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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NO. 000-23596
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________TO ___________
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C-CUBE MICROSYSTEMS INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 77-0192108
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1778 MCCARTHY BOULEVARD
MILPITAS, CALIFORNIA 95035
(408) 490-8000
(Address, including zip code, and phone number, including area code, of
Registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK,
$0.001 PAR VALUE.
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. 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.
The aggregate market value of the Registrant's common stock held by
non-affiliates on February 4, 2000 (based upon the average of the high and low
sales prices of such stock as of such date) was $3,502,180,126.
As of February 4, 2000, 44,331,394 shares of the Registrant's common stock
were outstanding.
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<PAGE>
C-CUBE MICROSYSTEMS INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
Page
PART I
Item 1 Business ....................................................... 1
Item 2 Properties ..................................................... 17
Item 3 Legal Proceedings .............................................. 17
Item 4 Submission of Matters to a Vote of Security Holders ............ 17
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder
Matters..................................................... 18
Item 6 Selected Financial Data ........................................ 19
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................... 21
Item 7A. Quantitative and Qualitative Disclosure About Market Risk ...... 27
Item 8 Financial Statements and Supplementary Data .................... 28
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................ 46
PART III
Item 10. Directors and Executive Officers of C-Cube Microsystems Inc. ... 47
Item 11. Executive Compensation ......................................... 50
Item 12. Security Ownership of Certain Beneficial Owners and Management . 57
Item 13. Certain Relationships and Related Transactions ................. 58
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 59
Exhibit Index............................................................ 60
Signatures............................................................... 63
<PAGE>
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 Item 1, those described elsewhere in this report and those
described in 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.
PART I
ITEM 1. BUSINESS
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 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 and the spin-off of
the semiconductor business. For information regarding the financial effects of
the Merger, readers are referenced to the "Liquidity and Capital Resources"
discussion in Item 7.
C-Cube Microsystems Inc. (referred to in this document as "C-Cube" or the
"Company") was established as a California corporation in 1988 and
reincorporated in Delaware in 1994. C-Cube designs, manufactures, and sells
semiconductors and systems for digital video applications. As a leading supplier
of the semiconductors used in digital video applications, C-Cube's Semiconductor
division has played a major role in enabling the growth of digital video. The
primary customers for C-Cube semiconductors are original equipment manufacturers
(OEMs). Many of the products that use C-Cube's semiconductors are sold directly
to consumers, for example, VideoCD (video compact disc) and DVD (digital video
disc). C-Cube's set-top box semiconductors reach consumers through deployments
by service providers such as cable companies and direct satellite broadcasters.
Other C-Cube semiconductors are found in professional applications for broadcast
transmission, post-production editing and content creation.
Beyond its role as a world-class supplier of semiconductors, C-Cube is
also a leading provider of digital video broadband communication systems through
its DiviCom subsidiary. Acquired by C-Cube in 1996, DiviCom designs,
manufactures and sells a full spectrum of products and systems that enable the
transmission of digital video, audio, and data over a variety of networks
including satellite, wireless, terrestrial, fiber and cable. With both systems
and semiconductor divisions focused exclusively on digital video applications,
C-Cube is uniquely positioned to support the continued growth of digital video
in a number of important consumer and communication markets.
DIGITAL VIDEO IN THE 1990S
The 1990s saw analog video, in use since the inception of television in
the 1930s, begin to give way to digital video applications. Digital video
provides two major benefits over analog video: it can be compressed to improve
storage and transmission efficiency, and it suffers little or no perceptible
image degradation in transmission or duplication. Combining these advantages
with the development of new media such as compact discs has created new markets
such as VideoCD and DVD video. By focusing exclusively on digital video
throughout its existence, C-Cube has developed a substantial body of expertise
in compression and decompression technology for digital video. This expertise
represents a significant store of intellectual property that positions C-Cube to
participate in and in many cases drive the growth of both mature and developing
markets for digital video applications.
<PAGE>
THE IMPORTANCE OF STANDARDS
As was the case in the personal computer market, industry standards have
proven critical to customer acceptance of digital video technology. Standards
enable customers to speed integration of products, develop multiple supplier
sources, and prolong the life of infrastructure investments through upgrades and
enhancements. C-Cube actively supports and participates in the standardization
efforts of ISO (International Standards Committee) and other industry
organizations active in creating standards for still-image and digital video
compression. In many cases, C-Cube's products incorporate support for multiple
standards to allow OEMs the maximum flexibility in developing products for
markets in which standards are in flux.
The early growth of digital video was enabled by the JPEG (Joint
Photographic Experts Group) for still-image compression and the MPEG (Moving
Pictures Experts Group) standards for digital video and audio compression. The
MPEG-1 standard enabled the first digital video consumer products such as
VideoCD, while the more recent MPEG-2 standard has become the accepted
compression format in diverse applications such as broadcast transmission,
professional editing, and DVD. C-Cube was and continues to be an active
participant in the development and growth of the MPEG standards.
The second half of the 1990s witnessed a major shift in video acquisition
from analog to digital. This trend started in professional broadcast production
applications and migrated into consumer markets such as camcorders. The
preeminent standard in this arena is the DV format and its professional
versions, DVCAM and DVPRO, which were developed by a consortium of consumer
electronics companies and are now supported by 60 companies, including Sony,
Panasonic, JVC, and Philips. C-Cube has incorporated support for the DV format
in many of its professional broadcast and editing products.
An emerging technology in the consumer electronics market is recordable
DVD, which offers greatly increased storage capacity over the recordable CDs
currently available. A number of competing technical standards for recordable
DVD have been proposed by various industry leaders and consortia, including
DVD-RAM, backed by Toshiba, Matsushita, JVC and others; DVD+RW, developed by
Sony, Philips, Hewlett-Packard and others; and DVD-R/W, supported by Pioneer and
MMVF (for MultiMedia Video File), an NEC initiative.
C-Cube's recordable DVD codecs are compatible with all these proposed standards.
To meet the often-conflicting goals of interoperability, reliability and
efficiency, nearly all new systems for broadcasting digital video implement new
standards such as DAVIC/DVB and DOCSIS, as well as various standards for
conditional access of premium programming. Increasingly, companies that
broadcast digital video realize that they need to foster interoperability and
competition among their equipment suppliers. Accordingly, adherence to industry
standards is a key requirement for suppliers in this market. C-Cube's DiviCom
division has a strong commitment to standards and open architectures in all of
its product lines.
ENCODING ALGORITHMS: C-CUBE'S INTELLECTUAL PROPERTY
Creating and using digital video requires both encoding (compressing the
data) and decoding (restoring the compressed data to viewable form). An
important factor in the encoding process is determining which parts of the
original video signal can be discarded or reduced without significantly
affecting the reconstructed image. These decisions are made by encoding
algorithms, which are mathematical rules that govern how the large volume of
uncompressed video is reduced to a manageable size without adversely affecting
image quality. C-Cube's core strength has been its expertise in the development,
testing and refinement of compression algorithms. These mathematical formulas
are proprietary and represent vital intellectual property of C-Cube. By
incorporating these highly efficient and powerful algorithms into our products,
C-Cube has consistently been recognized as an industry leader in digital video
encoding.
C-Cube attempts to protect its technology through a combination of
patents, copyrights, trade secret laws, confidentiality procedures and licensing
arrangements. C-Cube has several issued United States patents, and has several
U.S. applications pending. The Company intends to continue to seek patents on
its technology where appropriate.
<PAGE>
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 C-Cube's technology. While C-Cube intends to
protect its intellectual property rights vigorously, there can be no assurance
that any patents held by C-Cube will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to C-Cube.
END-TO-END COMMUNICATIONS SOLUTIONS
Cable operators, Internet service providers (ISPs) and broadcasters face a
growing technical challenge as they plan and deploy real-time digital video
transmission systems. These next-generation systems incorporate new system and
network technologies that are often outside of the service provider's core
competency. C-Cube's DiviCom division has benefited from this trend through its
experience in a range of digital video technologies as well as expertise in
integrating those technologies into complete end-to-end network systems. By
combining video compression technologies with network and communications
technologies, DiviCom creates innovative products for producers and distributors
of video and video-enhanced information. Products include MPEG audio/video
encoders, multiplexing and network management systems, as well as a wide range
of support and integration services. Based on the MPEG-2 international standard,
DiviCom's products enable digital video broadcasting over a variety of broadband
networks including satellite, terrestrial broadcast (VHF, UHF), cable, wireless
cable and telephone networks.
MARKET TRENDS
As a market-driven enterprise, C-Cube targets its product development
process to key trends in its target markets. This section describes some of the
trends in home media products, broadband networking products and communications
systems, and highlights the competitive advantages that C-Cube brings to each
market.
HOME MEDIA PRODUCTS
An important and growing market for digital video products is home
entertainment based on optical media such as DVD and VideoCD as well as magnetic
media such as hard discs in personal computers. The trends in this market area
are creating new and varied opportunities for C-Cube's semiconductor encoders,
decoders and codecs.
Digital Video Disc (DVD): Strong Growth in 1999
Sales of DVD players accelerated substantially in 1999. A recent report by
market research firm eBrain called DVD "the fastest selling CE [consumer
electronics] product of all time" based on 1999 sales of nearly four million
units. The proliferation of titles in retail outlets has contributed to this
growth, as well as falling prices due to increased manufacturing volumes. In
2000, C-Cube believes that DVD players sales will continue to grow in North
America and will begin to make gains in developing countries such as China.*
Market research firm Cahners In-Stat designated C-Cube as the market share
leader in supplying MPEG-2 chips for DVD players in 1998. C-Cube believes that
its expertise in digital video and long-term experience in designing and
manufacturing MPEG-2 decoders will continue to allow it to compete effectively
in this growing market area.
