreman holds
a B.S., with honors, in Mechanical Engineering from Villanova University,
an M.S. in Systems Engineering from the University of Pennsylvania and an
M.B.A. from the Wharton Graduate School.
Mr. Allen joined the Company in February 1995 as Vice President of
Operations. From 1987 to 1993 he was Vice President of Worldwide Operations
for Cypress Semiconductor, a semiconductor company. From 1993 to 1995, he
was a student at the Haas School of Business at the University of
California, Berkeley. Mr. Allen holds a B.S. in electrical engineering from
Purdue University.
PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's common stock has been included for quotation on the
Nasdaq National Market under the Nasdaq symbol "CUBE" since the Company's
initial public offering in April 1994. The following table sets forth, for
the periods indicated, the high and low closing sale prices for the common
stock on such market (adjusted to reflect a 2-for-1 stock split on
December 19, 1995).
High Low
---- ---
1995:
First Quarter $10 1/8 $ 7 1/2
Second Quarter 13 7/8 8 15/16
Third Quarter 24 1/8 13 5/16
Fourth Quarter 62 1/2 19 7/8
1996:
First Quarter $71 $42 3/4
Second Quarter 61 1/2 29 3/4
Third Quarter 44 3/4 23 3/8
Fourth Quarter 48 1/2 35 1/8
At March 3, 1997, the Company had 936 holders of record of its common
stock and 36,332,320 shares outstanding.
The market price of C-Cube's common stock has fluctuated significantly
since the initial public offering in April 1994. The market price of the
common stock could be subject to significant fluctuations in the future
based on factors such as announcements of new products by C-Cube or its
competitors, quarterly fluctuations in C-Cube's financial results or other
semiconductor companies' financial results, changes in analysts' estimates
of C-Cube's financial performance, general conditions in the semiconductor
and digital video networking industries, conditions in the financial
markets and general conditions in the global economy which might adversely
affect consumer purchasing. In addition, the stock market in general has
experienced extreme price and volume fluctuations, which have particularly
affected the market prices for many high technology companies and which
have often been unrelated to the operating performance of the specific
companies. Many technology companies, including C-Cube, have experienced
historic highs in the market price of their equity securities within the
last 12 months. The market price of C-Cube's common stock has declined
substantially from such historic highs, and may continue to experience
significant fluctuations in the future.
Dividend Policy
The Company has never paid cash dividends on its common stock. The
Company presently intends to retain all cash for use in the operation and
expansion of the Company's business and does not anticipate paying any cash
dividends in the near future. In addition, the Company's existing bank
credit agreement prohibits the declaration or payment of cash dividends on
its common stock.
ITEM 6. Selected Financial Data
The following selected consolidated financial data for each of the
three years in the period ended December 31, 1996 have been derived from
the audited consolidated financial statements of the Company included
herein. The selected consolidated financial data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial
statements and notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except percentage and per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues:
Product $319,558 $123,190 $42,026 $20,411 $ 8,783
Development contracts 200 1,412 2,993 3,328 4,848
-------- -------- ------- ------- -------
Total 319,758 124,602 45,019 23,739 13,631
-------- -------- ------- ------- -------
Costs and expenses:
Cost of product revenues 144,985 59,253 19,574 8,304 4,850
Research and development 44,177 14,342 9,774 7,372 7,219
Selling, general and
administrative 39,002 19,227 11,283 8,217 5,326
Purchased in-process technology 131,349 3,800 -- -- --
-------- -------- ------- ------- -------
Total 359,513 96,622 40,631 23,893 17,395
-------- -------- ------- ------- -------
Income (loss) from operations (39,755) 27,980 4,388 (154) (3,764)
Interest income (expense), net (28) 2,059 689 (257) (273)
Equity in net loss and write-off
of joint ventures -- -- -- -- (1,236)
-------- -------- ------- ------- -------
Income (loss) before income taxes
and minority interest (39,783) 30,039 5,077 (411) (5,273)
Income tax expense 32,944 4,933 69 71 56
-------- -------- ------- ------- -------
Income (loss) before minority
interest (72,727) 25,106 5,008 (482) (5,329)
Minority interest in net income
of subsidiary 318 211 -- -- --
-------- -------- ------- ------- -------
Net income (loss) $(73,045) $ 24,895 $ 5,008 $ (482) $(5,329)
======== ======== ======= ======= =======
Net income (loss) per share (1) $ (2.15) $ 0.72 $ 0.16 $ (0.02)
======== ======== ======= =======
Shares used in computation (1) 33,928 34,651 31,764 25,406
======== ======== ======= =======
Product Gross Margin Data:
Net product revenues $319,558 $123,190 42,026 20,411 8,783
Cost of product revenues 144,985 59,253 19,574 8,304 4,850
-------- -------- ------- ------- -------
Product gross margin $174,573 $ 63,937 22,452 12,107 3,933
======== ======== ======= ======= =======
Product gross margin percentage 54.6% 51.9% 53.4% 59.3% 44.8%
======== ======== ======= ======= =======
Balance Sheet Data:
Cash and short-term investments $ 82,246 $144,089 $43,833 $ 8,608 $10,907
Working capital 124,487 158,577 48,751 7,200 7,898
Total assets 279,515 203,526 67,862 23,925 23,943
Short-term debt and current
portion of long-term obligations 25,337 3,093 6,908 6,429 5,972
Long-term obligations, net of
current portion 87,700 88,010 2,081 2,613 2,529
Stockholders' equity 118,572 87,535 53,488 10,445 10,793
</TABLE>
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the computation of net income (loss) per share.
Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
1996 1995
---------------------------------------- ----------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(In thousands, except per share and percentage amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Product $95,520 $ 83,180 $72,958 $67,900 $50,353 $35,322 $ 21,054 $16,461
Development contracts -- -- -- 200 200 -- 560 652
------- --------- ------- ------- ------- ------- -------- -------
Total 95,520 83,180 72,958 68,100 50,553 35,322 21,614 17,113
------- --------- ------- ------- ------- ------- -------- -------
Costs and expenses:
Cost of product revenues 42,017 37,428 33,561 31,979 24,025 16,955 10,480 7,793
Research and development 15,327 12,637 9,363 6,850 4,991 3,598 3,007 2,746
Selling, general and
administrative 12,123 10,785 8,294 7,800 6,056 5,183 4,235 3,753
Purchased in-process technology -- 131,349 -- -- 3,800 -- -- --
------- --------- ------- ------- ------- ------- -------- -------
Total 69,467 192,199 51,218 46,629 38,872 25,736 17,722 14,292
------- --------- ------- ------- ------- ------- -------- -------
Income (loss) from operations 26,053 (109,019) 21,740 21,471 11,681 9,586 3,892 2,821
Interest income (expense), net (677) (59) 237 471 642 412 528 477
------- --------- ------- ------- ------- ------- -------- -------
Income (loss) before income taxes
and minority interest 25,376 (109,078) 21,977 21,942 12,323 9,998 4,420 3,298
Income tax expense 8,454 8,679 8,131 7,680 2,974 1,570 285 104
------- --------- ------- ------- ------- ------- -------- -------
Income (loss) before minority
interest 16,922 (117,757) 13,846 14,262 9,349 8,428 4,135 3,194
Minority interest (363) -- -- 681 211 -- -- --
------- --------- ------- ------- ------- ------- -------- -------
Net income (loss) $17,285 $(117,757) $13,846 $13,581 $ 9,138 $ 8,428 $ 4,135 $ 3,194
======= ========= ======= ======= ======= ======= ======== =======
Net income (loss) per share (1) $0.45 $ (3.46) $ 0.39 $ 0.38 $ 0.26 $ 0.24 $ 0.12 $ 0.10
======= ========= ======= ======= ======= ======= ======== =======
Shares used in computation (1) 38,648 34,078 35,697 36,042 35,825 35,264 34,332 33,616
======= ========= ======= ======= ======= ======= ======== =======
Product Gross Margin Data:
Net product revenues $95,520 $ 83,180 $72,958 $67,900 $50,353 $35,322 $21,054 $16,461
Cost of product revenues 42,017 37,428 33,561 31,979 24,025 16,955 10,488 7,793
------- --------- ------- ------- ------- ------- -------- -------
Product gross margin $53,503 $ 45,752 $39,397 $35,921 $26,328 $18,367 $10,566 $ 8,668
======= ========= ======= ======= ======= ======= ======== =======
Product gross margin
percentage 56.0% 55.0% 54.0% 52.9% 52.3% 52.0% 50.2% 52.7%
======= ========= ======= ======= ======= ======= ======== =======
</TABLE>
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the computation of net income (loss) per share.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The following table sets forth certain operating data as a percentage
of net revenues for the years ended December 31, 1996, 1995 and 1994:
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
Net revenues:
Product 99.9% 98.9% 93.4%
Development contracts 0.1 1.1 6.6
----- ----- -----
Total 100.0 100.0 100.0
----- ----- -----
Costs and expenses:
Cost of product revenues 45.3 47.6 43.5
Research and development 13.8 11.5 21.7
Selling, general and administrative 12.2 15.4 25.1
Purchased in-process technology 41.1 3.0 --
----- ----- -----
Total 112.4 77.5 90.3
----- ----- -----
Income (loss) from operations (12.4) 22.5 9.7
Interest income (expense), net 0.0 1.6 1.5
----- ----- -----
Income (loss) before income taxes and
minority interest (12.4) 24.1 11.2
Income tax expense 10.3 4.0 0.1
----- ----- -----
Income (loss) before minority interest (22.7) 20.1 11.1
Minority interest 0.1 0.1 --
----- ----- -----
Net income (loss) (22.8)% 20.0% 11.1%
===== ===== =====
Acquisition
On August 28, 1996, the Company acquired DiviCom Inc. a digital video
networking company. C-Cube paid $65.7 million in cash, issued 2.3 million
shares of its common stock, assumed options exercisable for 264,000 shares
of its common stock and incurred $1.35 million in other costs in exchange
for the outstanding shares of DiviCom stock that C-Cube did not already
own. C-Cube assumed net liabilities of $1.9 million, purchased technology
of $14.2 million, which will be amortized over five years, and wrote-off
$131.3 million of in-process technology.
