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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 000-23596
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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) 490-8000
Former name, former address and former fiscal year, if changed since last
year: N/A
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the securities exchange act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of october 31, 1999, 40,583,589 shares of the registrant's common stock were
outstanding.
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<PAGE>
C-CUBE MICROSYSTEMS INC.
TABLE OF CONTENTS
Page
----
Part I. Financial Information
ITEM 1. Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 ........................ 1
Condensed Consolidated Statements of Income
Quarters and Nine Months Ended September 30, 1999 and 1998 ...... 2
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998 ................... 3
Notes to Condensed Consolidated Financial Statements ............ 4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................. 7
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk....... 17
Part II. Other Information
ITEM 1. Legal Proceedings ............................................... 18
ITEM 2. Changes in Securities and Use of Proceeds ....................... 18
ITEM 3. Defaults Upon Senior Securities ................................. 18
ITEM 4. Submission of Matters to a Vote of Security Holders ............. 18
ITEM 5. Other Information ............................................... 18
ITEM 6. Exhibits and Reports on Form 8-K ................................ 18
Signatures ................................................................. 19
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998 (1)
---- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents...................................... $ 117,098 $ 108,224
Short-term investments.................................... 160,275 99,603
Accounts receivable - net................................. 61,046 36,980
Inventories............................................... 12,373 16,073
Deferred income taxes..................................... 11,723 11,170
Other current assets...................................... 14,914 19,977
---------- ----------
Total current assets.............................. 377,429 292,027
Property and equipment - net................................ 33,881 29,622
Production capacity rights.................................. 5,164 12,600
Distribution rights - net................................... 1,359 1,483
Purchased technology - net.................................. 5,139 5,921
Other assets................................................ 1,995 1,518
---------- ----------
Total............................................. $ 424,967 $ 343,171
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 24,356 $ 19,942
Accrued liabilities........................................ 31,195 29,007
Income taxes payable....................................... 12,162 15,551
Deferred contract revenue.................................. 5,537 6,706
Current portion of long-term obligations................... 368 355
---------- ----------
Total current liabilities.......................... 73,618 71,561
Long-term obligations........................................ 20,150 23,557
Deferred income taxes........................................ 3,230 4,650
---------- ----------
Total liabilities.................................. 96,998 99,768
---------- ----------
Minority interest in subsidiary.............................. 409 28
Stockholders' equity:
Common stock, $0.001 par value, 150,000 shares authorized;
shares outstanding: 1999 - 40,477; 1998 - 38,261........ 270,932 225,265
Accumulated other comprehensive loss....................... (1,992) (1,852)
Retained earnings.......................................... 58,620 19,962
---------- ----------
Total stockholders' equity......................... 327,560 243,375
---------- ----------
Total.............................................. $ 424,967 $ 343,171
========== ==========
</TABLE>
- ---------
(1) Derived from the December 31, 1998 audited balance sheet included in the
1998 Annual Report on Form 10-K of C-Cube Microsystems Inc.
See notes to consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues......................................... $ 101,368 $ 86,162 $ 291,922 $ 255,997
----------- ----------- ----------- -----------
Costs and expenses:
Cost of revenues................................... 45,210 38,757 130,947 116,768
Research and development........................... 21,094 18,867 61,659 55,134
Selling, general and administrative................ 17,462 15,207 50,677 43,756
----------- ----------- ----------- -----------
Total........................................... 83,766 72,831 243,283 215,658
----------- ----------- ----------- -----------
Income from operations............................... 17,602 13,331 48,639 40,339
Other income, net.................................... 2,657 1,636 7,084 2,547
----------- ----------- ----------- -----------
Income before income taxes, minority
interest and extraordinary item................... 20,259 14,967 55,723 42,886
Income tax expense................................... 6,078 4,490 16,717 12,869
----------- ----------- ----------- -----------
Income before minority interest and
extraordinary item................................ 14,181 10,477 39,006 30,017
Minority interest in net income (loss) of
subsidiary........................................ 148 (185) 381 (354)
----------- ----------- ----------- -----------
Income before extraordinary item..................... 14,033 10,662 38,625 30,371
Extraordinary gain on repurchase of convertible
notes (net of tax)................................ - 2,356 33 3,494
----------- ----------- ----------- -----------
Net income........................................... $ 14,033 $ 13,018 $ 38,658 $ 33,865
=========== =========== =========== ===========
Basic earnings per share:
Income before extraordinary item................... $ 0.35 $ 0.29 $ 0.98 $ 0.82
Extraordinary item (net of tax).................... - 0.06 - 0.09
----------- ----------- ------------ -----------
Net income......................................... $ 0.35 $ 0.35 $ 0.98 $ 0.91
=========== =========== =========== ===========
Diluted earnings per share:
Income before extraordinary item................... $ 0.32 $ 0.28 $ 0.91 $ 0.79
Extraordinary item (net of tax).................... - 0.06 - 0.09
----------- ----------- ------------ -----------
Net income......................................... $ 0.32 $ 0.34 $ 0.91 $ 0.88
=========== =========== =========== ===========
Shares:
Basic.............................................. 40,097 37,424 39,368 37,215
=========== =========== =========== ===========
Diluted............................................ 45,021 39,686 43,224 40,769
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................... $ 38,658 $ 33,865
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary gain on repurchase of convertible notes, net of taxes....... (33) (3,494)
Minority interest in subsidiary........................................... 381 (354)
Depreciation and amortization............................................. 14,397 13,327
Deferred income taxes..................................................... (1,973) 207
Changes in assets and liabilities:
Receivables............................................................ (23,758) 7,519
Inventories............................................................ 3,749 (1,314)
Other current assets................................................... 858 2,926