VideoCD: A Mature Market
The first mass-market application for digital video was the emergence of
VideoCD players in China during the last half of the 1990s. While higher-quality
DVD players are becoming more popular in China, VideoCD and its recent
enhancement, Chaoji VCD, which was introduced in 1998, continue to sell well
based on lower prices than DVD players and greater numbers of VideoCD titles
available.
<PAGE>
C-Cube dominated the market for MPEG-1 decoders used in VideoCD players
during the early years of the product's growth and, even in the face of strong
and aggressive competition by a number of semiconductor vendors, continues to be
a leading supplier of decoders to VideoCD and Chaoji VCD OEMs. Furthermore, the
working relationships built with Chinese consumer electronics OEMs provide a
basis for C-Cube to compete effectively in other emerging market opportunities
in China such as DVD and digital set-top boxes.
Recordable DVDs: Potential VCR Replacement
An important new development in digital video is the potential for a
consumer product that replaces the video cassette recorder (VCR). Such products
would include the ability to record broadcast programming onto removable DVDs
and to play back commercial DVD titles and user-recorded programming. Key
advantages of disc-based recording include higher video quality of digital
versus analog recording, the convenience of discs over tape, and the ability to
integrate the recording function with other desirable consumer features such as
easy program recording and timeshifting of programs.
C-Cube believes that rapid growth in this market will occur only when
single-chip codecs reach a low enough price point to enable a recordable unit at
mass-market prices. Once this milestone is achieved, C-Cube believes the
potential for wide consumer acceptance of a digital, disc-based VCR replacement
is high.* C-Cube's digital video codec products and relationships with consumer
electronics OEMs position it to compete effectively for design wins as this
market develops.
DVD Playback for Personal Computers
Computer makers and users are increasingly embracing digital video as the
most flexible and feature-rich data type for educational, entertainment,
communication and training applications. DVD-ROMs offer significant speed and
capacity advantages over CD-ROMs and are experiencing rapid adoption rates.
Personal computer OEMs are now offering add-in DVD decoder cards bundled
with DVD-ROM drives as options for their desktop models. Some OEMs began
bundling the DVD-ROM and decoder cards as part of build-to-order system
offerings. Compared to software-only decoders, DVD decoder cards offer
advantages such as TV-output, full Dolby Digital surround sound and the ability
to use the computer for other tasks while a DVD video is being played. However,
as computer processor speeds continue to increase, software-only-decoders are
becoming the more dominant solution for the personal computer market.
New portable PC models are also being designed as DVD-ready and often
feature the DVD decoder installed directly on the motherboard as opposed to
using an add-on card. This architecture allows the playback of full-motion video
from DVD discs while maximizing battery life.
Professional Digital Video Editing
Personal computers are extensively used for digital video editing and
video encoding in production studios. C-Cube's customers include a number of
OEMs who develop and market products for personal computer video editing. In
1999, these OEMs moved away from the motion JPEG (MJPEG) standard that had
dominated the market in the past, opting instead for MPEG- and DV-based
products. MPEG video editing products offer better compression ratios than MJPEG
or DV products and are compatible with MPEG-based media such as DVDs. DV-based
products interface well with consumer DV products such as digital camcorders.
C-Cube's codec products for this market incorporate support for both MPEG and DV
and include the ability to translate between the DV and MPEG formats in real
time.
Personal Desktop Editing
Sophisticated features such as non-linear video editing, once the province
of professional studios, are now coming to the consumer and prosumer markets in
the form of personal desktop editing systems. An important enabling factor is
the availability of low-cost recordable CD drives, which provide a convenient
<PAGE>
and cost-effective means to store edited digital video. This trend is expected
to accelerate in 2000, as the higher capacity recordable DVD drives become more
common in personal computers.*
BROADBAND NETWORKING PRODUCTS
Broadband entertainment is continuing its transition into the digital
arena, creating new potential markets for C-Cube's semiconductors. The home
entertainment trends discussed earlier have created new opportunities for
convergence products that incorporate both broadcast and disc-based
entertainment in a single consumer product.
Digital Set-Top Boxes in Retail Channels
The Federal Communications Commission (FCC) has mandated that digital
set-top boxes must be available in consumer retail channels by June 2000. This
move favors products that are standards-based in contrast to the proprietary
set-top box architectures that have characterized North American cable
television. Whereas the market for set-top boxes had previously been dominated
by two principal suppliers, General Instrument and Scientific Atlanta, now
consumer OEMs can compete effectively for set-top box sales in retail outlets.
C-Cube's traditional strength with consumer OEMs should allow it to compete
effectively for design wins in the digital set-top market.*
Enhanced Set-Top Features
Cable and satellite service providers are increasingly competing for
subscribers based on features. To address this trend, set-top boxes must offer
an increasing range of features such as two-way interactivity, Internet
connectivity and support for IP telephony services. These features require both
encoding and decoding functions as opposed to the decode-only solutions used in
previous generations of digital set-top boxes, and thus create market
opportunities for codec suppliers such as C-Cube.* Also, C-Cube has supplied
decoders for a number of set-top box manufacturers in the past, and expects
these relationships to prove valuable in developing the codec-based set-tops of
the future.*
Digital Video Recorders
1999 saw the introduction of digital video recorders from several OEMs
including TiVo and Replay. These recorders are connected to a television input
signal (cable or antenna) and enable high-quality recording of broadcast
television programming onto a hard disc located within the box. The controls are
similar to a VCR, featuring record, pause, rewind and playback buttons. Digital
video recorders allow users to timeshift programs, that is, to pause and rewind
live programming. They are marketed in retail channels and can be supplemented
with services such as weekly broadcast guides and automatic recording of
user-selected programs.
Digital video recorders use codec (encode and decode) technology. The
analog television signal is encoded in digital form for storage on the internal
hard disc and then is decoded back to analog form for playback. C-Cube's strong
product offerings in MPEG codecs is expected to create opportunities for design
wins in this emerging market segment.*
BROADBAND SYSTEMS
C-Cube addresses the broadband communications systems market primarily
through its DiviCom division. 1999 saw a continuation of the migration from
analog to digital in all segments of the broadcast market coupled with a trend
toward increased service offerings to subscribers. As these developments place
demands on the available spectrum space, DiviCom's traditional strength in
high-quality, high-efficiency compression technology continues to allow it to
compete effectively for customers in all segments of the communications systems
market.*
<PAGE>
Growth in Digital Cable and Terrestrial
The cable segment saw increased deployments of interactive services in a
number of geographies, primarily in North America and Europe. Cable service
providers continue to upgrade the level of their services using a variety of
approaches including switched digital video, fiber-to-the-curb (FTTC) and
hybrid-fiber cable (HFC).
In North America, terrestrial broadcasters are continuing to migrate to
digital television according to the FCC timeline. Most broadcasters offer at
least standard definition (SD) digital broadcasting and many have added high
definition (HD) broadcasts for some part of their programming. HD trials are
underway in some targeted geographies such as the UK.
New Deployments in Developing Countries
Wireless (often referred to as Multichannel Multipoint Distribution
Systems or MMDS) is an attractive choice for many developing countries,
particularly in Latin America and Asia, that lack the infrastructure of cable
and terrestrial broadcasting. 1999 saw a number of new deployments of MMDS
television in developing countries.
In addition, China is expected by many observers to begin deployment of a
cable infrastructure in late 2000 and should have substantial cable subscribers
in 2001 and 2002.* C-Cube's working relationships with Chinese OEMs and
government agencies involved in consumer entertainment should allow it to
compete for systems business in this emerging geographical market.*
Expanded Service Offerings
In general, service providers are deploying additional services as a means
to penetrate new geographic markets in developing countries and to compete for
subscribers in North America and the developed countries. More providers are
offering some form of interactivity or Internet connectivity as a premium
service in addition to their traditional programming options. Data broadcasting
applications and multicasting are additional opportunities for service providers
to attract new subscribers and develop new revenue sources.
DSL Trials Underway
Telephone service providers such as the regional Bell operating companies
(RBOCs) initiated a number of trial deployments in 1999 featuring video over DSL
(Digital Subscriber Line). Services using the existing telephone infrastructure
have a strong potential for two-way applications such as e-commerce and
interactive games.
PRODUCTS
C-Cube supplies products for three market areas: home media, broadband
networking and broadband systems products. Each of these areas had important
product introductions in 1999:
Home Media:
o ZiVA DVD-3 Decoder
o CL8830 Chaoji VCD MPEG-2 Audio/Video Processor
Broadband Networking:
o DVxpert-HD High-Definition Broadcast Encoder
o DVxpert 5120 Single-Chip Broadcast Codec
Broadband Systems:
o MediaView MV 400 High-Definition Program Encoder
o MediaView MV45 Program Encoder
<PAGE>
HOME MEDIA PRODUCTS
Recordable Digital Video
While DVD playback has achieved increasing success in both consumer
players and personal computer applications, C-Cube believes that the high-volume
applications of digital video in the consumer world depend on the ability to
both record and play back DVD-quality video. C-Cube contributed to the
development of this technology with its introduction in 1998 of the DVxplore(TM)
line of consumer codecs. DVxplore codecs are the first single-chip consumer
products to support both MPEG and DV formats. In 1999, C-Cube teamed with
Microsoft to develop drivers, sample applications and other software support to
help hardware developers incorporate DVxplore into recordable digital video
products based on the Windows and Windows CE operating systems.
DVD Decoders
C-Cube's ZiVATM family of DVD products includes decoders and system-level
design solutions for consumer and multimedia original equipment manufacturers.
The ZiVA DVD decoder family incorporates several critical DVD functions into a
single chip. C-Cube addresses a critical concern of content owners with
SecureViewTM copy protection and decryption technology. SecureView made ZiVA
decoders the first single-chip products to support the DVD consortium's copy
protection scheme.
C-Cube continued to enhance its ZiVA family of DVD products in 1999 with
the introduction of the ZiVA-3 DVD Decoder, a third-generation device for
consumer DVD players. The ZiVA-3 decoder features a 50-MIPS audio DSP running
C-Cube's proprietary RealSonic(TM) audio technology. OEM manufacturers JVC,
Samsung and LG Electronics announced plans to build DVD players based on the
ZiVA-3 decoder.