The Company incurred acquisition-related charges of $133 million in the
third quarter of 1996, which include the in-process technology write-off
and bonuses paid to DiviCom employees.
The acquisition of DiviCom is accounted for as a purchase and therefore
DiviCom financial results from the date of acquisition, August 28, 1996,
are included in C-Cube's consolidated financial results.
Net Revenues
Product revenues increased 159% to $319.6 million in 1996 compared to
$123.2 million in 1995. Revenue from the VideoCD market increased
significantly due to an increase in volume shipments of MPEG 1 VideoCD
system decoders, led by the CL484VCD advanced MPEG 1 system decoder, which
was introduced and began significant volume shipments in the first quarter
of 1996. Revenue from the Company's family of encoder products increased
primarily due to the acquisition of DiviCom and shipments of its MediaView(tm)
MV20 program encoder as well as increased volume shipments of C-Cube's MPEG
2 encoder chips. Revenue from the digital video broadcast market increased
due to increased volume shipments of the CL9100 MPEG 2 video decoder
product and the CL9110 MPEG 2 transport demultiplexer product. The increase
in product revenues noted above was partially offset by a decline in the
CL450 MPEG 1 video decoder product shipments and an increased provision for
sales return reserves.
1995 product revenues increased 193% to $123.2 million compared to
$42.0 million in 1994. The increase in product revenues was primarily due
to volume shipments of the CL480 and CL450 MPEG 1 decoder products, the
Company's MPEG 2 encoder products and the CL9100 and CL9110 MPEG 2 decoder
products. The CL480 began shipping at the end of 1994, but began
significant volume shipments in the first quarter of 1995. The CLM4700
MPEG 2 encoders began volume shipping in the second half of 1994. The
CL9100 and CL9110 began shipping at the end of 1994, but began to ship in
significant volume in the second half of 1995.
The Company's revenues from development contracts decreased to $0.2
million in 1996 as compared to $1.4 million in 1995 and $3.0 million in
1994 due to the Company's focus on product sales.
During 1996 one customer accounted for 12% of net revenues. During 1995
two customers accounted for 14% and 10% of the Company's net revenues,
respectively. There can be no assurance that such customers will continue
to account for a significant percentage of the Company's revenues in the
future. During 1994 no individual customer represented 10% or more of net
revenues.
International revenues accounted for 67%, 70% and 38% of net revenues
in 1996, 1995 and 1994, respectively. International revenues were a
significant portion of total revenues primarily due to volume shipments of
the CL480 family of products in Asia for VideoCD players in the consumer
market. The Company sells products and supports customers in Japan
primarily through C-Cube Japan, Inc. ("CCJ"), the Company's 65% owned joint
venture with Kubota Corporation. The Company expects that international
revenues will continue to represent a significant portion of net revenues.
C-Cube's international sales and manufacturing are subject to changes in
foreign political and economical conditions and to other risks, including
fluctuations in foreign exchange rates, export/import controls and changes
in tax laws, tariffs and freight rates. See "Item 1. Business -
International Business Activities."
Product Gross Margin
C-Cube's product gross margin percentage increased to 54.6% in 1996
from 51.9% in 1995 primarily due to cost reduction efforts and a shift in
product mix whereby the higher margin encoder products made up a larger
portion of sales, due in part to the acquisition of DiviCom. The increase
in product gross margin was partially offset by lower margins on end-of-
life products in 1996 as compared to 1995. C-Cube's product gross margin
percentage decreased to 51.9% in 1995 from 53.4% in 1994 primarily due to a
shift in product mix whereby the lower margin MPEG 1 and MPEG 2 decoder
products made up a larger portion of sales, partially offset by cost
reductions and improved manufacturing yields.
The markets into which the Company sells its products are characterized
by extreme price competition, and C-Cube expects the average selling prices
of its products and the gross margin for such products will decrease over
the life of each product. In particular, C-Cube expects to experience
significant price competition over the next year with respect to decoder
products.* The Company anticipates that its product gross margin may
decrease due to a continuing change in product mix toward lower margin
MPEG 1 and MPEG 2 decoder products and to decreases in average selling
prices of certain products.* In order to partially offset declines in the
average selling prices of its products, the Company will need to reduce the
cost of its products through design changes, obtaining cost reductions from
its manufacturers as and if volumes increase, and successfully managing
manufacturing and subcontracting relationships. The failure of the Company
to design and introduce lower-cost versions of its products in a timely
manner, to take advantage of lower-cost processes, or to successfully
manage manufacturing relations could have a material adverse effect on the
Company's business and results of operations.
Research and Development Expenses
In 1996, research and development expenses were $44.2 million or 13.8%
of net revenues, compared to $14.3 million or 11.5% of net revenues, in
1995. The increase in research and development expenses from the prior year
is primarily related to an increase in employee-related costs as well as an
increase in depreciation and product start-up costs. In 1995, research and
development expenses were $14.3 million or 11.5% of net revenues, compared
to $9.8 million or 21.7% of net revenues in 1994. The increase in research
and development expenses from 1994 reflects higher staffing levels and
increased product start-up costs. The increase in research and development
expenses reflects the Company's continued efforts to develop and bring to
market innovative and cost-effective digital video solutions. The Company
anticipates that absolute levels of research and development expenses will
increase in future periods.*
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $39.0 million
or 12.2% of net revenues in 1996 compared to $19.2 million or 15.4% of net
revenues for 1995. The increase in absolute dollars was primarily due to
increased staffing and related expenses and increased commissions on higher
sales levels. Selling, general and administrative expenses increased to
$19.2 million or 15.4% of net revenues in 1995 compared to $11.3 million or
25.1% of net revenues for 1994. The increase from 1994 was primarily due to
increased staffing and related expenses, increased commissions on higher
sales levels and a higher provision for doubtful accounts. The decrease in
selling, general and administrative expenses as a percentage of net
revenues over the past three years is primarily due to the significant
increase in net revenues over the same period. The Company expects that
absolute levels of selling, general and administrative expenses will
continue to increase in future periods.*
Interest Income (Expense)
Interest income increased to $5.9 million in 1996 compared to $3.6
million in 1995 primarily due to higher average balances in cash and
investments in 1996 as compared to 1995. Interest income increased to $3.6
million in 1995 compared to $1.6 million in 1994 primarily due to the
significant increase in cash and investments from cash provided by
operations as well as the proceeds from the Company's convertible
subordinated note offering in the fourth quarter of 1995. Interest expense
and other increased to $6.0 million in 1996 from $1.6 million in 1995 due
primarily to interest paid on the $86.3 million principal on convertible
subordinated notes issued in the fourth quarter of 1995. Interest expense
and other increased to $1.6 million in 1995 from $1.0 million in 1994.
Income Tax Expense
The Company provided $32.9 million for income taxes on a loss before
income taxes and minority interest of $39.8 million because the purchased
in-process technology charge was not tax deductible. Excluding the
purchased in-process technology charge, the effective tax rate would have
been 36%. The 36% effective rate for 1996 is less than the combined federal
and state statutory rate primarily due to tax credits. The Company's
effective tax rate for 1995 of 16.5% is lower than the federal statutory
rate as the Company has reduced its valuation allowance against its
deferred tax assets in order to recognize the earned benefit from operating
loss carryforwards. The Company's effective tax rate for 1994 of 1%
primarily represents the federal alternative minimum tax rate.