Accounts payable....................................................... 3,926 7,731
Accrued liabilities.................................................... 7,089 1,946
Income taxes payable................................................... (3,412) 11,195
Production capacity rights............................................. 11,800 -
Deferred revenue....................................................... (1,169) 1,195
----------- -----------
Net cash provided by operating activities.................................... 50,513 74,749
----------- -----------
Cash flows from investing activities:
Sales and maturities of short-term investments............................... 188,565 26,956
Purchases of short-term investments.......................................... (247,989) (36,073)
Capital expenditures......................................................... (17,051) (14,778)
Other assets................................................................. (2,780) 592
----------- -----------
Net cash used in investing activities........................................ (79,255) (23,303)
----------- -----------
Cash flows from financing activities:
Bank borrowings.............................................................. - 39,541
Repayment of bank borrowings................................................. - (39,541)
Repayments of capital lease obligations...................................... 4 (411)
Sale of common stock......................................................... 40,562 7,704
Repurchase of convertible subordinated notes................................. (3,271) (56,077)
----------- -----------
Net cash provided by (used in) financing activities.......................... 37,295 (48,784)
----------- -----------
Exchange rate impact on cash and equivalents................................... 321 99
----------- -----------
Net increase in cash and equivalents........................................... 8,874 2,761
Cash and equivalents, beginning of period...................................... 108,224 145,034
----------- -----------
Cash and equivalents, end of period............................................ $ 117,098 $ 147,795
=========== ===========
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on investments........................................ $ (295) $ 87
Equipment acquired under lease............................................... - 1,382
Conversion of notes at option of holder...................................... 48 -
Supplemental schedule of cash flow information: Cash paid during the period for:
Interest..................................................................... $ 818 $ 3,659
Income taxes................................................................. 11,985 1,011
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
C-CUBE MICROSYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of presentation
The unaudited condensed consolidated financial statements contained in
this report have been prepared by C-Cube Microsystems Inc. ("C-Cube" or the
"Company"). In the opinion of management, such financial statements include
all normal recurring adjustments and accruals necessary for a fair
presentation of the Company's financial position as of September 30, 1999,
and the results of operations for the quarters and nine months ended
September 30, 1999 and 1998 and cash flows for the nine months ended
September 30, 1999 and 1998. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted in
accordance with the rules and regulations of the Securities and Exchange
Commission. This unaudited quarterly information should be read in
conjunction with the audited consolidated financial statements of C-Cube
and the notes thereto included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
2. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Cost is computed using standard costs which approximate actual cost
on a first-in, first-out basis. Inventories consist of:
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
(IN THOUSANDS)
Finished goods............. $ 8,097 $ 3,566
Work-in-process............ 2,547 6,281
Raw materials.............. 1,729 6,226
--------- ---------
Total............ $ 12,373 $ 16,073
========= =========
3. Production capacity rights
In the second quarter of 1996, the Company expanded and formalized its
relationship with Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC") to
provide additional wafer production capacity in the years 1996 to 2001. The
agreement with TSMC provided that TSMC would produce and ship wafers to
C-Cube at specified prices and required C-Cube to make two advance payments
totaling $49 million. An advance payment of $24.5 million was made in June
1996. In May 1997, the Company amended its agreement with TSMC which
resulted in a reduction of the Company's future wafer purchase commitments
and the forgiveness of the second advance payment of $24.5 million. In
January 1999, TSMC refunded $11.8 million of the advance payment to the
Company. TSMC will apply the remaining prepayment against a portion of the
wafer cost as product is delivered to C-Cube. Accordingly, the prepaid
amount, which has been allocated between current and long-term assets, will
be amortized to inventory as wafers are received.
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<PAGE>
4. Earnings per share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Income before extraordinary item....................... $ 14,033 $ 10,662 $ 38,625 $ 30,371
Extraordinary item..................................... - 2,356 33 3,494
---------- ---------- ---------- ----------
Numerator for basic earnings per share................. 14,033 13,018 38,658 33,865
Addback interest income after tax related to
convertible shares................................... 186 333 577 2,031
---------- ---------- ---------- ----------
Numerator for diluted earnings per share............... $ 14,219 $ 13,351 $ 39,235 $ 35,896
========== ========== ========== ==========
Denominator:
Weighted-average shares - denominator for basic
earnings per share................................... 40,097 37,424 39,368 37,215
Convertible shares..................................... 633 1,216 660 2,247
Dilutive common stock equivalents, using
treasury stock method................................ 4,291 1,046 3,196 1,307
---------- ---------- ---------- ----------
Denominator for diluted earnings per share............. 45,021 39,686 43,224 40,769
========== ========== ========== ==========
Basic earnings per share................................ $ 0.35 $ 0.35 $ 0.98 $ 0.91
========== ========== ========== ==========
Diluted earnings per share.............................. $ 0.32 $ 0.34 $ 0.91 $ 0.88
========== ========== ========== ==========
</TABLE>
5. Comprehensive income
For the quarters ended September 30, 1999 and 1998, comprehensive
income, which was comprised of the Company's net income for the periods,
changes in accumulated translation adjustments and unrealized gains
(losses) on investments, was $14.3 million and $13.1 million, respectively.
For the nine months ended September 30, 1999 and 1998, comprehensive income
was $38.5 million and $34.0 million, respectively.
6. Extraordinary item
During the nine months ended September 30, 1999, the Company
repurchased $3.4 million of the face value of the Company's 5-7/8%
Convertible Subordinated Notes (the "Notes") due 2005 at 95.5% of the
principal amount, with related accrued interest to the date of repurchase,
and recognized an extraordinary gain of approximately $33,000 (zero effect
per diluted share), net of related income taxes of approximately $23,000.