Chaoji VCD Decoders
Continuing its leadership role in Chaoji VCD, in 1999 C-Cube introduced
the CL8830 Chaoji VCD Audio/Video Processor. The CL8830 is a full-featured
product incorporating C-Cube's patented RealSonic technology, which offers high
audio quality in home theater and Karaoke applications. Leading OEMs including
BBK, Beijing Philips, Malata, Nintaus, Samsung, SAST and Xiamin announced plans
to introduce Chaoji VCD products based on the CL8830. In addition, C-Cube
partnered with ITE Corporation to develop a Windows CE solution for Chaoji VCD
players, which will allow users to surf the World Wide Web using Microsoft's
Project Venus technology.
VideoCD Decoders
While Chaoji VCD represents the leading edge VCD technology, VideoCD
continues to generate substantial retail sales in the China market. C-Cube's
CL680 Advanced VideoCD Decoder provides VideoCD OEMs with an NTSC/PAL encoder,
improved ClearView(TM) error concealment technology and a new WideSound(TM)
feature, which simulates a surround-sound experience from two stereo channels.
Codecs for Digital Video Recorders
As described earlier, the DVxplore line of consumer codecs are enabling
digital home recording applications based on removable optical media. These same
codecs are also being used by OEMs as the basis for digital video recorders,
which are products that record broadcast programming onto an internal magnetic
hard disc and are usually bundled with broadcast services such as programming
guides and automatic recording services. A number of OEMs announced plans in
1999 to introduce digital video recorders based on C-Cube's DVxplore, including
JVC and FAST Multimedia. Also, C-Cube teamed with Western Digital to create a
reference platform which will enable OEMs to rapidly design digital video
recorders based on C-Cube semiconductors and Western Digital hard drives.
<PAGE>
Professional Editing Encoders
As noted earlier, the professional editing industry moved away from Motion
JPEG-based editors to MPEG- and DV-based editors in 1999. C-Cube's DVxpress(TM)
codec was a key driving technology enabling this shift with its proprietary
Frame-Accurate MPEG Editing (FAME) algorithm and dual-stream decoding, two
capabilities needed for professional non-linear editing. Addressing the reality
of a two-format environment, DVxpress-MX codecs can support both MPEG and DV
video formats to allow mixed-format editing in which, for example, an MPEG
stream and a DV stream are edited together. This innovation is particularly
important because DV is the most popular format for consumer and professional
digital camcorders, while MPEG is the prevailing standard for transmission. A
number of leading manufacturers of editing equipment incorporated the DVxpress
into their professional product lines in 1999, including Avid Technology,
Matrox, Pinnacle Systems, FAST Multimedia and Accom.
BROADBAND NETWORKING PRODUCTS
C-Cube's broadband networking products fall into three main categories:
encoders, decoders and codecs (combination of encoder and decoder). Encoders are
primarily used for editing and transmitting programming content, while decoders
are incorporated into set-top boxes and receivers. Codecs are targeted at a
number of new and emerging markets using recording and playback, most notably
the digital video recorder segment. Each of these categories saw new product
introductions and design wins in 1999.
Broadcast and Distribution Encoders
C-Cube introduced two new DVxpert(TM) products in 1999: the DVxpert 5120
Single-Chip MPEG Codec and the DVxpert-HD High-Definition Broadcast Encoder
Chipset. The DVxpert 5120 is targeted at two-way video networking applications
such as streaming video, enabling the creation and playback of broadcast-quality
video over narrow, middle and broadband Internet pipes. Optibase, a provider of
streaming media solutions for broadband applications, announced plans to use the
DVxpert 5120 to provide video encoding for Cisco Systems' video-over-IP
networking products. The DVxpert-HD chipset replaces discrete and
semi-programmable HD solutions with a scalable and programmable design, which
results in easier integration and lower overall system costs.
DVxpert broadcast encoders target applications such as distribution,
contribution, DVD authoring and video servers. All DVxpert encoders use C-Cube's
patented PerfectView(TM) feature, which ensures clear image quality with
advanced capabilities such as pre-filtering, error masking and inverse telecine.
Interactive Set-top Box Decoders
The primary broadband application for MPEG-2 decoders is in the set-top
box market. Recognizing the trends toward the convergence of digital broadcast,
Internet access, interactivity and advanced graphics, C-Cube brought out the
AViA@tv(TM) platform in November 1998 to address the needs of the set-top OEM.
Using set-tops based on AViA@tv products, service providers can now develop and
deploy additional revenue-generating features and services such as continuous
two-way data exchange, advanced graphical user interfaces, interactive
advertising and Internet services such as e-mail on TV, home banking and on-line
shopping. The AViA@tv line includes C-Cube's integrated FlickerFilter(TM), which
dramatically improves the visual quality of HTML text displayed over video, an
important feature for interactive applications. AViA@tv provides the MAC (Media
Access Control) for two-way network support so cable providers can deliver the
interactive multimedia applications needed for next-generation services. The
AViA@tv multi-planar graphics enable the development of a rich graphical user
interface. Key design wins for AViA@tv products in 1999 included betaresearch,
Philips and Pace Micro Technology.
In January of 1999, C-Cube acquired the communication technology, patents
and personnel of the company formerly known as TV/Com to reinforce the Company's
strategic thrust into the arena of broadband communications network products. A
key strategic advantage of this acquisition was that TV/Com's products have been
successfully deployed in the same networks and set-top boxes as C-Cube's MPEG
solutions. Through this purchase, C-Cube gained access to key people,
intellectual property and designs including modulation and demodulation
<PAGE>
technology. The combination of these capabilities with the designs and software
from C-Cube's AViA@tv product family and expertise in analog design should allow
C-Cube to develop state-of-the-art, highly integrated solutions for interactive
digital TV.*
With this acquisition, C-Cube is now able to service the end-to-end
requirements of a digital video network, including video compression in the head
end, network interfaces and the full spectrum of data, video, audio and graphics
requirements in the consumer terminal. This complete spectrum of products
enables a new generation of interactive services available through the TV in the
living room, including web-based e-commerce, video e-mail and voice over the
Internet.
BROADBAND SYSTEMS
C-Cube provides broadband communication systems through its DiviCom
division. DiviCom products are standards-based and open, allowing their
customers to choose solutions that provide the best cost/performance value for
specific applications. DiviCom makes extensive use of C-Cube Semiconductor's
products and support to design leading-edge products for the markets it
services. DiviCom also supplements its product offerings with services including
systems integration, consulting, training and technical support.
The DiviCom product line consists of: encoders, multiplexers, conditional
access systems, data networking products, network management products, control
and automation products and professional services.
Encoders
The workhorses of a digital video broadcast facility continue to be the
program encoders. DiviCom had its initial successes in supplying high-quality,
reliable program encoders, and this market continues to be both strategic and
profitable for C-Cube. The MediaView(TM) line of program encoders provides
MPEG-2 compression of video, audio and data channels. Using sophisticated signal
pre-processing, noise reduction and encoding algorithms, these encoders produce
high-quality video and audio at low data rates. Their compliance with MPEG-2 and
Digital Video Broadcasting (DVB) standards ensures interoperability with other
products and systems.
In 1999, DiviCom broadened the MediaView line with the introduction of two
new products: the MediaView MV45 Program Encoder and the MediaView MV400
High-Definition Program Encoder. The MV45 features three significant
improvements in digital television: advanced compression technology, greater
processing power and superior noise management. Together, these new features
allow broadcasters to carry a larger number of channels within their allocated
bandwidth, while maintaining high image quality. The MV45 encoder incorporates
three C-Cube DVxpert encoder chips.
Designed for flexibility, the MV400 offers broadcasters a choice of 1080I,
720P and 480P DTV and supports ATSC, DVB, and ISDB (Japanese) standards. Also
powered by DVxpert, the MediaView MV400 was given the "Pick of Show" award for
high-definition encoding at the 1999 National Association of Broadcasters show.
Multiplexers
In a broadcast facility, the video, audio and data streams must be
combined or multiplexed into a single stream prior to transmission. DiviCom's
MediaNodeTM MN20 Remultiplexer performs this task, combining MPEG-2 compressed
streams from various sources into a single MPEG-2 transport stream. Sources are
DiviCom program encoders or third-party devices such as video servers. The MN20
Remultiplexer is especially designed for flexible distribution to all types of
networks including satellite, broadcast, cable, wireless cable and telephone
networks. The MN20 Remultiplexer also provides scrambling and
monitoring/decoding capabilities.
Conditional Access System (CAS)
Conditional access defines how a digital television signal is encrypted or
scrambled and is at the heart of pay-TV systems worldwide. DiviCom's
implementation of the DVB SimulCryptTM standard allows several conditional
<PAGE>
access systems to be used in a single head end system, in conjunction with the
DVB Common Scrambling Algorithm. By deploying SimulCrypt, DiviCom customers can
increase their market penetration by enabling set-top receivers using different
conditional access standards to view their programming. Service providers who
adopt SimulCrypt can select conditional access and compression vendors
independently to allow more flexibility in system design and procurement.
Data Networking Products
Service providers are competing for new subscribers and increased revenues
by broadening their service offerings. DiviCom addresses this need in the
satellite broadcasting market with its DiviCastTM Data Encapsulator and
Multiplexer. DiviCast supports the transmission of IP (Internet Protocol) data
over MPEG-2 networks for data broadcasting applications. Using DiviCast, digital
television service providers can increase revenue by offering their customers
high-speed data services such as "push" information broadcasts, multimedia
streaming, file transfers and Internet/intranet access. Broadcast Engineering
Magazine chose DiviCast as its prestigious "Pick Hit" award for best product
exhibited at NAB in 1999.