Factors that May Affect Future Results
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, new
product introductions by the Company's competitors, market acceptance of
products of both C-Cube and its customers, supply constraints for other
components incorporated into its customers' products, fluctuations in the
Japanese Yen to U.S. Dollar exchange rate, and the level of expenditures in
manufacturing, research and development, and sales, general and
administrative functions.
In addition, C-Cube's operating results are subject to fluctuation in
the markets for its customers' products, particularly the consumer
electronics market, which has been extremely volatile in the past, and the
satellite broadcast and wireless cable markets, which are in an early
stage, creating uncertainty with respect to product volume and timing.
Furthermore, to the extent the Company is unable to fulfill its customers'
purchase orders on a timely basis, these orders may be canceled due to
changes in demand in the markets for its customers' products. Historically,
the Company has generally shipped a substantial portion of its product in
the last month of a given quarter. A significant portion of C-Cube's
expenses are fixed in the short term, and the timing of increases in
expenses is based in large part on the Company's forecast of future
revenues. As a result, if revenues do not meet the Company's expectations,
it may be unable to quickly adjust expenses to levels appropriate to actual
revenues, which could have a material adverse effect on the Company's
business and results of operations.
The growth in revenues and operating income experienced by C-Cube in
recent quarters is not necessarily indicative of future results. In
addition, in view of the significant growth in recent years, the Company
believes that period-to-period comparisons of its financial results should
not be relied upon as an indication of future performance. Due to the
Company's dependence on the consumer electronics market, the substantial
seasonality of sales in that market could impact the Company's revenues and
net income. In particular, C-Cube believes that there may be seasonality in
the Asia-Pacific region related to the Chinese New Year, which falls within
the first calendar quarter, which would indicate relatively lower product
demand from mid-first quarter until mid-third quarter. If the future
geographic mix of the Company's sales shifts towards the U.S. and Europe,
C-Cube would anticipate higher revenues and net income in the third and
fourth calendar quarters as system manufacturers in these areas make
purchases in preparation for the holiday season, and comparatively less
revenues and net income in the first and second calendar quarters. The
Company's significant growth in prior periods makes it impossible to assess
the effect of any such seasonal trends on the Company's operating results.
There can be no assurance, however, that the Company's operating results
will not exhibit such seasonal characteristics.
As a result of the foregoing, the Company's operating results and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in net revenues or net income from levels expected by
securities analysts could have an immediate and significant adverse effect
on the trading price of the Company's common stock.
The Company has recently experienced a period of significant growth
including its recent acquisition of DiviCom Inc., which has placed, and
could continue to place, a significant strain on C-Cube's limited personnel
and other resources. The Company's ability to manage any further growth,
should it occur, would require significant expansion of its research and
development and marketing and sales capabilities and personnel. In
particular, the Company is in the process of expanding its sales and
marketing organization to increase coverage of the United States, Europe
and the Asia-Pacific region. There can be no assurance that the Company
will be able to find qualified personnel to fill such sales and marketing
positions or be able to successfully manage a broader sales and marketing
organization. In addition, the sale and distribution of products to
numerous large system manufacturers in diverse markets and the requirements
of such manufacturers for design support would also place substantial
demands on C-Cube's research and development and sales functions. The
Company's ability to manage any further growth, should it occur, would
depend upon its ability to manage and potentially expand its foundry
relationships. The failure of C-Cube's management to effectively expand or
manage these functions consistent with any growth which may occur could
have a material adverse effect on the Company's business and results of
operations.
The market price of C-Cube's common stock has fluctuated significantly
since the initial public offering in April 1994. The market price of the
common stock could be subject to significant fluctuations in the future
based on factors such as announcements of new products by C-Cube or its
competitors, quarterly fluctuations in C-Cube's financial results or other
semiconductor companies' financial results, changes in analysts' estimates
of C-Cube's financial performance, general conditions in the semiconductor
and digital video networking industries, conditions in the financial
markets and general conditions in the global economy which might adversely
affect consumer purchasing. In addition, the stock market in general has
experienced extreme price and volume fluctuations, which have particularly
affected the market prices for many high technology companies and which
have often been unrelated to the operating performance of the specific
companies. Many technology companies, including C-Cube, have experienced
historic highs in the market price of their equity securities within the
last 12 months. The market price of C-Cube's common stock has declined
substantially from such historic highs, and may continue to experience
significant fluctuations in the future.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments decreased to $82.2
million at December 31, 1996 from the $144.1 million at the end of 1995
primarily due to the $65.7 million cash paid related to the DiviCom
acquisition (see Note 2 of Notes to Consolidated Financial Statements) and
$24.5 million paid to TSMC for wafer capacity. Working capital decreased to
$124.5 million at December 31, 1996 from $158.6 million at the end of 1995
primarily due to the reduction in cash and investments discussed above.
The Company's operating activities provided cash of $15.2 million in
1996, compared to $28.8 million in 1995 reflecting a reduced investment in
receivables and an increased investment in production capacity rights.
C-Cube's investing activities, exclusive of the maturities and
purchases of short-term investments of $54.7 million and $49.3 million,
respectively, used cash of $75.8 million, primarily for the acquisition of
DiviCom and capital expenditures.
Cash used in financing activities was $2.0 million, reflecting debt
payments of $9.5 million partially offset by sales of stock pursuant to
employee stock plans of $7.3 million.
At December 31, 1996, the Company had an available bank line of credit
of $20,000,000 which expires September 1, 1997. Borrowings bear interest at
the bank's prime rate (8.25% at December 31, 1996). There were no
borrowings under this line at December 31, 1996. The line is collateralized
by the Company's receivables, inventory and fixed assets. The agreement
requires the Company, among other things, to maintain a tangible net worth,
as defined and including convertible subordinated debt, of $102,964,000,
quarterly net income (no more than one quarterly loss per fiscal year), a
minimum quick ratio of 0.8 to 1, and a maximum debt to tangible net worth
(as defined) ratio of 1.4 to 1. In addition, the bank agreement prohibits
the payment of cash dividends. The Company was in compliance with these
covenants at December 31, 1996.
In the second quarter of 1996, the Company expanded and formalized its
relationship with Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC") to
provide additional wafer production capacity in the years 1996 to 2001. The
agreement with TSMC provides that TSMC will produce and ship wafers to C-
Cube at specified prices and requires C-Cube to make two advance payments
totaling $49 million. TSMC will apply this prepayment against a portion of
the wafer cost as product is delivered to C-Cube. Accordingly, the prepaid
amount will be amortized to inventory as wafers are received. The first
advance payment of $24.5 million was made in June 1996, and the final
payment, which is evidenced by an unsecured promissory note, is due June
1997. At December 31, 1996, $2.8 million of the $49 million production
capacity rights is included in other current assets.
Based on current plans and business conditions, C-Cube expects that its
cash, cash equivalents and short-term investments together with any amounts
generated from operations and available borrowings will be sufficient to
meet the Company's cash requirements for at least the next 12 months.*
However, there can be no assurance that the Company will not be required to
seek other financing sooner or that such financing, if required, will be
available on terms satisfactory to the Company. The Company will continue
to evaluate its options for the conversion or repayment of its convertible
subordinated notes as obligations become due. In addition, the Company has
considered and will continue to consider various possible transactions to
secure additional foundry capacity, which could include, without
limitation, equity investments in, prepayments to, non-refundable deposits
with or loans to foundries in exchange for guaranteed capacity, "take or
pay" contracts that commit the Company to purchase specified quantities of
wafers over extended periods, joint ventures or other partnership
relationships with foundries.
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
Index to Financial Statements and Financial Statement Schedule
- --------------------------------------------------------------
Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Independent Auditors' Report
Schedule II-Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are not required, are not
applicable, or the information is included in the financial statements or
notes thereto.