During the quarter and nine months ended September 30, 1998, the Company
repurchased $42.8 million and $63.5 million of the face value of the Notes
at 88.4% of the principal amount, with related accrued interest to the date
of repurchase, and recognized extraordinary gains of $2.4 million and $3.5
million, or $0.06 and $0.09 per diluted share, net of related income taxes
of $1.6 million and $2.4 million, respectively.
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<PAGE>
7. Segment information
On December 31, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of an
Enterprise and Related Information." Readers are referenced to "ITEM 8,
NOTE 17. SEGMENT INFORMATION" in the Company's most recent Annual Report on
Form 10-K, filed with the Securities and Exchange Commission ("SEC") on
March 23, 1999, for further discussion.
Segment information based on internal company reports used by the chief
operating decision maker is as follows (in thousands):
<TABLE>
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- -----
<S> <C> <C> <C> <C>
Revenues:
Semiconductor........................... $ 52,308 $ 47,867 $ 158,101 $ 153,700
DiviCom................................. 49,060 38,295 133,821 102,297
----------- ----------- ----------- -----------
Consolidated net revenues................. $ 101,368 $ 86,162 $ 291,922 $ 255,997
=========== =========== =========== ===========
Income from operations:
Semiconductor........................... $ 8,807 $ 6,373 $ 27,427 $ 24,721
DiviCom................................. 8,795 6,958 21,212 15,618
----------- ----------- ----------- -----------
Consolidated income from operations....... $ 17,602 $ 13,331 $ 48,639 $ 40,339
=========== =========== =========== ===========
</TABLE>
8. Recently issued accounting standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. Adoption
of this statement is not expected to materially impact the Company's
consolidated financial position, results of operations or cash flows. The
Company is required to adopt this statement in the first quarter of fiscal
year 2001, with early adoption permitted.
9. Subsequent event
On October 27, 1999, C-Cube entered into an Agreement and Plan of
Merger and Reorganization with Harmonic Inc., a Delaware corporation
("Harmonic"), pursuant to which, subsequent to the sale or spin-off of
C-Cube's semiconductor business, C-Cube has agreed to merge with and into
Harmonic (the "Merger"). The Merger will be effected through the issuance
of 0.5427 shares of Harmonic stock for each share of common stock of C-Cube
outstanding immediately prior to the consummation of the Merger. The merger
is subject to the approval of the stockholders of each company, customary
closing conditions, including applicable regulatory clearances, and the
spin-off or sale of the semiconductor business. The closing is anticipated
to take place during Q1 2000.* Readers are referenced to the Company's Form
8-K filed with the SEC on October 29, 1999 for more information.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of
section 27A of the securities act of 1933 and section 21E of the securities
exchange act of 1934. The forward-looking statements involve risks and
uncertainties. Actual results could differ materially from those projected in
the forward-looking statements as a result of certain factors, including those
set forth in this item 2, those described elsewhere in this report and those
described in the company's form 10-K for the year ended december 31, 1998, other
form 10-Qs and other reports under the securities exchange act of 1934. Such
forward-looking statements include, but are not limited to, those statements
marked with an asterisk (*) in this report. The company assumes no obligation to
update any forward-looking statements.
QUARTER ENDED SEPTEMBER 30, 1999
The following table sets forth certain operating data as a percentage of
net revenues for the quarters ended September 30, 1999 and 1998:
<TABLE>
QUARTER ENDED SEPTEMBER 30,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Net revenues................................... 100.0% 100.0%
----- -----
Costs and expenses:
Cost of revenues............................. 44.6 45.0
Research and development..................... 20.8 21.9
Selling, general and administrative.......... 17.2 17.6
----- -----
Total................................ 82.6 84.5
----- -----
Income from operations......................... 17.4 15.5
Other income, net.............................. 2.6 1.9
----- -----
Income before income taxes, minority
interest and extraordinary item............. 20.0 17.4
Income tax expense............................. 6.0 5.2
----- -----
Income before minority interest and
extraordinary item.......................... 14.0 12.2
Minority interest in net income of subsidiary.. 0.1 (0.2)
----- -----
Income before extraordinary item............... 13.8 12.4
Extraordinary gain (net of tax)................ - 2.7
----- -----
Net income..................................... 13.8% 15.1%
===== =====
</TABLE>
MERGER
On October 27, 1999, C-Cube entered into an Agreement and Plan of Merger
and Reorganization with Harmonic Inc., a Delaware corporation ("Harmonic"),
pursuant to which, subsequent to the sale or spin-off of C-Cube's semiconductor
business, C-Cube has agreed to merge with and into Harmonic (the "Merger"). The
Merger will be effected through the issuance of 0.5427 shares of Harmonic stock
for each share of common stock of C-Cube outstanding immediately prior to the
consummation of the Merger. The merger is subject to the approval of the
stockholders of each company, customary closing conditions, including applicable
regulatory clearances, and the spin-off or sale of the semiconductor business.
The closing is anticipated to take place during Q1 2000.* The Company expects to
incur additional costs during the fourth quarter of 1999 and the first quarter
of 2000 for legal, accounting and other costs related to the Merger.* Readers
are referenced to the Company's Form 8-K filed with the SEC on October 29, 1999
for more information.
NET REVENUES
Net revenues in the third quarter of 1999 were $101.4 million, an increase
of 17.6% over the $86.2 million reported in the corresponding quarter a year
ago. This increase was led by growth in sales of DiviCom's encoder products,
primarily attributable to existing customer upgrades to next generation
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<PAGE>
products, contract wins in the cable and satellite markets, and higher selling
prices on next generation products due to design improvements and feature and
quality enhancements. The growth in revenues was also attributable to increased
Semiconductor revenues, primarily from increased volumes of DVD decoder chips
used in consumer applications and from increased volumes of codecs for nonlinear
editing and video server applications. These increases were partially offset by
decreases in revenues of VideoCD and Chaoji VCD decoder chips primarily due to
declines in average selling prices.