DiviCom's InterSectTM Interactive Set-top Box Controller addresses a
similar need in the cable industry by allowing service providers to deliver
TCP/IP traffic to their subscribers over two-way hybrid fiber coax (HFC)
networks. Each InterSect controller can support thousands of individual set-top
boxes and can be managed from a central facility or distributed locations using
standard Internet network management protocols.
Control and Automation Products
Modern digital networks are a diverse array of hardware and software
components from a variety of vendors and using a number of network protocols and
standards. Network management is the glue that holds it all together, the tool
that lets service providers monitor and control their networks. Because of its
special expertise in digital video, audio and data, DiviCom is uniquely
qualified to help service providers with the network management side of their
operations. The TheSysTM Network Management Family includes a full range of
products that service providers can adapt and configure to meet the needs of
their deployments. The TheSys Family includes these individual products:
o TheSys Controller: Allows network operator to configure and manage a
digital video network
o System monitor: Remote configuration, monitoring, alarm control, and
bandwidth validation
o Alarm manager: Advanced features for fault isolation and alarm logging
o Bandwidth manager: Analyses network traffics and provides visual
monitoring tools
o Professional Services and Customer Support
DiviCom has long recognized the need of service providers to have a
working partner in integrating and deploying their digital broadcasting systems.
By offering services that complement their products, DiviCom can compete more
effectively for system business while generating service-related revenues from
existing customers. DiviCom's DiviSysTM technology integration group provides
consulting and implementation services to DiviCom customers worldwide. DiviSys
draws upon its expertise in broadcasting television, communications networking
and compression technology to design, integrate and install complete business
solutions. DiviSys offers a broad range of services including program
management, budget analysis, technical design and planning, parts inventory
management, building and site preparation, equipment installation and
integration, end-to-end system testing and comprehensive customer training.
The DiviSys group also has extensive experience in integrating DiviCom
products with numerous third-party products and services. This capability
includes the procurement and integration of encoders, multiplexers,
system/network controllers, ATM and TCP/IP network equipment, NVOD servers,
modulators, transmitters, antennas, downlink systems, satellite dishes/IRDs,
subscriber management systems, conditional access systems for pay-per-view,
electronic program guides and diagnostics/quality assurance tools.
<PAGE>
DiviTecTM, DiviCom's customer service and support organization, provides
technical support to DiviCom customers. The DiviTec Service Agreement provides
for a customized set of services for ongoing maintenance, support-on-demand and
customer training.
CUSTOMERS
<TABLE>
<CAPTION>
=========================== ====================================== =================================================
MARKET APPLICATION CUSTOMERS
=========================== ====================================== =================================================
<S> <C> <C>
Home Media Recordable DVD Samsung, NEC
-------------------------------------- -------------------------------------------------
DVD players JVC, Samsung, LG Electronics, Hitachi, Acer
-------------------------------------- -------------------------------------------------
Chaoji and VideoCD players BBK, Nintaus, Malata, Changhong, Yuxing,
Skyworth, Hitaker, Beijing Philips, SAST
-------------------------------------- -------------------------------------------------
Digital VHS JVC
=========================== ====================================== =================================================
Philips, Pace Micro, Pioneer, Nokia,
Broadband Digital set-top boxes Sagem, Samsung, Sony, Panasonic,
Networking General Instrument, Zenith
-------------------------------------- -------------------------------------------------
Video editing Matrox, Avid, Pinnacle, FAST, Accom, Dazzle
Multimedia, Metabyte, Ulead
-------------------------------------- -------------------------------------------------
Broadcast encoding DiviCom, General Instrument, NDS, Optibase,
Scientific Atlanta
=========================== ====================================== =================================================
Broadband Digital cable MediaOne, Time Warner, Telegeneve, NTL,
Systems Cablevision, DirecTV, GTE Media Ventures, Canal+
-------------------------------------- -------------------------------------------------
Direct satellite broadcast Echostar, Mega Media Broadcasting, CBSat,
CanalSatellite, APT Satellite
-------------------------------------- -------------------------------------------------
Wireless cable GTE, Look Communications, TV Distribution
System, Shenzhen Broadcast
-------------------------------------- -------------------------------------------------
Digital terrestrial broadcast Paxson Communications, Thomcast, Infravision,
WHTV
-------------------------------------- -------------------------------------------------
Video over DSL Bell South
=========================== ====================================== =================================================
</TABLE>
During 1999 and 1998, no individual customer accounted for 10% or more of
net revenues. During 1997, sales to Sinorex, a distributor, accounted for 20% 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, 1999, the Company
had 476 full-time employees engaged in research and development. Expenditures
for research and development in 1999, 1998 and 1997 were approximately $84.4
million, $74.0 million and $64.2 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, the 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.* 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 2000.* The failure of any of
these products to be successfully introduced and achieve market acceptance could
<PAGE>
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 could 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 with
designing in the Company's products.
In the United States, the Company sells its products through direct sales
channels, independent representatives and distributors. The Company records
revenues from product sales to customers at the time of shipment. The Company
records revenues from systems sales under contract accounting. 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. Generally, the Company pays its independent sales representatives on a
commission basis. As of December 1999, C-Cube has North American regional sales
offices in California, Florida, Georgia, Quebec and Virginia, and international
sales offices in the United Kingdom, France, Korea, China, Singapore, Taiwan and
Japan. In Japan, C-Cube sells products through the direct sales force of C-Cube
Japan, Inc. (CCJ) and two distributors. CCJ was formed by the Company and Kubota
Corporation in 1988 and is currently 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, Denmark, France, Germany,
Great Britain, Hong Kong, Ireland, India, Israel, Italy, Korea, Latin America,
Malaysia, Philippines, Scandinavia, Singapore and Taiwan.
INTERNATIONAL BUSINESS ACTIVITIES
During 1999, 1998 and 1997, international revenues accounted for
approximately 60%, 62% and 65% 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 Company's success will depend in part
upon its ability to manage international marketing and sales operations. In
addition, C-Cube purchases a substantial portion of its manufacturing services
from foreign suppliers. C-Cube's international manufacturing and sales are
subject to changes in foreign political and economic conditions, and to other
risks, including currency or export/import controls, changes in tax laws,
tariffs and freight rates and changes in the ownership and/or leadership of
international customers that may result in delayed or canceled orders. For
example, China is the primary 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 the
Company's products.
<PAGE>
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 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, in the long term,
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 consumer electronics markets accounted for approximately 43%,
49% and 55% of total Company sales in 1999, 1998 and 1997, respectively, and are
expected to continue to account for a substantial, though declining, percentage
of sales in the future.* Asia has experienced economic instability in the past
few years, characterized by increases in idle production capacity, real estate
vacancies, unemployment and bank failures, and has resulted in currency
devaluation, falling consumer spending and domestic price deflation. Any of
these factors could significantly reduce the demand for the end-user goods in
which the Company's products are incorporated. A significant portion of the
Company's sales in Asia were of decoder chips, which are used in DVD, VideoCD
and Chaoji VCD players. The Company believes purchases of these products are not
as likely to be deferred as are purchases of higher priced consumer durables and
production equipment, which have dramatically impacted U.S. export sales.*
However, there can be no assurance that the Company will not experience reduced
sales of its products into Asia because of declining consumer spending or
because of its customers' increasing difficulty in obtaining letters of credit,
which the Company requires prior to shipment.
MANUFACTURING
The Company has chosen to use independent silicon foundries to fabricate
its integrated circuits. Assembly, test and packaging are also subcontracted to
third parties. This approach enables the Company to concentrate its resources on
product design and development, where the Company believes it has greater
competitive advantages. the Company continually evaluates alternative sources
for wafer assembly and test capacity.
During 1999, the Company's semiconductor devices were fabricated using
complementary metal oxide semiconductor (CMOS) process technology with 0.5
micron, 0.35 micron, 0.30 micron and 0.25 micron and 0.22 micron process feature
sizes, using either three, four or five layers of metal interconnect. In 1999,
the Company began designing with 0.18 micron process technology. Production
fabricated wafers are tested by the fabrication facility to Company
specifications. Once the fully tested and accepted wafers are received by the
Company, the die are assembled into packages by subcontractors, primarily
located in Taiwan and Korea. The Company utilizes multiple assembly
subcontractors for its products. In 1999, the Company has invested in new
information technology tools that improve the speed and quality of subcontract
management.
The Company has wafer production capacity agreements with Taiwan
Semiconductor Manufacturing Co., Ltd. and with United Microelectronics
Corporation. Details of these agreements are provided in the "Production
Capacity" discussion in Item 7.
<PAGE>
The Company believes that an increase in the demand for semiconductor
chips over currently expected levels, or a failure of manufacturing capacity in
the industry to grow at anticipated rates could result in greater difficulty in
obtaining adequate manufacturing capacity, increased prices and increased lead
times.* The Company's future operating results 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 chips 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 manufacturing capacity, its business and results of
operations would be materially and adversely affected.
The Company sources its integrated circuit products from Matsushita
Electronics Corporation, UMC, TSMC and Yamaha. 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, the Company 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 process
technology. 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 the
Company'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 the Company intellectual
property. The Company obtains manufacturing capacity through forecasts that are
generated in advance of expected delivery dates. The Company's ability to obtain
the manufacturing 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 chips 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 manufacturing capacity in the
future.
The Company 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 wafer fabrication 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 the Company's customers, which would have a material adverse
effect on the Company's business and results of operations. In addition, the
Company'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 chips or
finished goods purchased from higher cost suppliers in order to obtain adequate
product volumes.
The markets into which the Company sells its products are subject to
extreme price competition. Thus, the Company expects to continue to experience
declines in the selling prices of its products over the life cycle of each
product.* In order to offset or partially offset declines in the selling prices
of its products, the Company 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 operate its own manufacturing
facilities and must make volume commitments to subcontractors at prices that
remain fixed over certain periods of time, it may not be able to reduce its
costs as rapidly as its competitors who perform their own manufacturing. The
<PAGE>
failure of the Company to design and introduce, in a timely manner, lower cost
versions of existing products or new products with higher gross margins, or to
successfully manage its manufacturing subcontractor relationships would have a
material adverse effect on the Company's gross margins.