[DELOITTE & TOUCHE LOGO APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
C-Cube Microsystems Inc.:
We have audited the accompanying consolidated balance sheets of C-Cube
Microsystems Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of C-Cube Microsystems
Inc. and subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
San Jose, California
January 15, 1997
<PAGE>
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
December 31, December 31,
1996 1995
---- ----
ASSETS
Current assets:
Cash and equivalents $ 76,241 $133,414
Short-term investments 6,005 10,675
Receivables, net of allowances: 1996 -- $14,092,
1995 -- $2,787 40,706 24,421
Inventories 28,056 11,871
Deferred taxes 18,423 3,414
Other current assets 23,246 2,468
-------- --------
Total current assets 192,677 186,263
Property and equipment -- net 22,653 7,222
Production capacity rights 46,200 --
Distribution rights -- net 1,812 1,977
Purchased technology -- net 12,895 3,095
Other assets 3,278 4,969
-------- --------
Total $279,515 $203,526
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 24,500 $ 1,934
Accounts payable 18,320 10,704
Accrued compensation and benefits 10,243 4,253
Other accrued liabilities 7,260 3,987
Income taxes payable 320 5,649
Deferred contract revenue 6,710 --
Current portion of long-term obligations 837 1,159
-------- --------
Total current liabilities 68,190 27,686
Long-term obligations 87,700 88,010
Deferred taxes 4,440 --
-------- --------
Total liabilities 160,330 115,696
-------- --------
Minority interest in subsidiary 613 295
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000 shares
authorized -- --
Common stock, $0.001 par value, 50,000 shares
authorized; shares outstanding:
1996 -- 36,013, 1995 -- 32,363 191,044 87,124
Deferred stock compensation (250) (635)
Notes receivable from stockholders (305) (459)
Accumulated translation adjustments (1,238) (860)
Unrealized loss on investments (13) (14)
Retained earnings (deficit) (70,666) 2,379
-------- --------
Total stockholders' equity 118,572 87,535
-------- --------
Total $279,515 $203,526
======== ========
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
Net revenues:
Product $319,558 $123,190 $42,026
Development contracts 200 1,412 2,993
-------- -------- -------
Total 319,758 124,602 45,019
-------- -------- -------
Costs and expenses:
Cost of product revenues 144,985 59,253 19,574
Research and development 44,177 14,342 9,774
Selling, general and administrative 39,002 19,227 11,283
Purchased in-process technology 131,349 3,800 --
-------- -------- -------
Total 359,513 96,622 40,631
-------- -------- -------
Income (loss) from operations (39,755) 27,980 4,388
Other income (expense):
Interest income and other 5,934 3,637 1,643
Interest expense and other (5,962) (1,578) (954)
-------- -------- -------
Total (28) 2,059 689
-------- -------- -------
Income (loss) before income taxes and
minority interest (39,783) 30,039 5,077
Income tax expense 32,944 4,933 69
-------- -------- -------
Income (loss) before minority interest (72,727) 25,106 5,008
Minority interest in net income of
subsidiary 318 211 --
-------- -------- -------
Net income (loss) $(73,045) $ 24,895 $ 5,008
======== ======== =======
Net income (loss) per share $ (2.15) $ 0.72 $ 0.16
======== ======== =======
Shares used in computation 33,928 34,651 31,764
======== ======== =======
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Convertible Notes
Preferred Stock Common Stock Deferred Receivable Accumulated Unrealized Retained Total
---------------- ---------------- Stock From Translation Loss on Earnings Stockholders'
Shares Amount Shares Amount Compensation Stockholders Adjustments Investments (Deficit) Equity
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1994 7,494 $37,064 8,476 $ 2,743 $ (893) $(614) $ (331) $ -- $(27,524) $ 10,445
Common stock issued under
stock plans 1,808 863 863
Conversion of convertible
preferred stock into
common stock (7,494) (37,064) 14,988 37,064 --
Sale of common stock net of
issuance costs of $1,111 5,520 37,391 37,391
Deferred stock compensation 421 (615) (194)
Amortization of deferred
stock compensation 443 443
Collection of notes
receivable from stockholders 108 108
Accumulated translation
adjustments (495) (495)
Unrealized loss on investments (81) (81)
Net income 5,008 5,008
--------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1994 -- -- 30,792 78,482 (1,065) (506) (826) (81) (22,516) 53,488
Common stock issued under
stock plans 1,571 1,967 1,967
Tax benefit from employee
stock transactions 5,907 5,907
Amortization of deferred
stock compensation 430 430
Collection of notes
receivable from stockholders 47 47
Accumulated translation
adjustments (34) (34)
Unrealized gain on investments 67 67
Capital activity of subsidiary 768 768
Net income 24,895 24,895
--------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1995 -- -- 32,363 87,124 (635) (459) (860) (14) 2,379 87,535
Common stock issued under
stock plans 1,359 7,302 7,302
Common stock issued and
stock options assumed in
connection with
business acquisition 2,291 76,580 76,580
Tax benefit from employee
stock transactions 20,038 20,038
Amortization of deferred
stock compensation 385 385
Collection of notes
receivable from stockholders 154 154
Accumulated translation
adjustments (378) (378)
Unrealized gain on investments 1 1
Net loss (73,045) (73,045)
--------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1996 -- $-- 36,013 $191,044 $(250) $(305) $(1,238) $(13) $(70,666) $118,572
========================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income (loss) $(73,045) $24,895 $5,008
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Equity in net loss and write-off of
joint ventures and investments -- -- 200
Minority interest in subsidiary 318 295 --
Depreciation and amortization 7,728 3,073 2,079
Deferred income taxes (9,007) (5,224) --
Purchased in-process technology 131,349 3,800 --
Changes in assets and liabilities:
Receivables (890) (13,627) (4,539)
Inventories (6,751) (7,138) (1,602)
Production capacity rights (24,500) -- --
Prepaids and other assets (455) (244) (1,342)
Accounts payable (6,685) 7,312 504
Accrued liabilities (2,841) 15,707 88
-------- -------- -------
Net cash provided by operating activities 15,221 28,849 396
-------- -------- -------
Cash flows from investing activities:
Maturities of short-term investments 54,701 49,700 18,914
Purchases of short-term investments (49,297) (29,758) (44,860)
Capital expenditures (17,141) (5,389) (1,493)
Acquisition of business (net of $8.4 million
cash acquired in 1996) (58,568) (4,818) --
Other assets (126) (264) (558)
-------- -------- -------
Net cash provided by (used in) investing
activities (70,431) 9,471 (27,997)
-------- -------- -------
Cash flows from financing activities:
Bank term loan borrowings (repayments) -- net -- (694) (306)
Notes payable -- net (8,836) (3,596) 98
Repayments of capital lease obligations (626) (1,078) (1,444)
Issuance of convertible subordinated notes -- 83,662 --
Sale of common stock, net of notes receivable 7,302 2,735 38,254
Collection of stockholder notes receivable 154 47 108
-------- -------- -------
Net cash provided by (used in) financing
activities (2,006) 81,076 36,710
-------- -------- -------
Exchange rate impact on cash and equivalents 43 344 (45)
-------- -------- -------
Net increase (decrease) in cash and
equivalents (57,173) 119,740 9,064
Cash and equivalents, beginning of period 133,414 13,674 4,610
-------- -------- -------
Cash and equivalents, end of period $ 76,241 $133,414 $13,674
======== ======== =======
Supplemental schedule of noncash investing
and financing activities:
Computer and office equipment acquired
under capital lease arrangements $ -- $ -- $ 994
Deferred stock compensation -- -- 615
Unrealized gain (loss) on investments 1 67 (81)
Issuance of note payable for production
capacity rights 24,500 -- --
Supplemental disclosure of cash flow
information --
Cash paid during the period for:
Interest $ 5,852 $ 519 $ 571
Income taxes 38,127 133 69
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
Note 1. Organization and Significant Accounting Policies
Organization
C-Cube Microsystems Inc. (the "Company") was founded in July 1988. The
Company operates in one industry as a leading provider of both digital
video semiconductor solutions which implement international standards for
digital video, including MPEG 1 and MPEG 2, and digital video networks for
broadcast communications applications.
Consolidation
The consolidated financial statements include the Company, its wholly
owned subsidiaries and C-Cube Japan, Inc. (a 65% owned Japanese subsidiary)
after elimination of intercompany accounts and transactions.
Cash and Equivalents and Short-term Investments
All highly liquid debt instruments purchased with a remaining maturity of
three months or less are classified as cash equivalents.
Management determines the classification of debt and equity securities at
the time of purchase and reevaluates the classification at each balance
sheet date. Debt securities are classified as available-for-sale when the
Company generally has the ability and intent to hold such securities to
maturity, but, in certain circumstances, may potentially dispose of such
securities prior to their maturity. Securities available-for-sale are
reported at fair value with unrealized gains and losses reported as a
separate component of stockholders' equity. All available-for-sale
securities are classified as current assets.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over estimated useful lives of three years.
Equipment under capital lease and leasehold improvements is amortized over
the shorter of their estimated useful lives, generally three years, or the
lease term.
Investments in Companies
Investments in 20% to 50% owned companies are accounted for using the
equity method. Investments in less than 20% owned companies are accounted
for using the cost method unless the Company can exercise significant
influence or the investee is economically dependent upon the Company, in
which case the equity method is used. Such investments are included in
other assets.
Revenue Recognition
The Company records product sales to customers and distributors at the
time of shipment. Certain of the Company's agreements with its distributors
permit limited stock rotation and provide for price protection. Allowances
for returns and adjustments, including price protection, are provided at
the time sales are recorded.
Revenue from product development agreements is recognized using the
percentage of completion method. Estimates are reviewed and revised
periodically throughout the lives of the contracts. Any revisions are
recorded in the accounting period in which the revisions are made.
Research and Development
Research and development expenses include costs and expenses associated
with the development of the Company's design methodology and the design and
development of new products, including initial nonrecurring engineering and
product verification charges from foundries. Research and development is
expensed as incurred.