DiviCom revenues accounted for 48% of consolidated net revenues for the
third quarter of 1999, compared to 44% for the third quarter of 1998. DiviCom
integrates solutions for customers which involve its own and third party
products, with the integrations usually occurring over a number of months.
Difficulty in completing the stages of these integrations on the expected
schedule can adversely affect the timing of revenue recognition.
International revenues accounted for 58% of net revenues for the third
quarter of 1999, compared to 56% for the third quarter of 1998. The Company
expects that international revenues will continue to represent a significant
portion of net revenues.* The Company's success will depend in part upon its
ability to manage international marketing and sales operations. In addition,
C-Cube purchases a substantial portion of its manufacturing services from
foreign suppliers. The earthquake in Taiwan during the third quarter of 1999
caused minimal wafer damage at C-Cube's foundries, but resulted in temporary
production delays at such facilities. As a result, production capacity during
the fourth quarter of 1999 is anticipated to be constrained; however, C-Cube is
working with its existing partner, TSMC, with whom the Company has a capacity
agreement, to assure supply of product for the next several years.* In addition,
C-Cube has expanded its source of supplies by signing a production capacity
agreement for a term of up to three years, with another foundry, United
Microelectronics Corporation ("UMC"), during the fourth quarter of 1999.*
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 continues to be a large
market for VideoCD and Chaoji VCD players utilizing the Company's decoder
products. As a consequence, any political or economic instability in China could
significantly reduce demand for those products. The Company has made investments
in 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 sells products to
customers in Korea and is subject to the risk of economic and political
instability in Korea, including the potential for conflict between North and
South Korea. In addition, the Company sells certain of its products in
international markets and buys certain products from its foundries in currencies
other than the U.S. dollar and, as a result, currency fluctuations could have a
material adverse effect on the Company's business and results of operations. The
Company mitigates this risk through the use of foreign currency hedges for
transactions denominated in foreign currencies. However, with respect to
international sales that are denominated in U.S. dollars, increases in the value
of the U.S. dollar relative to foreign currencies can increase the effective
price of and reduce demand for the Company's products relative to competitive
products priced in the local currency. The United States has considered trade
sanctions against Japan and has had disputes with China relating to trade and
human rights issues. If trade sanctions were imposed, Japan or China could enact
trade sanctions in response. Because a number of the Company's current and
prospective customers and suppliers are located in Japan and China, trade
sanctions, if imposed, could have a material adverse effect on C-Cube's business
and results of operations. Similarly, protectionist trade legislation in either
the United States or foreign countries could have a material adverse effect on
the Company's ability to manufacture or sell its products in foreign markets.
The Asian markets accounted for approximately 43% of total Company sales
in the third quarter of 1999 and are expected to continue to account for a
substantial, though declining, percentage of sales in the future.* In the third
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<PAGE>
quarter of 1999, most of the Company's sales in Asia were of DVD, VideoCD and
Chaoji decoder chips. There can be no assurance that the Company will not
experience reduced sales of its semiconductor products into Asia because of
declining consumer spending or because of its customers' increasing difficulty
in obtaining letters of credit, which the Company generally requires prior to
shipment into that region.
GROSS MARGIN
C-Cube's gross margin for the third quarter of 1999 was 55.4% compared to
a gross margin of 55.0% for the same period in the prior year. This moderate
improvement was primarily due to a reduction in product transition costs and a
moderate improvement in DiviCom product margins over the third quarter of 1998.
While the selling prices for semiconductor products have generally declined from
the prior year quarter, the Company was able to offset the related impact on
gross margin by realizing operating efficiencies, including reduced material
costs, refinement of its semiconductor fabrication process and the reduction of
outside manufacturing costs.
DiviCom's business involves transactions which can vary substantially in
the portions of DiviCom manufactured products, third party products and services
included. These variations can cause substantial differences in gross margin
from one contract to another. DiviCom has a number of competitors which are
divisions of larger corporations. Such corporations may decide from time-to-time
to aggressively lower prices of products that compete with DiviCom in order to
sell related products or achieve strategic goals. Such "strategic pricing" by
competitors can place strong pricing pressure on DiviCom products in certain
transactions, resulting in lower selling prices and gross margins for those
transactions.
The markets into which C-Cube sells its semiconductor products are subject
to extreme price competition. Thus, the Company expects to continue to
experience declines in the selling prices of its semiconductor products over the
life cycle of each product.* In particular, C-Cube expects to continue to
experience significant price competition in the markets for decoder chips.* In
order to offset or partially offset declines in the selling prices of its
products, C-Cube must continue to reduce the costs of products through product
design changes, manufacturing process changes, volume discounts, yield
improvements and other savings negotiated with its manufacturing subcontractors.