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, obtain 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
assemble.
Once a product or subsystem has demonstrated design stability, it is
transitioned from the DiviCom engineering group to the contract partner for
management and full turnkey assembly. The contract partner purchases components
to DiviCom specifications, contracts with the assembly facility to perform
product builds and ships the completed systems to DiviCom. DiviCom manages the
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 market for consumer electronics semiconductors, principal
competitors include ESS Technology, Inc., SGS-Thomson and Zoran as well as
several large, integrated Japanese and Korean consumer electronics companies,
such as Sony and MEC, which have their own semiconductor design and
manufacturing capacity. In the personal computer segment of the consumer
electronics market, principal C-Cube competitors include the increasingly
powerful microprocessors that are now available from, among others, Intel, AMD
and Motorola, as well as hardware solutions from Zoran and IBM. Graphics chip
manufacturers such as ATI, S3 Incorporated and Trident Microsystems, Inc. are
also potential competitors. In the market for communications decoders, C-Cube's
principal competitors include SGS-Thomson and Philips.
IBM is the principal competitor in the broadcast encoder market. Principal
competitors in the codec market include IBM, Sony, iCompression, and Stream
Machines. C-Cube expects that other companies will introduce competing encoder
products in the 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.* As the markets
for C-Cube's products develop, competition from large semiconductor companies,
such as SGS-Thompson and Phillips, and from vertically integrated companies such
as Sony and MEC, may increase significantly.* If C-Cube can offer low-cost
hardware solutions, then it may continue to compete with providers of software
solutions such as National and AMD, and manufacturers of central processing
units such as Intel, AMD and Motorola.* 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
<PAGE>
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. Competitor companies are
designing products around these and other 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. There can be no assurance that
system manufacturers will not use such processors for video compression
applications. While MPEG has become the accepted standard, any of the
alternative approaches, individually or collectively, could be adopted on a
widespread basis in the emerging video compression market. If this were to
happen, C-Cube's business and results of operations would be materially and
adversely affected.
In the broadband system business, DiviCom competes with vertically
integrated system suppliers including General Instrument, Scientific Atlanta,
SGS-Thomson and Philips, as well as focused system suppliers such as Tandberg
and Barco. C-Cube believes that its DiviCom subsidiary 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 Instrument, Scientific Atlanta and Philips have been established in the
analog technology market for many years.
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. As of December 31, 1999, the Company has 69 issued United States
patents and 41 U.S. patent applications pending and has filed certain
corresponding applications in certain foreign jurisdictions. These patents
expire at various times from 2010 to 2018. 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.
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.
<PAGE>
In order to defray the cost of developing its products and to develop
products with specifications meeting customer requirements, C-Cube has
established development relationships with certain companies. Under these
arrangements, these companies provided the Company with development funding
and/or technical assistance, and participated with C-Cube in determining the
specifications for the performance requirements of various 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. In certain cases, as consideration for such development
assistance, C-Cube has agreed to pay royalties to such customers and generally
C-Cube retains ownership of such products.
EMPLOYEES
As of December 31, 1999, the Company had approximately 1,062 employees,
476 of whom are engaged in, or directly support, the Company's research and
development, 284 of whom are in sales and marketing, 183 of whom are in
operations and 119 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 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.
ITEM 2. PROPERTIES
C-Cube's principal facilities consist of approximately 303,000 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.
These facilities are occupied by both segments of the Company. The Company
intends to assign or sublease the three buildings currently occupied by its the
Company segment from Harmonic for a period of up to two years subsequent to the
consummation of the merger with Harmonic Inc.* 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.
<PAGE>
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.
<TABLE>
HIGH LOW
1998:
<S> <C> <C>
First Quarter........................ $ 22 1/4 $ 17 5/8
Second Quarter....................... 24 11/16 15 11/16
Third Quarter........................ 20 3/16 14 9/16
Fourth Quarter....................... 29 13/16 15 1/4
1999:
First Quarter........................ $ 30 1/16 $ 17 5/8
Second Quarter....................... 32 18 3/4
Third Quarter........................ 43 29/32 26 5/8
Fourth Quarter....................... 62 13/16 35 1/8
</TABLE>
At February 4, 2000, the Company had 687 holders of record of its common
stock and 44,331,394 shares outstanding.
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 stockholder approval of the merger with Harmonic, future merger
or acquisition activity, announcements of new products by C-Cube or its
competitors, quarterly fluctuations in C-Cube's financial results or 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.
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.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for each of the five
years in the period ended December 31, 1999 have been derived from the audited
consolidated financial statements of the Company. 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,
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- -------
(IN THOUSANDS, EXCEPT PERCENTAGE AND PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net revenues:
Product.................................. $407,648 $351,797 $337,012 $319,758 $123,190
Development contracts.................... -- -- -- -- 1,412
-------- -------- -------- -------- --------
Total............................... 407,648 351,797 337,012 319,758 124,602
-------- -------- -------- -------- --------
Costs and expenses:
Cost of product revenues................. 181,891 160,839 151,333 144,985 59,253
Research and development................. 84,366 74,031 64,204 44,177 14,342
Selling, general and administrative...... 69,437 60,512 52,732 39,002 19,227
Purchased in-process technology.......... -- -- -- 131,349 3,800
-------- -------- -------- -------- --------
Total............................... 335,694 295,382 268,269 359,513 96,622
-------- -------- -------- -------- --------
Income (loss) from operations............... 71,954 56,415 68,743 (39,755) 27,980
Other income (expense), net................. 10,456 4,239 (1,757) (28) 2,059
-------- -------- -------- -------- --------
Income (loss) before income taxes, minority
interest and extraordinary item.......... 82,410 60,654 66,986 (39,783) 30,039
Income tax expense.......................... 24,723 18,196 22,895 32,944 4,933
-------- -------- -------- -------- --------
Income (loss) before minority interest and
extraordinary item....................... 57,687 42,458 44,091 (72,727) 25,106
Minority interest in net income (loss) of
subsidiary............................... 442 (337) (248) 318 211
-------- -------- -------- -------- --------
Income (loss) before extraordinary item..... 57,245 42,795 44,339 (73,045) 24,895
Extraordinary gain on repurchase of
convertible notes (net of tax)........... 33 3,494 -- -- --
-------- -------- -------- -------- --------
Net income (loss)........................... $ 57,278 $ 46,289 $ 44,339 $(73,045) $ 24,895
======== ======== ======== ======== ========
Basic earnings (loss) per share: (1)
Income (loss) before extraordinary item.. $ 1.44 $ 1.14 $ 1.21 $ (2.15) $ 0.78
Extraordinary item (net of tax).......... -- 0.09 -- -- --
-------- -------- -------- -------- --------
Net income (loss) per share.............. $ 1.44 $ 1.24 $ 1.21 $ (2.15) $ 0.78
======== ======== ======== ======== ========
Diluted earnings (loss) per share: (1)
Income (loss) before extraordinary item.. $ 1.30 $ 1.11 $ 1.15 $ (2.15) $ 0.74
Extraordinary item (net of tax).......... -- 0.09 -- -- --
-------- -------- -------- -------- --------
Net income (loss) per share.............. $ 1.30 $ 1.19 $ 1.15 $ (2.15) $ 0.74
======== ======== ======== ======== ========
Shares used in computation: (1)
Basic.................................... 39,891 37,382 36,497 33,928 31,819
======== ======== ======== ======== ========
Diluted.................................. 44,571 40,754 41,683 33,928 35,000
======== ======== ======== ======== ========
PRODUCT GROSS MARGIN DATA:
Net product revenues........................ $407,648 $351,797 $337,012 $319,758 $123,190
Cost of product revenues.................... 181,891 160,839 151,333 144,985 59,253
-------- -------- -------- -------- --------
Product gross margin........................ $225,757 $190,958 $185,679 $174,773 $ 63,937
======== ======== ======== ======== ========
Product gross margin percentage............. 55.4% 54.3% 55.1% 54.7% 51.9%
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash and short-term investments............. $319,653 $207,827 $166,350 $ 82,246 $144,089
Working capital............................. 367,450 220,466 208,391 124,487 158,577
Total assets................................ 496,309 343,171 304,108 279,515 203,526
Short-term debt and current portion of
long-term obligations.................... 742 355 608 25,337 3,093
Long-term obligations, net of current portion 18,869 23,557 87,462 87,700 88,010
Stockholders' equity........................ 398,792 243,375 175,415 118,572 87,535
</TABLE>
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the computation of net income (loss) per share.