Income Taxes
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, which requires an asset and liability
approach to account for income taxes and requires recognition of deferred
tax liabilities and assets for the expected future tax consequences of
temporary differences between the financial statement carrying amounts and
the tax bases of assets and liabilities and net operating loss and tax
credit carryforwards.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets, liabilities, revenues
and expenses as of the dates and for the periods presented. Significant
estimates include the allowance for doubtful accounts, provisions for stock
rotation, price protection and warranty as well as realization of
intangible assets. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Financial instruments include cash equivalents, short-term investments, a
promissory note and convertible subordinated notes. Cash equivalents and
short-term investments are stated at fair value based on quoted market
prices. Fair value of convertible subordinated notes is determined using
market information and valuation methodologies considered to be
appropriate. The estimated fair value of the Company's convertible
subordinated notes was $111 million and $184 million at December 31, 1996
and 1995, respectively. The estimated fair value of all other financial
instruments at December 31, 1996 and 1995 was not materially different from
the values presented in the consolidated balance sheets.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-
term investments and trade accounts receivable. By policy, the Company
places its investments only with financial institutions meeting its credit
guidelines and, other than U.S. Government Treasury instruments, limits the
amounts invested in any one institution or in any type of instrument.
Almost all of the Company's trade accounts receivable are derived from
sales to manufacturers and distributors in the consumer electronics,
computer and communications markets. The Company performs ongoing credit
evaluations of its customers' financial condition and manages its exposure
to losses from bad debts by limiting the amount of credit extended whenever
deemed necessary and generally does not require collateral.
Product and Geographic Risks
Beginning in the second quarter of 1995, sales of the Company's MPEG 1
system decoders have represented a significant percentage of the Company's
total net revenues. The Company expects that revenues from its MPEG 1
system decoders will account for a significant portion of its product
revenues in 1997. Declines in demand for these products, whether as a
result of competition, technological change or otherwise, would have a
material adverse effect on the Company's business and results of
operations.
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 and changes in tax laws, tariffs and
freight rates. The Asian consumer electronics market comprises a
substantial market for products utilizing the Company's MPEG 1 system
decoders, such as VideoCD players. As a consequence, any political,
economic or other instability in the region could significantly reduce
demand for products from certain of the Company's major customers.
Foreign Currency Translation
The functional currency of C-Cube Japan is the Japanese yen. Accordingly
all assets and liabilities of C-Cube Japan are translated at the current
exchange rate at the end of the period and revenues and costs at average
exchange rates in effect during the period. Gains and losses from
translation are recorded directly into a separate component of
stockholders' equity. Foreign currency transaction gains and losses were
immaterial in 1996, 1995, and 1994.
Amortization of Distribution Rights
As a result of the Company increasing its ownership interest in C-Cube
Japan to 65% at December 31, 1992, the Company capitalized $2,471,000 as
distribution rights and amortizes this intangible asset over its expected
useful life of 15 years. Accumulated amortization was $659,000 and $494,000
at December 31, 1996 and 1995, respectively. The Company evaluates the
recoverability of this and other long-lived assets on a regular basis based
on estimated future undiscounted cash flows.
During 1995, the Company and Kubota Corporation contributed additional
equity to C-Cube Japan and the Company recorded a $768,000 adjustment to
paid-in capital to reflect subsidiary losses previously recognized.
Net Income (Loss) Per Share
Net income (loss) per share is based on the weighted average number of
common and dilutive common equivalent shares (common stock options)
outstanding during 1996, 1995 and 1994. Pursuant to rules of the Securities
and Exchange Commission Staff, all common shares issued and options to
purchase shares of common stock granted by the Company at a price less than
the initial public offering price during the twelve months preceding the
offering date (using the treasury stock until shares are issued) have been
included in the computation of common and common equivalent shares
outstanding for periods prior to the April 1994 initial public offering.
Stock-Based Compensation
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board No.
25, "Accounting for Stock Issued to Employees."
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation. These reclassifications have no effect on net
income or stockholders' equity.
Note 2. Acquisitions
On August 28, 1996, the Company acquired DiviCom Inc. a digital video
networking company. C-Cube paid $65.7 million in cash, issued 2.3 million
shares of its common stock valued at $69.6 million, assumed options
exercisable for 264,000 shares of its common stock valued at $7.0 million
and incurred $1.35 million in other costs in exchange for the outstanding
shares of DiviCom stock that C-Cube did not already own. The purchase price
was allocated on the basis of the estimated fair value of the assets
acquired and liabilities assumed as follows (in thousands):
Fair value of tangible assets
acquired (including cash of $8,448) $ 53,741
Purchased technology 14,159
In-process technology 131,349
Liabilities assumed (including
deferred tax liabilities of $5,239) (55,653)
--------
Purchase consideration $143,596
========
The purchased technology is being amortized over 5 years. The Company
incurred acquisition-related charges of $133 million, which include the in-
process technology write-off and bonuses paid to DiviCom employees.
The acquisition of DiviCom is accounted for as a purchase and therefore
DiviCom financial results from the date of acquisition, August 28, 1996,
are included in C-Cube's consolidated financial results.
Excluding the one-time charge of $133 million, intercompany sales and
cost of sales, and including amortization of purchased technology, pro
forma revenue, net income and earnings per share would be $354 million, $49
million and $1.29, respectively for the year ended December 31, 1996, and
$155 million, $21 million and $.57, respectively for the year ended
December 31, 1995 assuming DiviCom had been acquired at the beginning of
the respective periods. The pro forma results are not necessarily
indicative of what actually would have occurred if the acquisition had been
in effect for the entire periods presented or of future operations of the
combined companies.
On November 17, 1995, the Company acquired all of the outstanding capital
stock of Media Computer Technologies, Inc. ("MCT"), a fabless semiconductor
company marketing video based products, for cash of $6.35 million,
including $100,000 of acquisition costs. The Company withheld $1,125,000 of
the purchase price which is included in long-term obligations as of
December 31, 1996 and 1995. The acquisition was accounted for using the
purchase method of accounting. Accordingly, the purchase price was
allocated on the basis of the estimated fair value of the assets acquired
and liabilities assumed. Purchased technology of $1.7 million and goodwill
of $1.6 million are each being amortized over 5 years. Approximately $3.8
million of the total purchase price represented the value of in-process
technology that had not yet reached technological feasibility and had no
alternative future use and was charged to the Company's operations in the
fourth quarter of fiscal 1995.
Note 3. Wafer Supply Agreement
In the second quarter of 1996 the Company expanded and formalized its
relationship with Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC") to
provide additional wafer production capacity in the years 1996 to 2001. The
agreement with TSMC provides that TSMC will produce and ship wafers to C-
Cube at specified prices and requires C-Cube to make two advance payments
totaling $49 million. TSMC will apply this prepayment against a portion of
the wafer cost as product is delivered to C-Cube. Accordingly, the prepaid
amount will be amortized to inventory as wafers are received. The first
advance payment of $24.5 million was made in June 1996, and the final
payment, which is evidenced by an unsecured promissory note, is due June
1997. At December 31, 1996, $2.8 million of the $49 million production
capacity rights is included in other current assets.
Note 4. Investments
Investments include the following debt securities as of December 31, 1996
and 1995:
Unrealized Unrealized
Amortized Market Holding Holding
Cost Value Gains Losses
--------- ------ ---------- ----------
(in thousands)
Available-for-sale corporate
debt securities:
December 31, 1996 $ 6,018 $ 6,005 $-- $13
======= ======= === ===
December 31, 1995 $10,689 $10,675 $11 $25
======= ======= === ===
There were no gains or losses on the sale of investments in 1996 or 1995.
Note 5. Inventories
Inventories consist of:
December 31,
-------------------
1996 1995
---- ----
(in thousands)
Finished goods $22,817 $ 7,572
Work-in-process 2,898 1,667
Raw materials 2,341 2,632
------- -------
Total $28,056 $11,871
======= =======
Note 6. Property and Equipment
Property and equipment consist of:
December 31,
-------------------
1996 1995
---- ----
(in thousands)
Equipment under capital lease $ 3,647 $ 3,814
Machinery and equipment --
principally computers 34,113 11,821
Furniture and fixtures 3,068 1,417
Leasehold improvements 2,449 512
------- -------
Total 43,277 17,564
Accumulated depreciation and
amortization (20,624) (10,342)
------- -------
Property and equipment -- net $22,653 $ 7,222
======= =======
Note 7. Line of Credit and Notes Payable to Banks
At December 31, 1996, the Company had an available bank line of credit of
$20,000,000 which expires September 1, 1997. Borrowings bear interest at
the bank's prime rate (8.25% at December 31, 1996). There were no
borrowings under this line at December 31, 1996. The line is collateralized
by the Company's receivables, inventory and fixed assets. The agreement
requires the Company, among other things, to maintain a tangible net worth,
as defined and including convertible subordinated debt, of $102,964,000,
quarterly net income (no more than one quarterly loss per fiscal year), a
minimum quick ratio of 0.8 to 1, and a maximum debt to tangible net worth
(as defined) ratio of 1.4 to 1. In addition, the bank agreement prohibits
the payment of cash dividends. The Company was in compliance with these
covenants at December 31, 1996.