Since the Company does not believe that it can continually achieve cost
reductions which fully offset the price declines of its products, it expects
gross margin percentages to decline for existing products over their life
cycles.*
C-Cube does not operate its own manufacturing facilities and must make
volume commitments to subcontractors at prices that remain fixed over certain
periods of time. Therefore, the Company may not be able to reduce its costs as
rapidly as its competitors who perform their own manufacturing. Failure of the
Company to design and introduce in a timely manner lower cost versions of
existing products or higher gross margin new products, or to successfully manage
its manufacturing subcontractor relationships, would have a material adverse
effect on C-Cube's gross margins. The Company anticipates production capacity at
its foundries to be constrained during the fourth quarter of 1999 and the first
quarter of 2000 due to production delays caused by the earthquake in Taiwan,
which occurred during the third quarter of 1999, and due to higher projected
industry demand for semiconductor products causing a reduction of available
capacity.* As a result, product costs may increase at a rate faster than C-Cube
can offset those increases with other cost-saving measures, which could
adversely affect gross margins for semiconductor products during those periods.*
RESEARCH AND DEVELOPMENT EXPENSES
In the third quarter of 1999, research and development expenses were $21.1
million, or 20.8% of net revenues, compared with $18.9 million, or 21.9% of net
revenues in the third quarter of 1998. The increase in research and development
expenses primarily represents additional employee-related costs associated with
-9-
<PAGE>
increases in product engineering staff, reflecting the Company's continuing
efforts to provide industry leading digital video solutions at the chip and
systems levels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $17.5 million,
or 17.2% of net revenues, in the third quarter of 1999, compared to $15.2
million, or 17.6% of net revenues, for the same quarter last year. The increase
was primarily due to increased headcount and related expenses, as the Company
continues to increase its international coverage in sales and marketing. The
increase was also due to higher sales commission expense resulting from the
growth in revenues over the third quarter of 1998.
OTHER INCOME (EXPENSE)
Other income, net of other expense, increased to $2.7 million for the
third quarter of 1999, compared to $1.6 million for the third quarter of 1998.
The increase over the prior year quarter is primarily due to higher interest
income earned on higher average cash and investment balances and lower interest
expense on lower average outstanding debt balances.
INCOME TAX EXPENSE
The Company's effective tax rate for the third quarters of 1999 and 1998
was 30%. The Company's effective tax rate is less than the combined federal and
state statutory rate primarily due to tax credits and lower foreign tax rates.
EXTRAORDINARY ITEM
During the third quarter of 1999, the Company did not repurchase any of
the outstanding balance of its 5-7/8% Convertible Subordinated Notes (the
"Notes") due 2005. During the third quarter of 1998, the Company repurchased
$42.8 million of the face value of the Notes at 88.4% of principal amount, with
related accrued interest to the date of repurchase, and recognized an
extraordinary gain of $2.4 million, or $0.06 per diluted share, net of related
income taxes of $1.6 million.
-10-
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999
The following table sets forth certain operating data as a percentage of
net revenues for the nine months ended September 30, 1999 and 1998:
<TABLE>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Net revenues.................................... 100.0% 100.0%
----- -----
Costs and expenses:
Cost of revenues.............................. 44.9 45.6
Research and development...................... 21.1 21.5
Selling, general and administrative........... 17.4 17.1
----- -----
Total................................. 83.3 84.2
----- -----
Income from operations.......................... 16.7 15.8
Other income, net............................... 2.4 1.0
----- -----
Income before income taxes, minority
interest and extraordinary item.............. 19.1 16.8
Income tax expense.............................. 5.7 5.0
----- -----
Income before minority interest and
Extraordinary item........................... 13.4 11.7
Minority interest in net income (loss) of
Subsidiary................................... 0.1 (0.1)
----- -----
Income before extraordinary item................ 13.2 11.9
Extraordinary gain (net of tax)................. - 1.4
----- -----
Net income...................................... 13.2% 13.2%
===== =====
</TABLE>
PRODUCTION CAPACITY RIGHTS
In the second quarter of 1996, the Company expanded and formalized its
relationship with Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC") to
provide additional wafer production capacity in the years 1996 to 2001. The
agreement with TSMC provided that TSMC would produce and ship wafers to C-Cube
at specified prices and required C-Cube to make two advance payments totaling
$49 million. An advance payment of $24.5 million was made in June 1996. In May
1997, the Company amended its agreement with TSMC which resulted in a reduction
of the Company's future wafer purchase commitments and the forgiveness of the
second advance payment of $24.5 million. In January 1999, TSMC refunded $11.8
million of the advance payment to the Company. TSMC will apply the remaining
prepayment against a portion of the wafer cost as product is delivered to
C-Cube. Accordingly, the prepaid amount, which has been allocated between
current and long-term assets, will be amortized to inventory as wafers are
received.
NET REVENUES
Net revenues for the nine months ended September 30, 1999 were $291.9
million, a 14.0% increase from $256.0 million in revenues during the nine month
period ending September 30, 1998. This increase was led by growth in sales of
DiviCom's encoder products, primarily attributable to existing customer upgrades
to next generation products, contract wins in the cable and satellite markets,
and higher selling prices on next generation products, due to design
improvements and feature and quality enhancements. Semiconductor revenues were
slightly higher than in the first nine months of 1998; however, the revenue
product mix changed significantly. Revenues from DVD decoder chips used in
consumer applications increased due to higher volume shipments, despite price
reductions resulting from increasing competition. Revenues from encoder and
codec chipsets for broadcast, non-linear editing and video server applications
increased due to higher volume shipments. These increases were largely offset by
a reduction in revenues from VideoCD decoder chips due to reduced shipments and
increased price competition.
-11-
<PAGE>
GROSS MARGIN
C-Cube's gross margin percentage increased to 55.1% in the nine months
ended September 30, 1999 from 54.4% in the nine month period in the prior year.
This increase was primarily the result of changes in product mix, as sales of
products with higher gross margins, including DiviCom encoders, DVD decoders and
digital set-top boxes, contributed more to revenues in the first nine months of
1999 than the first nine months of 1998. While the selling prices for
semiconductor products have generally declined from the prior year, the Company
was able to offset the related impact on gross margin by realizing operating
efficiencies, including reduced material costs, refinement of its semiconductor
fabrication process and the reduction of outside manufacturing costs.