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------------------------------------ ------------------------------------------
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................... $115,726 $101,368 $94,095 $96,459 $95,800 $86,162 $82,518 $87,317
-------- -------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of product revenues.... 50,944 45,210 41,852 43,885 44,071 38,757 36,997 41,014
Research and development.... 22,707 21,094 20,661 19,904 18,897 18,867 18,596 17,671
Selling, general and
administrative............ 18,760 17,462 16,855 16,360 16,756 15,207 13,963 14,586
-------- -------- ------- ------- ------- ------- ------- -------
Total................ 92,411 83,766 79,368 80,149 79,724 72,831 69,556 73,271
-------- -------- ------- ------- ------- ------- ------- -------
Income from operations......... 23,315 17,602 14,727 16,310 16,076 13,331 12,962 14,046
Other income (expense), net.... 3,372 2,657 2,310 2,117 1,692 1,636 638 273
-------- -------- ------- ------- ------- ------- ------- -------
Income before income taxes,
minority interest and
extraordinary item........ 26,687 20,259 17,037 18,427 17,768 14,967 13,600 14,319
Income tax expense............. 8,006 6,078 5,111 5,528 5,327 4,490 4,083 4,296
-------- -------- ------- ------- ------- ------- ------- -------
Income before minority interest
and extraordinary item.... 18,681 14,181 11,926 12,899 12,441 10,477 9,517 10,023
Minority interest in net income
(loss) of subsidiary...... 61 148 261 (28) 17 (185) (28) (141)
-------- -------- ------- ------- ------- ------- ------- -------
Income before extraordinary item 18,620 14,033 11,665 12,927 12,424 10,662 9,545 10,164
Extraordinary gain on repurchase
of convertible notes (net
of tax)..... ............. -- -- -- 33 -- 2,356 1,138 --
-------- -------- ------- ------- ------- ------- ------- -------
Net income..................... $ 18,620 $ 14,033 $11,665 $12,960 $12,424 $13,018 $10,683 $10,164
======== ======== ======= ======= ======= ======= ======= =======
Diluted earnings per share: (1)
Income before extraordinary
item...................... $ 0.40 $ 0.32 $ 0.28 $ 0.32 $ 0.31 $ 0.28 $ 0.25 $ 0.27
Extraordinary item (net of
tax)...................... -- -- -- -- -- 0.06 0.03 --
-------- -------- ------- ------- ------- ------- ------- -------
Net income per share......... $ 0.40 $ 0.32 $ 0.28 $ 0.32 $ 0.31 $ 0.34 $ 0.28 $ 0.27
======== ======== ======= ======= ======= ======= ======= =======
Shares used in computation (1). 47,424 45,021 42,925 41,344 40,708 39,686 41,485 41,137
======== ======== ======= ======= ======= ======= ======= =======
Gross margin percentage........ 56.0% 55.4% 55.5% 54.5% 54.0% 55.0% 55.2% 53.0%
======== ======== ======= ======= ======= ======= ======= =======
</TABLE>
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the computation of net income per share.
<PAGE>
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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Net revenues........................................ 100.0% 100.0% 100.0%
----- ----- -----
Costs and expenses:
Cost of product revenues.......................... 44.6 45.7 44.9
Research and development.......................... 20.7 21.0 19.1
Selling, general and administrative............... 17.0 17.2 15.6
----- ----- -----
Total..................................... 82.3 84.0 79.6
----- ----- -----
Income from operations.............................. 17.7 16.0 20.4
Other income (expense), net......................... 2.6 1.2 (0.5)
----- ----- -----
Income before income taxes, minority interest
and extraordinary item........................... 20.2 17.2 19.9
Income tax expense.................................. 6.1 5.2 6.8
----- ----- -----
Income before minority interest and
extraordinary item............................... 14.2 12.1 13.1
Minority interest in net income (loss) of subsidiary 0.1 (0.1) (0.1)
----- ----- -----
Income before extraordinary item.................... 14.1 12.2 13.2
Extraordinary gain on repurchase of convertible
notes (net of tax)............................... -- 1.0 --
----- ----- -----
Net income.......................................... 14.1% 13.2% 13.2%
===== ===== =====
</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 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 and the spin-off of
the semiconductor business. The closing is anticipated to take place during the
second quarter of 2000.* For further information regarding the financial effects
of the Merger, see "Liquidity and Capital Resources" discussion herein. For more
information about the Merger, readers are referenced to the Company's Form 8-K
filed on October 29, 1999.
PRODUCTION CAPACITY
In the second quarter of 1996, the Company expanded and formalized its
relationship with Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC) to provide
wafer production capacity in the years 1996 to 2001. The agreement with TSMC
provided that TSMC would produce and ship wafers to the Company at specified
prices and required the Company to make two advance payments totaling $49.0
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, the Company signed a second
amendment to its agreement with TSMC which resulted in a refund to the Company
of $11.7 million and an extension of the term of the agreement to 2003. Advance
payments associated with wafer production capacity rights are amortized over the
shorter of the contract period or the actual delivery of wafers in relation to
the total amount of wafers purchased under the agreement. At December 31, 1999,
remaining production capacity rights were $6.4 million, of which $1.4 million
was included in other current assets and $5.0 million was classified as a
non-current asset.
<PAGE>
In the fourth quarter of 1999, the Company signed a production capacity
agreement with United Microelectronics Corporation (UMC) to provide chip
production capacity in the years 2000 to 2002, for which it paid a $20 million
refundable payment in January 2000. This deposit allows for certain discounts on
purchased capacity based upon the quantities purchased. The agreement does not
commit the Company to purchase chips, but does guarantee the availability of a
set capacity of chips at "not to exceed" prices.
NET REVENUES
Net revenues increased 15.9% to $407.6 million in 1999 compared to $351.8
million in 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, based on design improvements
and feature and quality enhancements. Semiconductor division revenues increased
slightly over 1998; however, the product mix changed significantly. Revenues
from DVD decoder chips used in consumer applications increased significantly due
to higher volume shipments, despite price reductions resulting from increased
competition. Revenues from encoder and codec chipsets for set-top, broadcast and
non-linear editing applications increased due to higher volume shipments. The
increases discussed above were largely offset by reductions in VideoCD and
Chaoji VCD decoder chip revenues due to reduced shipments and increased price
competition.
In 1998, net revenues increased 4.4% to $351.8 million compared to $337.0
million in 1997. Revenue from the Company's family of encoder products increased
due to growth in sales of communications products, which was led by DiviCom and
increased sales of the Company's DVxpress and DVxpert families of codecs.
Revenue from MPEG-2 decoder chips used primarily in digital set-top boxes and in
DVD-ROMs on PCs increased from 1997 due to customers' adoption of the Company's
AViA and ZiVA families of decoder chips and the wider acceptance of the DVD
format. The Company also had sales from the introduction of its Chaoji VCD
decoder. These increases were partially offset by a decrease in revenues from
MPEG-1 decoder chips used in VideoCD players sold primarily in China, due to
price reductions made in response to competitive pricing pressures, partially
offset by an increase in unit volumes.
The sales returns allowance at December 31, 1999 was $6.8 million,
decreasing from $13.1 million at December 31, 1998. During 1999, additions to
the sales returns allowance were $2.4 million and deductions were $8.8 million.
The deductions to the allowance were primarily due to price protection credits
given to distributors and other pricing adjustments. The additions to the
allowance were to cover price protection, pricing adjustments and stock rotation
credits to distributors.
The sales returns allowance at December 31, 1998 was $13.1 million,
increasing from $6.7 million at December 31, 1997. During 1998, additions to the
sales returns allowance were $12.6 million and deductions were $6.2 million. The
deductions to the allowance were primarily due to price protection credits given
to distributors and other pricing adjustments. The additions to the allowance
were to cover price protection, pricing adjustments and stock rotation credits
to distributors.
During 1999 and 1998, no customer accounted for 10% or more of net
revenues. During 1997, sales to Sinorex, a distributor, accounted for 20% of the
Company's net revenues.
International revenues accounted for 60%, 62% and 65% of net revenues in
1999, 1998 and 1997, respectively. International revenues were a significant
portion of total revenues primarily due to volume shipments of DVD, VideoCD and
Chaoji VCD players into Asia and an increase in set-top and encoder sales into
Europe. The Company sells products and supports customers internationally
through subsidiaries in Hong Kong and Japan. 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 economic 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."
<PAGE>
GROSS MARGIN
C-Cube's gross margin percentage increased to 55.4% in 1999 from 54.3% in
1998. This increase was primarily the result of changes in product mix, as the
volume of sales of products with higher gross margins, including DiviCom
encoders, DVD decoders and digital set-top boxes, increased in 1999 over 1998.
While the selling prices for semiconductor products have generally declined from
1998, the Company was able to offset the related impact on gross margin by
realizing greater operating efficiencies, including reduced material costs,
refinement of its semiconductor fabrication process and the reduction of outside
manufacturing costs. C-Cube's gross margin percentage decreased to 54.3% in 1998
from 55.1% in 1997. This decrease was due primarily to higher product transition
costs and lower average selling prices partially offset by reduced product
material costs and a shift in product mix to higher margin encoder products.
DiviCom's business involves transactions which can vary substantially in
the portions of DiviCom manufactured products, third party products and services
included in their contract agreements. 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 somewhat constrained during the first half of 2000 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 1999, research and development expenses were $84.4 million or 20.7% of
net revenues, compared to $74.0 million or 21.0% of net revenues in 1998. The
increase in research and development expenses from 1998 is primarily related to
an increase in employee-related costs associated with increases in product
engineering staff, in addition to increases in costs for development tools and
non-recurring engineering. The increase in headcount reflects the Company's
continuing efforts to provide industry leading digital video solutions at the
chip and systems levels. In 1998, research and development expenses were $74.0
million or 21.0% of net revenues, compared to $64.2 million or 19.1% of net
revenues in 1997. The increase in research and development expenses from 1997
was primarily related to an increase in employee-related costs associated with
increases in product engineering staff, partially offset by decreases in
start-up and non-recurring engineering costs. The Company anticipates that
absolute levels of research and development expenses will continue to increase
in future periods.*
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $69.4 million or
17.0% of net revenues in 1999 compared to $60.5 million or 17.2% of net revenues
in 1998. The increase from 1998 is primarily related to an increase in
employee-related costs associated with increases in sales and marketing staff,
and to a lesser extent from higher sales commissions, as a result of the
increase in revenues over 1998. The increase in sales and marketing headcount
reflects the Company's efforts to increase its international presence. Selling,
general and administrative expenses increased to $60.5 million or 17.2% of net
revenues in 1998 compared to $52.7 million or 15.6% of net revenues for 1997.