Notes payable to banks of $1,934,000 at December 31, 1995 represented yen
denominated borrowings of 200,000,000 Yen by the Company's Japanese
subsidiary, C-Cube Japan, and were repaid in 1996.
Note 8. Long-term Obligations
Long-term obligations consist of the following:
December 31,
-----------------
1996 1995
---- ----
(in thousands)
Convertible notes (see below) $86,250 $86,250
Purchase consideration (see Note 2) 1,125 1,125
Capital lease obligations (see Note 9) 903 1,633
Other long-term obligations 259 161
------- -------
88,537 89,169
Current portion (837) (1,159)
------- -------
Long-term portion $87,700 $88,010
======= =======
In November 1995, the Company completed a public debt offering of
$86,250,000 aggregate principal amount of convertible subordinated notes.
The notes mature in 2005. Interest is payable semi-annually at 5.875% per
annum. The notes are convertible at the option of the note holders into the
Company's common stock at an initial conversion price of $30.70 per share,
subject to adjustment. Beginning in November 1997, the notes are redeemable
at the option of the Company at an initial redemption price of 104.7% of
the principal amount. The Company has reserved 2,809,446 shares of common
stock for the conversion of these notes. Offering costs of $2,853,000 are
included in other assets and are amortized on a straight-line basis as an
adjustment to interest expense over the term of the notes.
Note 9. Lease Commitments
Equipment with a cost and accumulated amortization of $3,647,000 and
$3,380,000 at December 31, 1996 ($3,814,000 and $3,050,000 at December 31,
1995) has been leased under capital leases. In addition, the Company rents
office and research facilities under operating lease agreements which
expire through April 2005.
Future minimum annual operating and capital lease commitments at December
31, 1996 are as follows:
Operating Capital
--------- -------
(in thousands)
1997 $ 2,898 $ 734
1998 1,917 240
1999 1,494 --
2000 1,333 --
2001 1,345 --
Thereafter 3,703 --
------- -----
Total minimum lease payments $12,690 974
=======
Amount representing interest (71)
-----
Present value of minimum lease payments 903
Current portion (462)
-----
Long-term portion $ 441
=====
Rent expense for operating leases was approximately $2,048,000, $857,000
and $593,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Note 10. Stockholders' Equity
Common Stock Offering
In April 1994, the Company completed an initial public offering of
4,800,000 shares of common stock at a price of $7.50 per share. In May
1994, upon the exercise of the Underwriter's overallotment option, 720,000
additional shares of common stock were sold at $7.50 per share. Concurrent
with the Company's initial public offering, each of the 1,910,000 shares of
Series A, each of the 2,700,000 shares of Series B and each of the
2,883,738 shares of Series C convertible preferred stock outstanding were
converted into two shares of common stock. The proceeds, net of commissions
and certain expenses, to the Company from the offering were approximately
$37.4 million.
Preferred Stock
The number of shares of preferred stock authorized to be issued is
5,000,000 with a par value of $0.001 per share. Preferred stock may be
issued from time to time in one or more series. The Board of Directors is
authorized to provide for the rights, preferences, privileges and
restrictions of the shares of such series. As of December 31, 1996, no
shares of preferred stock had been issued.
Common Stock
The Company's common stock was split two-for-one (effected as a dividend
of one share for each outstanding share) on December 19, 1995 for
stockholders of record on December 1, 1995. All applicable share and per
share data in these financial statements have been restated to give effect
to this stock split.
The Company has authorized 24,486,292 shares of its common stock for
issuance to founders, employees and others as designated by the Board of
Directors through the Company's stock option plans or through stock
purchase agreements. Notes receivable from stockholders bear interest with
interest and principal due in 1997.
Employee Stock Option Plans
The Company's stock option plans (the "Plans") authorize the issuance of
21,637,292 shares of common stock (included in the 24,486,292 authorized
shares discussed above) for the grant of incentive or nonstatutory stock
options and the direct award or sale of shares to employees, directors,
contractors and consultants. Under the Plans, options are generally granted
at fair value at the date of grant. Such options become exercisable over
periods of one to five years and expire up to 10 years from the grant date.
Upon the acquisition of DiviCom in August 1996, 268,285 outstanding
options under DiviCom's Stock Option Plan at an average exercise price of
$7.75 were assumed by C-Cube. These options retained their original terms.
The Company repriced 3,532,716 options to $38.125, the market price on
September 11, 1996. The repriced shares are treated as canceled and
regranted, however, they retain their original vesting terms.
Option activity under the Plans was as follows:
Weighted
Number Average
of Shares Exercise Price
--------- --------------
Outstanding, January 1, 1994 4,562,478 $ 0.43
Granted 1,179,160 6.37
Exercised (1,771,384) 0.35
Canceled (200,074) 2.55
----------
Outstanding, December 31, 1994
(1,515,018 exercisable at a
weighted average price of $1.26) 3,770,180 2.20
Granted (weighted average fair value
of $10.39) 3,985,106 17.11
Exercised (1,432,941) 0.78
Canceled (308,527) 6.66
----------
Outstanding, December 31, 1995
(1,316,523 exercisable at a
weighted average price of $4.16) 6,013,818 12.20
Granted (weighted average fair value
of $17.87) 8,076,424 40.57
Exercised (1,189,523) 4.56
Canceled (3,899,002) 44.38
----------
Outstanding, December 31, 1996 9,001,717 $24.63
==========
Additional information regarding options outstanding as of December 31,
1996 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- --------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price
- --------------- ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.14- $ 3.00 1,009,888 5.57 $ 1.20 883,149 $ 1.20
6.00- 7.50 1,223,873 8.59 7.40 448,741 7.28
8.00- 13.00 1,003,857 8.10 10.73 437,362 10.32
14.34- 22.88 1,075,514 8.82 18.78 378,754 18.26
23.13- 38.00 487,568 9.32 30.66 53,297 28.47
38.13- 38.13 3,469,800 9.43 38.13 26,500 38.13
38.75- 50.00 531,217 9.50 41.76 50,638 40.12
52.38- 52.38 20,000 9.30 52.38 -- --
54.00- 54.00 170,000 9.28 54.00 22,667 54.00
63.00- 63.00 10,000 9.15 63.00 -- --
- -------------- --------- ---- ------ --------- ------
$ 0.14- $63.00 9,001,717 8.66 $24.61 2,301,108 $ 9.36
============== ========= ==== ====== ========= ======
</TABLE>
At December 31, 1996, 4,497,163 shares were available for future grants.
Employee Stock Purchase Plan
The Company has an employee stock purchase plan, under which eligible
employees may authorize payroll deductions of up to 10% of their
compensation (as defined) to purchase common stock at a price equal to 85%
of the lower of the fair market values as of the beginning or the end of
the offering period. Stock issued under the plan was 171,000, 138,000 and
36,000 shares in 1996, 1995 and 1994 at weighted average prices of $11.07,
$6.51 and $6.38, respectively. The weighted average fair value of the 1996
and 1995 awards was $10.39 and $2.05, respectively. At December 31, 1996,
434,000 shares of common stock were available for issuance under this plan.
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its stock-
based awards using the intrinsic value method in accordance with Accounting
Principles Board No. 25, "Accounting for Stock Issued to Employees" and its
related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements
which are granted with exercise prices equal to the fair market value at
grant date.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") requires the disclosure of pro
forma net income and earnings per share had the Company adopted the fair
value method as of the beginning of fiscal 1995. Under SFAS 123, the fair
value of stock-based awards to employees is calculated through the use of
option pricing models, even though such models were developed to estimate
the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock
option awards. These models also require subjective assumptions, including
future stock price volatility and expected time to exercise, which greatly
affect the calculated values. The Company's calculations were made using
the Black-Scholes option pricing model with the following weighted average
assumptions: expected life, 5.25 to 6.25 years; stock volatility, 66% in
1996 and 58% in 1995; risk free interest rates, 6.12% in 1996 and 6.62% in
1995; and no dividends during the expected term. The Company's calculations
are based on a single option valuation approach and forfeitures are
recognized as they occur. If the computed fair values of the 1996 and 1995
awards had been amortized to expense over the vesting period of the awards,
pro forma net loss would have been $85,637 ($2.52 per share) in 1996 and
net income would have been $22,392 ($0.65 per share) in 1995. However, the
impact of outstanding non-vested stock options granted prior to 1995 has
been excluded from the pro forma calculation; accordingly, the 1996 and
1995 pro forma adjustments are not indicative of future period pro forma
adjustments, when the calculation will apply to all applicable stock
options.