RESEARCH AND DEVELOPMENT EXPENSES
In the first nine months of 1999, research and development expenses were
$61.7 million or 21.1% of net revenues, as compared to $55.1 million, or 21.5%
of net revenues, for the same period in the prior year. The increase in research
and development expenses primarily represents additional employee-related costs
associated with increases in product engineering staff, reflecting the Company's
continuing efforts to provide digital video solutions at the chip and systems
levels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $50.7 million,
or 17.4% of net revenues in the first nine months of 1999, as compared to $43.8
million, or 17.1% of net revenues for the same period in the prior year. The
increase was primarily due to increased headcount and related expenses, and also
due to higher sales commission expense resulting from the growth in revenues
over the first nine months of 1998.
OTHER INCOME (EXPENSE)
Other income, net of other expense, was $7.1 million for the first nine
months of 1999, an increase from $2.5 million reported for the nine months ended
September 30, 1998. The increase is primarily due to higher interest income
earned on higher average cash and investment balances and lower interest expense
on lower average outstanding debt balances during the first nine months of 1999
compared to the same period last year.
INCOME TAX EXPENSE
The Company's effective tax rate for the nine months ended September 30,
1999 and 1998 was 30%. The Company's effective tax rate is less than the
combined federal and state statutory rate primarily due to tax credits and lower
foreign tax rates.
EXTRAORDINARY ITEM
During the nine months ended September 30, 1999, the Company repurchased
$3.4 million of the face value of the Company's 5-7/8% Convertible Subordinated
Notes due 2005 at 95.5% of the principal amount, with related accrued interest
to the date of repurchase, and recognized an extraordinary gain of approximately
$33,000 (zero effect per diluted share), net of related income taxes of
approximately $23,000. During the nine months ended September 30, 1998, the
Company repurchased $63.5 million of the face value of the notes at 88.4% of the
principal amount, with related accrued interest to the date of repurchase, and
recognized an extraordinary gain of $3.5 million, or $0.09 per diluted share,
net of related taxes of $2.4 million.
-12-
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
On October 27, 1999, C-Cube entered into an Agreement and Plan of Merger
and Reorganization with Harmonic Inc., a Delaware corporation ("Harmonic"),
pursuant to which, subsequent to the sale or spin-off of C-Cube's semiconductor
business, C-Cube has agreed to merge with and into Harmonic (the "Merger"). The
consummation of the Merger and the sale or spin-off of the semiconductor
business may have a material effect on the Company's financial statements taken
as a whole, as the execution of these transactions may contribute to the
Company's results differing from the investment community's expectation in a
given quarter. These activities may result in the cancellation of orders and
additional charges to earnings. The success of the merger between C-Cube and
Harmonic may require, among other things, integration or coordination with a
different company culture, management team organization and business
infrastructure. It may also require the development, manufacture and marketing
of C-Cube's product offerings with Harmonic's products in a way that enhances
the performance of the combined business or product line. Successful integration
of the companies depends on a variety of factors, including the hiring and
retention of key employees, management of geographically separate facilities,
and the integration or coordination of different research and development and
product manufacturing facilities. The success of the semiconductor business may
depend on a variety of factors, including the hiring and retention of key
employees and management team and business infrastructure reorganization. All of
these efforts require varying levels of management resources, which may
temporarily adversely impact business operations.
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 timing of revenue recognized under its systems contracts and the
level of orders which are received and can be shipped in a quarter, the
rescheduling or cancellation of orders by its customers, competitive pressures
on selling prices, changes in product or customer mix, availability and cost of
foundry capacity and raw materials, fluctuations in yield, loss of any strategic
relationships, C-Cube's ability to introduce new products and technologies on a
timely basis, unanticipated problems in the performance of the Company's next
generation or cost-reduced products, the ability to successfully introduce
products in accordance with OEM design requirements and design cycles, new
product introductions by the Company's competitors, market acceptance of
products of both C-Cube and its customers, compatibility of new products with
emerging digital video standards, purchase commitments for customized components
procured in advance of anticipated systems contracts, supply constraints for
other components incorporated into its customers' products, credit risk for
international customers not using letters of credit, fluctuations in foreign
currency exchange rates to the U.S. dollar, the level of expenditures in
manufacturing, research and development, and sales, general and administrative
functions, and a recent trend of mergers and acquisitions creating larger
competitors which may have established market share or greater financial or
technical resources than the Company.*
In addition, C-Cube's operating results are subject to fluctuations in the
markets for its customers' products, particularly the consumer electronics and
personal computer markets, which have been extremely volatile in the past, and
the digital satellite broadcast, cable and wireless cable markets, which are in
an early stage, creating uncertainty with respect to product volume and timing.
To the extent the Company is unable to fulfill its customers' purchase orders on
a timely basis, these orders may be canceled due to changes in demand in the
markets for its customers' products. Historically, the Company has shipped a
substantial portion of its product in the last month of a given quarter. A
significant portion of C-Cube's expenses are fixed in the short term, and the
timing of increases in expenses is based in large part on the Company's forecast
of future revenues. As a result, if revenues do not meet the Company's
expectations, it may be unable to quickly adjust expenses to levels appropriate
to actual revenues, which could have a material adverse effect on the Company's
business and results of operations.
The Company's dependence on the Asian consumer electronics market has
started to decline, and the Company believes it will either remain stable or
continue to decline in the future, as growth in the encoder, digital satellite
-13-
<PAGE>
broadcast, non-linear editing, digital cable and wireless cable markets generate
larger contributions to revenues.* Nevertheless, the substantial seasonality of
sales in the consumer electronics market could impact the Company's revenues and
net income. In particular, C-Cube believes that there may be seasonality in the
Asia-Pacific region related to the Chinese New Year, which falls within the
first calendar quarter, which could result in relatively lower product demand
during the second and third quarters of each year.* If in the future the
geographic mix of the Company's sales shifts towards the U.S. and Europe, C-Cube
would anticipate higher revenues and net income in the third and fourth calendar
quarters as system manufacturers in these regions make purchases in preparation
for the holiday season, and comparatively less revenues and net income in the
first and second calendar quarters.*
As a result of the foregoing, the Company's operating results and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in net revenues or net income from levels expected by
securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's common stock.