The increase in absolute dollars from 1997 was primarily due to increased
travel, staffing and related expenses partially offset by decreased commissions
to distributors. The Company expects that absolute levels of selling, general
and administrative expenses will continue to increase in future periods.*
OTHER INCOME (EXPENSE)
Interest income and other increased to $12.1 million in 1999 compared to
$8.5 million in 1998 primarily due to higher average balances of cash and
investments in 1999 compared to 1998. Interest income and other increased to
$8.5 million in 1998 compared to $4.3 million in 1997 primarily due to higher
average balances of cash and investments in 1998 compared to 1997. Interest
expense and other decreased to $1.6 million in 1999 compared to $4.3 million in
1998 primarily due to lower average outstanding debt balances due to the
repurchase of a significant portion of the Company's convertible subordinated
notes during 1998 and 1999. Interest expense and other decreased to $4.3 million
in 1998 compared to $6.0 million in 1997 primarily due to lower average
outstanding debt balances due to the repurchase of a significant portion of the
Company's convertible subordinated notes.
INCOME TAX EXPENSE
The Company provided $24.7 million for income taxes in 1999 on income
before taxes, minority interest and extraordinary items of $82.4 million, for an
effective tax rate of 30%. In 1998, the Company provided $18.2 million for
income taxes on income before taxes, minority interest and extraordinary items
of $60.7 million, for an effective tax rate of 30%. In 1997, the Company
provided $22.9 million for income taxes on income before taxes and minority
interest of $67.0 million, for an effective tax rate of 34%. The effective tax
rates for 1999, 1998 and 1997 are less than the combined federal and state
statutory rate primarily due to tax credits and lower foreign taxes.
EXTRAORDINARY ITEM
During 1999, the Company repurchased $3.4 million of the face value of the
Company's 5.875% subordinated convertible notes due 2005 (the "notes") at 95.5%
of the principal amount, with accrued interest to the date of repurchase, and
recognized an extraordinary gain of $33,000 (zero effect per diluted share), net
of related income taxes of $23,000. During 1998, the Company repurchased $63.5
million of the face value of the notes at 88.4% of the principal amount, with
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 income taxes of $2.4
million.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The consummation of the merger of C-Cube with Harmonic and the 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
<PAGE>
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
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 stockholder approval of the merger with Harmonic, merger or
acquisition activity, announcements of new products by C-Cube or its
competitors, quarterly fluctuations in C-Cube's financial results or other
semiconductor or digital video networking companies' financial results, changes
in analysts' estimates of C-Cube's financial performance, general conditions in
<PAGE>
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.
YEAR 2000
The Company completed its Year 2000 project as scheduled, including
addressing leap year calendar date calculation concerns. As a result of these
efforts, to date the Company has experienced no significant problems with either
its own technology or that of its infrastructure providers. The Company
continues to monitor its products, business systems, infrastructure, and
manufacturing systems to ensure that latent defects do not manifest themselves
over the next few months. In addition, the Company continues to monitor the
impact of the Year 2000 on those suppliers and other third parties on whom the
Company is dependent for key raw materials, components, products, or services.
Contingency plans to manage all identified areas of perceived risk will remain
in place throughout 2000. Based upon information currently available, the
Company believes that its most reasonably likely worst-case Year 2000 scenario
would relate to a temporary disruption in the supply of key raw materials,
components, products, or services resulting from problems with the systems and
services of third parties, rather than with its internal systems or products.
The costs incurred to date by the Company in connection with its Year 2000
project have not and are not expected to exceed $500,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments increased to $319.7
million at December 31, 1999 from the $207.8 million at December 31, 1998.
Working capital increased to $367.5 million at December 31, 1999 from $220.5
million at December 31, 1998.
The Company's operating activities generated cash of $71.9 million in
1999, compared to $98.3 million in 1998, primarily from net income, a reduction
of $11.8 million prepaid production capacity rights and increases in accrued
liabilities and accounts payable, partially offset by increases in accounts
receivable and deferred taxes and a decrease in income taxes payable.
C-Cube's investing activities, exclusive of the sales and maturities and
purchases of short-term investments of $222.8 million and $296.1 million,
respectively, used cash of $27.0 million, primarily for capital expenditures.
Cash provided by financing activities was $64.2 million, primarily from
proceeds of $67.8 million from the sale 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.
As noted earlier, C-cube has entered into a merger agreement with Harmonic
Inc., which is subject, in part, to the spin-off of the semiconductor business.
The merger agreement specifies that employees must exercise all vested stock
options prior to the merger/spin-off date. The Company expects to receive cash
inflows from the remaining option exercises after December 31, 1999 of
approximately $83 million.* Cash outflows related to the merger include
approximately $22 million of expenses the Company expects to incur during the
first half of 2000 for legal, accounting and other direct costs related to the
Merger.* Cash outflows will also include $60 million to be retained by C-Cube
upon consummation of the Merger, as specified by the Merger agreement. In
addition, the semiconductor business will incur significant income tax expense
for the spin-off transaction. The valuation of the semiconductor business cannot
be estimated with any certainty at this time, as it will depend on market
factors around the date of the spin-off. If the valuation of the semiconductor
business is $975 million, related income tax expense is estimated to be
approximately $203 million.* If the valuation of the semiconductor business is
$1.1 billion, related income tax expense is estimated to be approximately $288
million.* The Company estimates that each additional $100 million in valuation
will reduce cash and retained earnings by approximately $40 million.* The
Company has debt financing available should the valuation of the semiconductor
business exceed $1.2 billion.* Readers are referenced to the "Unaudited Pro
Forma Financial Statements" presented herein for two pro forma balance sheet
<PAGE>
presentations based on the possible valuations discussed above. Readers are also
referenced to the Company's Form 8-K filed on October 29, 1999 for more
information about the Merger.
At December 31, 1999, the Company had an available bank line of credit of
$30.0 million which expires May 1, 2001. Borrowings bear interest at LIBOR plus
1.25% or the bank's prime rate (8.5% at December 31, 1999). The line of credit
agreement requires the Company, among other things, to maintain a minimum
tangible net worth, annual net income (no quarterly loss exceeding $3.0 million)
and certain financial ratios. In addition, the bank agreement prohibits the
payment of cash dividends. At December 31, 1999, the Company was in compliance
with these covenants, and there were no borrowings under this line.
As discussed earlier, C-Cube has a wafer production capacity agreement
with Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC). In January 1999, the
Company signed a second amendment to its agreement with TSMC which resulted in a
refund to the Company of $11.7 million. In the fourth quarter of 1999, the
Company entered into a wafer production capacity agreement with United
Microelectronics Corporation, for which C-Cube paid a refundable deposit of $20
million in January 2000.
Based on current plans, business conditions and estimations of the
valuation of C-Cube's semiconductor division, C-Cube expects that its cash, cash
equivalents and short-term investments together with any amounts generated from
operations and available borrowings, will be sufficient to meet the Company's
cash requirements for at least the next 12 months.* However, there can be no
assurance that the Company will not be required to seek other financing sooner
or that such financing, if required, will be available on terms satisfactory to
the Company. In addition, the Company has considered and will continue to
consider various possible transactions to secure additional foundry capacity,
which could include, without limitation, equity investments in, prepayments to,
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosures
involves forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company is exposed to
market risk related to changes in interest rates and foreign currency exchange
rates. The Company does not use derivative financial instruments for speculative
or trading purposes.
Interest Rate Sensitivity. The Company maintains a short-term investment
portfolio consisting mainly of income securities with an average maturity of
less than two years. The market value of this portfolio was $175.4 million at
December 31, 1999. These available-for-sale securities are subject to interest
rate risk and will fall in value if market interest rates increase. If market
interest rates were to increase immediately and uniformly by 10% from current
levels at December 31, 1999, the fair value of the portfolio would decline by
$1.0 million. The Company has the ability to hold its fixed income investments
until maturity, and therefore the Company would not expect its operating results
or cash flows to be affected to any significant degree by the effect of a sudden
change in market interest rates on its securities portfolio.* The Company does
not hedge any interest rate exposures.
The Company has fixed rate long-term debt of approximately $17.6 million,
and a hypothetical 10% increase or decrease in current interest rates from
levels at December 31, 1999 would not have a material impact on the fair market
value of this debt.
Foreign Currency Exchange Risk. The Company enters into foreign exchange
forward contracts and foreign currency options to hedge certain economic
exposures, balance sheet exposures and inter-company balances against future
movements in the dollar/yen, dollar/pound and dollar/franc exchange rates. Gains
and losses on the forward contracts are largely offset by gains and losses on
the underlying exposure. A hypothetical 10% appreciation of the U.S. dollar from
December 31, 1999 market rates would increase the unrealized value of the
Company's forward contracts by $0.3 million. Conversely, a hypothetical 10%
depreciation of the U.S. dollar from December 31, 1999 market rates would
<PAGE>
decrease the unrealized value of the Company's forward contracts by $0.3
million. In either scenario, the gains or losses on the forward contracts are
largely offset by the gains or losses on the underlying transactions and
consequently a sudden or significant change in foreign exchange rates would not
be expected to have a material impact on future net income or cash flows.
All of the potential changes noted above are based on sensitivity analyses
performed on the Company's financial positions at December 31, 1999. Actual
results may differ materially.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE
Financial Statements:
Independent Auditors' Report ............................................ 29
Consolidated Balance Sheets at December 31, 1999 and 1998 ............... 30
Consolidated Statements of Income for the years ended December 31, 1999,
1998 and 1997......................................................... 31
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997 ............................... 32
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997................................................... 33
Notes to Consolidated Financial Statements .............................. 34
Financial Statement Schedule:
Independent Auditors' Report............................................. 64
Schedule II--Valuation and Qualifying Accounts and Reserves.............. 65
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.
<PAGE>
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, 1999 and 1998, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1999.