Deferred Stock Compensation
In connection with the grant of certain stock options to employees in
1993, the Company recorded deferred stock compensation of $980,000 for the
difference between the deemed fair value for accounting purposes and the
option price as determined by the Board at the date of grant. Such amount
is presented as a reduction of stockholders' equity and is amortized over
the 48-month vesting period of the related stock options. In connection
with the grant of stock options to employees in the first quarter of 1994,
the Company recorded additional deferred stock compensation of $615,000
which will be amortized over the 48-month vesting period of such options.
Note 11. Income Taxes
The provision for income taxes is as follows:
December 31,
1996 1995
(in thousands)
Current:
Federal $37,087 $ 8,779
State 4,686 1,636
Foreign 170 --
------- -------
Total 41,943 10,415
Deferred:
Federal (6,660) (4,606)
State (1,189) (876)
Foreign (1,150) --
------- -------
Total (8,999) (5,482)
------- -------
Total $32,944 $ 4,933
======= =======
Income tax expense in 1994 relates to foreign withholding taxes on
certain license and development fees, and alternative minimum taxes.
Otherwise, the Company was not required to pay income taxes for that year
due to its loss carryforwards.
Income tax expense differs from the amount computed by applying the
federal statutory income tax rate to income before taxes as follows:
Years Ended December 31,
-------------------------
1996 1995 1994
---- ---- ----
(in thousands)
Tax expense (benefit) computed
at federal statutory rate $(14,035) $10,514 $1,726
State income taxes, net of
federal effect (1,865) 947 312
Foreign withholding taxes 170 88 4
Tax credits (4,710) (892) (499)
Change in valuation allowance (1,324) (2,149) (1,716)
Purchased in-process technology 52,080 -- --
Foreign loss benefits at different
rates 1,069 -- --
Other 1,559 (3,575) 242
-------- ------- ------
Income tax expense $ 32,944 $ 4,933 $ 69
======== ======= ======
The components of the net deferred tax asset as of December 31 were as
follows:
1996 1995
---- ----
(in thousands)
Deferred tax assets:
Accruals and reserves recognized
in different periods $14,985 $3,672
Net operating loss carryforwards 2,302 2,476
Capitalized research and development 188 1,182
Tax basis depreciation 1,163 542
Other 2,045 86
------- ------
Total 20,683 7,958
Valuation allowance (1,152) (2,476)
------- ------
Net 19,531 5,482
Deferred tax liabilities:
Purchased technology (5,548) --
------- ------
Net deferred tax assets $13,983 $5,482
======= ======
At December 31, 1996, the Company has foreign net operating loss
carryforwards of approximately $7,995,000 of which $2,215,000 expires
through 1998 and $5,780,000 carries forward indefinitely. Income (loss)
before income taxes for the years ended December 31, 1996, 1995 and 1994
includes income of $25,956,000, $2,020,000 and $412,000, respectively from
the Company's foreign subsidiaries.
Note 12. Employee Benefit Plan
The Company has a 401(k) tax-deferred savings plan under which
participants may contribute up to 20% of their compensation, subject to
certain Internal Revenue Service limitations. The Company has not
contributed to the plan to date.
Note 13. Development Agreements
The Company enters into development agreements with other companies for
which it receives development fees with certain payments contingent upon
attaining contract milestones. The Company generally retains ownership of
the products developed under the agreements; however, some agreements limit
the product markets in which the Company may sell the developed product. In
addition, under certain of the agreements, the Company is required to pay
royalties based on a percentage of the net sales of the products developed
under the agreements. Royalty expense was $1,860,000 in 1996, $574,000 in
1995 and $1,377,000 in 1994.
Note 14. Geographic and Customer Information
Information concerning the Company's operations by geographic area as of
and for the years ended December 31, is as follows:
Geographic Region Information
1996 1995 1994
---- ---- ----
(in thousands)
Net revenues from unaffiliated customers
by geographic region:
United States $241,239 107,341 $37,691
Bermuda 39,813 -- --
Japan 38,706 17,261 7,328
-------- -------- -------
Net revenues $319,758 $124,602 $45,019
======== ======== =======
Revenues from affiliates (eliminated in
consolidation) by geographic region:
United States $ 77,268 $ 13,406 $ 4,979
Bermuda 5,442 -- --
Japan -- -- 112
Other Areas 2,925 -- --
-------- -------- -------
Total revenues from affiliates $ 85,635 $ 13,406 $ 5,091
======== ======== =======
Income (loss) from operations by
geographic region:
United States $(23,134) $ 26,574 $ 4,121
Bermuda (2,229) -- --
Japan 1,243 2,048 424
Other Areas 190 -- --
Transfers between geographic areas (15,825) (642) (157)
-------- -------- -------
Income (loss) from operations $(39,755) $ 27,980 $ 4,388
======== ======== =======
Identifiable assets by geographic
region:
United States $335,114 $202,862 $66,184
Bermuda 88,000 -- --
Japan 17,970 6,614 3,660
Other Areas 1,371 -- --
Eliminations (162,940) (5,950) (1,982)
-------- -------- -------
Total assets $279,515 $203,526 $67,862
======== ======== =======
The Company sells its products primarily in Asia, the U.S. and Western
Europe. Export revenues for the years ended December 31, consisted of the
following:
1996 1995 1994
---- ---- ----
(in thousands)
Asia $123,745 $63,469 $6,027
Europe 14,258 5,435 3,629
-------- ------- ------
Total export revenues $138,003 $68,904 $9,656
======== ======= ======
International revenues as a percentage of net revenues were 67% in 1996,
70% in 1995 and 38% in 1994. During 1996, one customer accounted for 12% of
net revenues. During 1995, two customers accounted for 14% and 10% of net
revenues, respectively. During 1994, no single customer accounted for more
than 10% of net revenues. At December 31, 1996, three customers represented
15%, 12% and 12% of accounts receivable, respectively. At December 31,
1995, one customer represented 25% of accounts receivable.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of C-Cube Microsystems Inc.
The information required by Item 10 of Form 10-K with respect to
identification of directors is incorporated by reference to the information
contained in the section captioned "Proposal No. 1: Election of Directors"
in C-Cube's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held April 22, 1997 (the "Proxy Statement"), a copy of
which has been filed with the Securities and Exchange Commission. For
information with respect to the executive officers of the Registrant, see
"Executive Officers of the Registrant" at the end of Part I of this report.
ITEM 11. Executive Compensation
The information required by Item 11 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Executive
Compensation and Other Matters" in the Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Stock
Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement.
ITEM 13. Certain Relationships and Related Transactions
The information required by Item 13 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Executive
Compensation and Other Matters - Certain Relationships and Related
Transactions" in the Proxy Statement.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements - See Index to Consolidated Financial
Statements and Financial Statement Schedule at page 28 of this
Form 10-K.
(2) Financial Statement Schedule - See Index to Consolidated Financial
Statements and Financial Statement Schedule at page 28 of this
Form 10-K.
(3) Exhibits-See Exhibit Index at page 4423 of this Form 10-K.
(b) The Registrant did not file any reports on Form 8-K during the
fourth quarter of 1996.