The market price of C-Cube's common stock has fluctuated significantly
since its initial public offering in April 1994. The market price of the common
stock could be subject to significant fluctuations in the future based on
factors such as announcements of new products by C-Cube or its competitors,
quarterly fluctuations in C-Cube's financial results, quarterly fluctuations in
other semiconductor or digital video networking companies' financial results,
changes in analysts' estimates of C-Cube's financial performance, general
conditions in the semiconductor and digital video networking industries,
conditions in the financial markets and general conditions in the global economy
which might adversely affect consumer purchasing. In addition, the stock market
in general has experienced extreme price and volume fluctuations, which have
particularly affected the market prices for many high technology companies and
which have often been unrelated to the operating performance of the specific
companies. The market price of C-Cube's common stock has declined substantially
from its historic highs, and may continue to experience significant fluctuations
in the future.
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approaches. The Year
2000 problem is pervasive and complex, as virtually every computer operation
will be affected by the rollover of the two digit year value to 00. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. C-Cube has
initiated a Year 2000 project designed to identify and assess the risks
associated with its information systems, products, operations and
infrastructure, suppliers and customers that are not Year 2000 compliant, and to
develop, implement and test remediation and contingency plans to mitigate these
risks. C-Cube is replacing or upgrading systems, equipment and facilities that
are known to be Year 2000 non-compliant. For the Year 2000 non-compliance issues
identified to date, the Company does not expect the cost of upgrade or
remediation to exceed $500,000, which is not expected to be material to the
Company's operating results.* If implementation of replacement systems is
delayed, or if significant new non-compliance issues are identified, the
Company's results of operations or financial condition could be materially
adversely affected.
INFORMATION SYSTEMS. Testing of all information systems has been completed
and all systems are believed to be Year 2000 compliant.* The Company has
reviewed its hardware and systems infrastructure, such as networks, and believes
all critical Year 2000 information systems issues have been resolved.* The
Company has not incurred to date, nor does it expect to incur, material Year
2000 costs pertaining to its information systems and hardware and systems
infrastructure.*
-14-
<PAGE>
PRODUCTS. The Company has assessed the capabilities of its semiconductor
products sold to customers and has not identified any significant problems
related to Year 2000 compliance. The Company has also identified and assessed
the risks related to integrated systems sold by its DiviCom segment. Products
manufactured by DiviCom are either believed to be Year 2000 compliant or have an
available upgrade to bring them into compliance. To be in compliance for the
Year 2000, the Company has suggested to customers that they obtain a full system
upgrade. All customers were sent a notification letter during the second quarter
of 1999 describing the compliance status of the products purchased by the
customer, along with the procedures necessary to bring those products into
compliance for the Year 2000. Customers with service contracts and customers
with whom the Company has specific Year 2000 contractual obligations have been
offered upgrades at no charge. At present, the majority of the customers in this
category have completed the upgrade. It is up to the customer to initiate the
request for upgrade based on the offer extended by DiviCom. The remaining
requested upgrades are expected to be completed during the fourth quarter of
1999.*
DiviCom products are often installed with third party hardware and
software. The Company has tested the Year 2000 compliance of standard third
party hardware and software products included in its systems and has not
encountered any non-compliance issues. The Company does not comment as to the
Year 2000 compliance of non-standard third party hardware and software products.
Accordingly, DiviCom recommends that customers verify the Year 2000 compliance
status of non-standard third party hardware and software products and that
customers schedule their own Year 2000 system validation tests during 1999 after
Year 2000 upgrades are performed. DiviCom has not assessed all possible customer
configurations, nor can it anticipate all customer situations, particularly
those involving third party products. As a result, the Company may see an
increase in warranty and other claims resulting from the Year 2000 transition
process. In addition, litigation against the Company regarding Year 2000
compliance issues may occur in the future. For these reasons, the impact of
customer claims could have a material adverse impact on the Company's results of
operations or financial condition.
OPERATIONS AND INFRASTRUCTURE. Machinery and equipment and other items
used in the operations and facilities of the Company have been inventoried and
assessed for Year 2000 compliance. The Company has replaced and tested systems
found to be non-compliant, and believes all current systems are Year 2000
compliant.* All servers and employee desktop computers have been upgraded for
Year 2000 compliance. No other material deficiencies were detected from our
assessments.
SUPPLIERS. C-Cube has contacted its critical suppliers and shippers to
inquire whether their operations, products, and services are Year 2000
compliant. All suppliers have responded favorably as to their status of Year
2000 compliance. Where practicable, C-Cube has attempted to mitigate its risks
with respect to the failure of primary suppliers to be Year 2000 compliant
through contracting with secondary suppliers.* In the event that suppliers are
not Year 2000 compliant, the Company will seek alternative sources of supplies
if they have not already been established. However, such failures remain a
possibility and could have a material adverse impact on the Company's results of
operations or financial condition.
CUSTOMERS. The Company is actively responding to all customer requests for
compliance and other general information related to its Year 2000 programs.
GENERAL. The Company does not currently expect its costs associated with
the Year 2000 problem to exceed $500,000, and expects to be able to fund these
costs through operating cash flows.* While, the Company expects to complete its
Year 2000 compliance program during the fourth quarter of 1999, the risks
associated with the Year 2000 problem can be difficult to identify and to
address, and could result in material adverse consequences to the Company.* Even
when the Company completes all of its assessments, identifies and tests
remediation plans believed to be adequate, and develops contingency plans
believed to be adequate, some problems may not be identified or corrected in
time to prevent material adverse consequences to the Company.
-15-
<PAGE>
As the Year 2000 project continues, the Company may discover additional
Year 2000 problems, may not be able to develop, implement, or test remediation
or contingency plans in a timely manner, or may find that the costs of these
activities exceed current expectations and become material. In many cases, the
Company is relying on assurances from suppliers and customers that new and
upgraded information systems and other products will be Year 2000 compliant. The
Company has tested certain third-party products, but cannot be sure that its
tests will be adequate or that, if problems are identified, they will be
addressed by the supplier in a timely and satisfactory way.
Because the Company uses a variety of information systems and has
additional systems embedded in its operations and infrastructure, the Company
cannot be sure that all of its systems will work together in a Year
2000-compliant fashion. Furthermore, the Company cannot be sure that it will not
suffer business interruptions, either because of its own Year 2000 problems or
those of its customers or suppliers whose Year 2000 problems may make it
difficult or impossible for them to fulfill their commitments to the Company. If
the Company fails to satisfactorily resolve Year 2000 issues related to its
products in a timely manner, it could be exposed to liability to third parties.
The Company has not developed a "worst case" scenario with respect to Year
2000 issues, but instead has focused its resources on identifying material,
remediable problems and reducing uncertainties generally, through the Year 2000
project described above.
If the Company or the third parties with which it has relationships were
to cease or not successfully complete its or their Year 2000 remediation
efforts, the Company would encounter disruptions to its business that could have
a material adverse effect on its business, financial position and results of
operations. The Company could be materially and adversely impacted by widespread
economic or financial market disruption or by Year 2000 computer system failures
at third parties with which it has relationships.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $277.4 million at
September 30, 1999 compared to $207.8 million at the end of 1998. Working
capital increased to $303.8 million at September 30, 1999 from $220.5 million at
December 31, 1998.
The Company's operating activities generated cash of $50.5 million in the
nine months ended September 30, 1999, primarily from net income and a refund of
$11.8 million prepaid production capacity rights, partially offset by a $23.8
million increase in accounts receivable. Receivable days outstanding increased
from 35 days at December 31, 1998 to 54 days at September 30, 1999 primarily due
to DiviCom's growing contribution to consolidated revenues, as a substantial
portion of DiviCom's revenues are generated under long-term contracts which
generally have longer payment terms than the semiconductor business. During the
fourth quarter of 1999, the Company signed a production capacity agreement with
UMC for which the Company expects to pay a $20 million refundable deposit to UMC
during the first quarter of 2000.*
C-Cube's investing activities, exclusive of sales and maturities of $188.6
million and purchases of $248.0 million of short-term investments, used cash of
$19.8 million, primarily for $17.1 million capital expenditures.
Cash provided by financing activities was $37.3 million, primarily from
proceeds of $40.6 million from sales of stock pursuant to employee stock plans,
partially offset by $3.3 million used to repurchase a portion of the Company's
Convertible Subordinated Notes.
At September 30, 1999, the Company had an available bank line of credit of
$30.0 million which expires in May 2001. Borrowings bear interest at LIBOR plus
1.25% or the bank's prime rate (8.25% at September 30, 1999). The line of credit
-16-
<PAGE>
agreement requires that the Company, among other things, maintain a minimum
tangible net worth, a minimum annual net income (no quarterly loss exceeding $3
million) and certain financial ratios. In addition, this agreement prohibits the
payment of cash dividends. At September 30, 1999, the Company was in compliance
with these covenants, and there were no outstanding balances under this line.
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, or at all. In addition, the Company has considered
and will continue to consider various possible transactions with foundries to
secure additional foundry capacity, which could include, without limitation,
equity investments, prepayments, non-refundable deposits or loans in exchange
for guaranteed capacity, "take or pay" contracts that commit the Company to
purchase specified quantities of wafers over extended periods, joint ventures or
other partnership relationships.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Readers are referenced to "PART II, ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK", in the Company's most recent Annual Report on
Form 10-K, filed with the SEC on March 23, 1999, as there have been no material
changes since that filing.
-17-
<PAGE>
C-CUBE MICROSYSTEMS INC.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
From time to time the Company is party to certain litigation or legal
claims. Management has reviewed all pending legal matters and
believes that the resolution of such matters will not have a
significant adverse effect on the Company's financial position or
results of operations.
ITEM 2. Changes in Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On October 29, 1999, C-Cube filed a report on Form 8-K
relating to a change in control of registrant, as presented in
a press release dated October 27, 1999.
-18-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
C-Cube Microsystems Inc.
(Registrant)
Dated: November 11, 1999 By: /s/ Walt Walczykowski
---------------------------------- -----------------------------
Walt Walczykowski
Vice President of Finance
and Chief Financial Officer
-19-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 117,098
<SECURITIES> 160,275
<RECEIVABLES> 61,046
<ALLOWANCES> 0
<INVENTORY> 12,373
<CURRENT-ASSETS> 377,429
<PP&E> 81,575
<DEPRECIATION> 47,694
<TOTAL-ASSETS> 424,967
<CURRENT-LIABILITIES> 73,618
<BONDS> 0
0
0
<COMMON> 270,932
<OTHER-SE> 56,628
<TOTAL-LIABILITY-AND-EQUITY> 424,967
<SALES> 291,922
<TOTAL-REVENUES> 291,922
<CGS> 130,947
<TOTAL-COSTS> 130,947
<OTHER-EXPENSES> 112,336
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,064
<INCOME-PRETAX> 55,723
<INCOME-TAX> 16,717
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<EPS-BASIC> 0.98
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</TABLE>