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
3.1 Restated Certificate of Incorporation filed June 30, 1994. (3)
3.2 By-Laws (1)
4.1 Specimen of Common Stock Certificate. (1)
4.2 Restated Registration Rights and Shareholder Rights
Agreement dated December 18, 1992. (1)
10.1 Form of Indemnity Agreement for directors and officers. (1)
10.2 1994 Employee Stock Plan and form of agreement thereunder. (1)
10.3 1994 Outside Directors Stock Option Plan and form of
agreement thereunder. (1)
10.4 1994 Employee Stock Purchase Plan. (1)
10.5 1990 Stock Plan and forms of agreements thereunder. (1)
10.6 Employee Stock Option Plan and form of agreements
thereunder. (1)
10.7 Series A Preferred Stock Purchase Agreement dated July 25,
1988 and January 20, 1989. (1)
10.8 Series B Preferred Stock Purchase Agreement Dated
October 1989, January 26, 1990 and May 30, 1990. (1)
10.9 Series C Preferred Stock Purchase Plan Agreements dated
March 15, 1991, December 16, 1991 and December 18, 1992. (1)
10.10 Common Stock Purchase Agreement dated December 18, 1992. (1)
10.11 Loan and Security Agreement and Promissory Note
with Comerica Bank--California dated December 27, 1993. (1)
10.12 Joint Venture Agreement dated July 11, 1990 and
First Amendment to and Restatement of Joint Venture
Agreement dated December 18, 1992 with Kubota Corporation. (1)
10.13 Strategic Relationship Agreement dated July 5,
1988, First Amendment to and Restatement of Strategic
Relationship Agreement dated July 11, 1990 and Second
Amendment to and Restatement of Strategic Relationship
Agreement dated December 18, 1992 with Kubota Corporation
and Kubota C-Cube, Inc. (1)
10.14 Stock Exchange Agreement and License and Purchase
Agreement each dated December 18, 1992, with Kubota
Corporation and Kubota C-Cube, Inc. (1)
10.15 Warrant Agreement dated December 18, 1992 with
Kubota Corporation. (1)
10.16 Financial Support Agreement dated December 18,
1992 and form of Amendment to Financial Support Agreement
with Kubota Corporation and Kubota C-Cube, Inc. (1)
10.17 Agreement Regarding Collateral dated December 20,
1993 with Kubota Corporation. (1)
10.18(2) Letter of Intent dated December 15, 1992 with
Advanced Micro Devices, Inc. (1)
10.19(2) Technology License and Wafer Foundry Agreement
dated December 22, 1992 with Texas Instruments
Incorporated. (1)
10.20(2) Development Agreement and Agreement on CL450A
Procurement, each dated June 30, 1993 and Amended Agreement
on CL450A Procurement dated September 1, 1993 with Victor
Company of Japan, Limited. (1)
10.21 Secured Promissory Note dated February 17, 1993 by
William J. O'Meara. (1)
10.22 Secured Promissory Note dated October 21, 1993 by
James G. Burke. (1)
10.23 Standard Industrial Lease -- Multi-Tenant dated
August 1991 with San Bernardino County Employees Retirement
Association, as amended October 19, 1992, January 8, 1993,
June 15, 1993 and December 9, 1993. (1)
10.24 Oxford Financial Services Corporation Master Lease
Agreement dated as of May 31, 1994. (3)
10.25 Agreement dated June 29, 1994 with Donald T. Valentine. (3)
10.26 Revolving Credit Loan Agreement with Comerica Bank-
California dated August 18, 1994. (4)
10.27(2) Manufacturing and Sales Agreement between C-Cube
Microsystems Inc. and Matsushita Electronics Corporation. (6)
10.28 Sublease agreement with Atari Games Corporation
dated October 4, 1995. (7)
10.29 Agreement and Plan of Merger By and Among C-Cube
Microsystems Inc., MCT Acquisition Corporation, Media
Computer Technologies, Inc., Dhimant Bhayani and Hemant
Bhayani dated November 17, 1995. (8)
10.30 Supplemental Stock Option Plan. (9)
10.31 Amendment to Revolving Credit Loan Agreement dated
January 3, 1996. (9)
10.32(2) Option Agreement dated May 18, 1996 with Taiwan
Semiconductor Manufacturing Co., Ltd. (10)
10.33 Form of Affiliate Agreement among C-Cube
Microsystems, Inc., SAGEM S.A., SAGEM International S.A.,
Tregor Electronique S.A., and Iena International S.A. dated
as of May 28, 1996. (11)
10.34 Form of Affiliate Agreement among C-Cube
Microsystems Inc., DiviCom Inc. and certain stockholders of
DiviCom Inc. (11)
10.35 Form of Voting Agreement among C-Cube Microsystems
Inc., SAGEM S.A, SAGEM International S.A. Tregor
Electronique S.A. and Iena International S.A. dated as of
May 28, 1996. (11)
10.36 Lease agreement with Callahan-Pentz Properties
dated July 9, 1996. (12)
11.1 Statement regarding computation of net income per share.
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedule.
-------------------------------------------------------------------------
(1) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Registration
Statement on Form S-1 filed March 4, 1994, as amended (File
No. 33-76082)
(2) Confidential treatment has been grantedgranted as to a
portion of this Exhibit.
(3) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q
filed August 5, 1994 (File No. 0-23596)
(4) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q
filed October 28, 1994 (File No. 0-23596)
(5) Confidential treatment has been requested as to a
portion of this Exhibit.
(6) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-K
filed March 21, 1995 (File No. 0-23596)
(7) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 8-K
filed November 14, 1995 (File No. 0-23596)
(8) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-K
filed March 15, 1996 (File No. 0-23596)
(9) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q
filed May 10, 1996 (File No. 0-23596)
(10) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q
filed August 9, 1996 (File No. 0-23596)
(11) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Registration
Statement on Form S-4 filed August 8, 1996, as amended (File
No. 33-06653)
(12) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q
filed November 13, 1996 (File No. 0-23596)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 17, 1997 By: /s/ Alexandre A. Balkanski, Ph.D.
---------------- -----------------------------------
Alexandre A. Balkanski, Ph.D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Donald T. Valentine Director and
- ------------------------ Chairman of the Board March 17, 1997
(Donald T. Valentine)
President,
/s/ Alexandre A. Balkanski, Ph.D. Chief Executive Officer
- --------------------------------- and Director
(Alexandre A. Balkanski, Ph.D.) (Principal Executive Officer) March 17, 1997
Vice President of Finance and
/s/ James G. Burke Administration, Chief Financial Officer
- ------------------------ and Secretary
(James G. Burke) (Principal Financial and
Accounting Officer) March 17, 1997
/s/ Gregorio Reyes Director March 17, 1997
- ------------------------
(Gregorio Reyes)
/s/ T.J. Rodgers Director March 17, 1997
- ------------------------
(T.J. Rodgers)
/s/ Baryn S. Futa Director March 17, 1997
- ------------------------
(Baryn S. Futa)
/s/ Donald McKinney Director March 17, 1997
- ------------------------
(Donald McKinney)
<PAGE>
[DELOITTE & TOUCHE LOGO APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
C-Cube Microsystems Inc.:
We have audited the consolidated financial statements of C-Cube
Microsystems Inc. as of December 31, 1996 and 1995, and for each of the
three years in the period ended December 31, 1996, and have issued our
report thereon dated January 15, 1997. Our audits also included the
consolidated financial statement schedule of C-Cube Microsystems Inc.,
listed in the Index at Item 14. This consolidated financial statement
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our
opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
San Jose, California
January 15, 1997
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged to Charged to Deductions Balance
Beginning Costs and Other From at End
of Period Expenses Accounts Reserves of Period
--------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Sales returns allowance $1,800 $12,188 $ -- $2,459 $11,529
Allowance for doubtful accounts 987 900 707 (1) 31 2,563
Warranty 567 919 1,467 (1) 1,094 1,859
YEAR ENDED DECEMBER 31, 1995:
Sales returns allowance $ 848 $ 2,846 $ -- $1,894 $ 1,800
Allowance for doubtful accounts 443 574 -- 30 987
Warranty 238 889 -- 560 567
YEAR ENDED DECEMBER 31, 1994:
Sales returns allowance $ 308 $ 1,257 $ -- $ 717 $ 848
Allowance for doubtful accounts 190 286 -- 33 443
Warranty 90 733 -- 585 238
</TABLE>
(1) Adjustments relating to purchased business.
<PAGE>
Exhibit 11.1
C-CUBE MICROSYSTEMS INC.
COMPUTATION OF EARNINGS (LOSS) PER SHARE
Quarter and Year Ended December 31, 1996 and 1995
(in thousands, except per share amounts)
Quarter Ended Year Ended
December 31, December 31,
---------------------- --------------------
1996 1995 1996 1995
--------- --------- -------- --------
Net income (loss) $ 17,285 $ 9,138 $(73,045) $ 24,895
========= ========= ======== ========
Weighted average common
shares outstanding 35,821 32,323 33,928 31,819
Common share equivalents
related to stock options 2,827 3,502 n/a 2,832
--------- --------- -------- --------
Weighted average common and
equivalent shares 38,648 35,825 33,928 34,651
========= ========= ======== ========
Net income (loss) per share $0.45 $0.26 $(2.15) $0.72
========= ========= ======== ========
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statements No. 33-81718, 33-89474, 333-19777, 333-14799, 333-
02877, 333-03881, 333-03677 and 333-02812 of C-Cube Microsystems
Inc. on Form S-8 of our reports dated January 15, 1997, appearing
in this Annual Report on Form 10-K of C-Cube Microsystems Inc.
for the year ended December 31, 1996.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
San Jose, California
March 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 76,241
<SECURITIES> 6,005
<RECEIVABLES> 40,706
<ALLOWANCES> 14,092
<INVENTORY> 28,056
<CURRENT-ASSETS> 192,677
<PP&E> 43,277
<DEPRECIATION> 20,624
<TOTAL-ASSETS> 279,515
<CURRENT-LIABILITIES> 68,190
<BONDS> 0
0
0
<COMMON> 191,044
<OTHER-SE> (72,472)
<TOTAL-LIABILITY-AND-EQUITY> 279,515
<SALES> 319,558
<TOTAL-REVENUES> 319,758
<CGS> 144,985
<TOTAL-COSTS> 144,985
<OTHER-EXPENSES> 214,528
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,962
<INCOME-PRETAX> (39,783)
<INCOME-TAX> 32,944
<INCOME-CONTINUING> (73,045)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (73,045)
<EPS-PRIMARY> (2.15)
<EPS-DILUTED> (2.15)
</TABLE>