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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
San Jose, California
January 20, 2000
[February 10, 2000 as to Note 17]
<PAGE>
<TABLE>
<CAPTION>
C-CUBE MICROSYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
(In thousands, except par value amounts) 1999 1998
- ----------------------------------------------------------------------------------- ------------- -------------
ASSETS
Current assets:
<S> <C> <C>
Cash and equivalents......................................................... $ 144,296 $ 108,224
Short-term investments....................................................... 175,357 99,603
Accounts receivable, net of allowances: 1999-- $10,974 , 1998-- $17,034...... 74,850 36,980
Inventories.................................................................. 19,335 16,073
Deferred income taxes........................................................ 14,064 11,170
Other current assets......................................................... 17,725 19,977
---------- ----------
Total current assets................................................. 445,627 292,027
Property and equipment-- net................................................... 36,293 29,622
Production capacity rights..................................................... 4,985 12,600
Distribution rights-- net...................................................... 1,318 1,483
Purchased technology-- net..................................................... 4,194 5,921
Non-current deferred taxes..................................................... 867 --
Other assets................................................................... 3,025 1,518
---------- ----------
Total................................................................ $ 496,309 $ 343,171
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 38,882 $ 19,942
Accrued compensation and benefits............................................ 14,556 12,379
Other accrued liabilities.................................................... 16,573 16,628
Income taxes payable......................................................... 5,503 15,551
Deferred contract revenue.................................................... 1,921 6,706
Current portion of long-term obligations..................................... 742 355
---------- ----------
Total current liabilities............................................ 78,177 71,561
Long-term obligations.......................................................... 18,869 23,557
Deferred income taxes.......................................................... -- 4,650
---------- ----------
Total liabilities.................................................... 97,046 99,768
---------- ----------
Minority interest in subsidiary................................................ 471 28
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000 shares authorized................... -- --
Common stock, $0.001 par value, 150,000 shares authorized; shares
outstanding: 1999-- 42,441, 1998-- 38,261................................. 323,756 225,265
Accumulated other comprehensive loss......................................... (2,204) (1,852)
Retained earnings............................................................ 77,240 19,962
---------- ----------
Total stockholders' equity........................................... 398,792 243,375
---------- ----------
Total................................................................ $ 496,309 $ 343,171
========== ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
C-CUBE MICROSYSTEMS INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
(In thousands, except per share amounts) 1999 1998 1997
-------------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Net revenues...................................................... $ 407,648 $ 351,797 $ 337,012
--------- --------- ---------
Costs and expenses:
Cost of product revenues....................................... 181,891 160,839 151,333
Research and development....................................... 84,366 74,031 64,204
Selling, general and administrative............................ 69,437 60,512 52,732
--------- --------- ---------
Total....................................................... 335,694 295,382 268,269
--------- --------- ---------
Income from operations............................................ 71,954 56,415 68,743
Other income (expense):
Interest income and other...................................... 12,067 8,511 4,291
Interest expense and other..................................... (1,611) (4,272) (6,048)
--------- --------- ---------
Total....................................................... 10,456 4,239 (1,757)
--------- --------- ---------
Income before income taxes, minority interest and extraordinary
item........................................................... 82,410 60,654 66,986
Income tax expense................................................ 24,723 18,196 22,895
--------- --------- ---------
Income before minority interest and extraordinary item............ 57,687 42,458 44,091
Minority interest in net income (loss) of subsidiary.............. 442 (337) (248)
--------- --------- ---------
Income before extraordinary item.................................. 57,245 42,795 44,339
Extraordinary gain on repurchase of convertible notes (net of tax) 33 3,494 --
--------- --------- ---------
Net income........................................................ $ 57,278 $ 46,289 $ 44,339
========= ========= =========
Basic earnings per share:
Income before extraordinary item............................... $ 1.44 $ 1.14 $ 1.21
Extraordinary item (net of tax)................................ -- 0.09 --
--------- --------- ---------
Net income per share........................................... $ 1.44 $ 1.24 $ 1.21
========= ========= =========
Diluted earnings per share:
Income before extraordinary item............................... $ 1.30 $ 1.11 $ 1.15
Extraordinary item (net of tax)................................ -- 0.09 --
--------- --------- ---------
Net income per share........................................... $ 1.30 $ 1.19 $ 1.15
========= ========= =========
Shares used in computation:
Basic.......................................................... 39,891 37,382 36,497
========= ========= =========
Diluted........................................................ 44,571 40,754 41,683
========= ========= =========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
C-CUBE MICROSYSTEMS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NOTES ACCUMULATED
DEFERRED RECEIVABLE OTHER RETAINED
COMMON STOCK STOCK FROM COMPRE- EARNINGS
(In thousands) SHARES AMOUNT COMPENSATION STOCKHOLDERS HENSIVE LOSS (DEFICIT) TOTAL
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1996........ 36,013 $ 191,044 $ (250) $ (305) $(1,251) $(70,666) $118,572
Components of comprehensive income:
Net income...................... 44,339 44,339
Accumulated translation
adjustments.................. (731) (731)
Unrealized loss on investments.. (4) (4)
--------
Total comprehensive income.. 43,604
--------
Common stock issued under stock
plans........................... 774 9,111 9,111
Tax benefit from employee
stock transactions.............. 3,573 3,573
Amortization of deferred stock
compensation.................... 250 250
Collection of notes receivable from
stockholders.................... 305 305
------- --------- ------ ------ ------- -------- --------
BALANCES, DECEMBER 31, 1997......... 36,787 203,728 -- -- (1,986) (26,327) 175,415
Components of comprehensive income:
Net income...................... 46,289 46,289
Accumulated translation
adjustments.................. 41 41
Unrealized gain on investments.. 93 93
--------
Total comprehensive income.. 46,423
--------
Common stock issued under stock
plans........................... 1,474 20,111 20,111
Tax benefit from employee
stock transactions.............. 1,426 1,426
------- --------- ------ ------ ------- -------- --------
BALANCES, DECEMBER 31, 1998......... 38,261 225,265 -- -- (1,852) 19,962 243,375
Components of comprehensive income:
Net income...................... 57,278 57,278
Accumulated translation
adjustments.................. 202 202
Unrealized loss on investments.. (554) (554)
--------
Total comprehensive income.. 56,926
--------
Common stock issued under stock
plans........................... 4,119 67,740 67,740
Tax benefit from employee
stock transactions.............. 28,938 28,938
Conversion of convertible debt into
common stock.................... 61 1,813 1,813
------- --------- ----- ----- ------- -------- --------
BALANCES, DECEMBER 31, 1999......... 42,441 $ 323,756 $ -- $ -- $(2,204) $ 77,240 $398,792
======= ========= ===== ===== ======= ======== ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
C-CUBE MICROSYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(In thousands) 1999 1998 1997
----------------------------------------------------------------------- ----------- ----------- -----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income........................................................ $ 57,278 $ 46,289 $ 44,339
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary gain on repurchase of convertible notes.......... (33) (3,494) --
Minority interest in subsidiary................................ 443 (337) (248)
Depreciation and amortization.................................. 18,687 22,577 17,396
Deferred income taxes.......................................... (8,411) 4,107 3,356
Changes in assets and liabilities:
Receivables................................................. (37,315) 4,138 (146)
Inventories................................................. (3,211) (490) 12,712
Production capacity rights.................................. 11,800 -- --
Prepaids and other assets................................... (1,664) (4,457) 10,956
Accounts payable............................................ 18,368 10,153 (8,993)
Income taxes payable ....................................... (10,071) 10,680 2,147
Deferred contract revenue................................... (4,785) 2,811 (2,815)
Accrued liabilities......................................... 30,803 6,352 9,926
---------- ---------- ----------
Net cash provided by operating activities......................... 71,889 98,329 88,630
---------- ---------- ----------
Cash flows from investing activities:
Sales and maturities of short-term investments.................... 222,765 69,736 14,850
Purchases of short-term investments............................... (296,052) (147,322) (29,956)
Capital expenditures.............................................. (23,021) (20,037) (13,572)
Other assets...................................................... (3,933) 207 368
----------- ---------- ----------
Net cash used in investing activities............................. (100,241) (97,416) (28,310)
---------- ---------- ----------
Cash flows from financing activities:
Bank borrowings................................................... -- 39,541 --
Repayment of bank borrowings...................................... -- (39,541) --
Payment of purchase consideration................................. -- (1,125) --
Payments of capital lease obligations............................. (275) (369) (467)
Repurchase of convertible subordinated notes...................... (3,271) (56,099) --
Common stock issued under stock plans............................. 67,740 20,111 9,111
Collection of stockholder notes receivable........................ -- -- 305
---------- ---------- ----------
Net cash provided by (used in) financing activities............... 64,194 (37,482) 8,949
---------- ---------- ----------
Exchange rate impact on cash and equivalents......................... 230 (241) (476)
---------- ---------- ----------
Net increase (decrease) in cash and equivalents...................... 36,072 (36,810) 68,793
Cash and equivalents, beginning of period............................ 108,224 145,034 76,241
---------- ---------- ----------
Cash and equivalents, end of period.................................. $ 144,296 $ 108,224 $ 145,034
========== ========== ==========
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on investments............................. $ (554) $ 93 $ (4)
Forgiveness of note payable for production capacity rights........ -- -- 24,500
Equipment acquired under lease.................................... 1,133 861 --
Conversion of convertible debt into common stock.................. 1,813 -- --
Supplemental disclosure of cash flow information -- Cash paid during
the period for:
Interest....................................................... $ 1,614 $ 4,410 $ 5,609
Income taxes................................................... 13,199 1,092 11,473
See notes to consolidated financial statements.
</TABLE>
<PAGE>
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
C-Cube Microsystems Inc. (the "Company" or "C-Cube") was founded in July
1988. The Company operates in two segments 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. Short-term investments 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 to implement management strategies.
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. Cost is computed using standard costs which approximate actual cost on a
first-in, first-out basis.
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 are 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.
PRODUCTION CAPACITY RIGHTS
Production capacity rights are allocated between current and long-term
assets and are amortized over the shorter of the contract period or the actual
delivery of the wafers in relation to the total amount of wafers purchased under
the agreement.
<PAGE>
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
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 systems contracts is recognized based on performance of
specific tasks with approval and acceptance by the customer. Completion of these
tasks are natural milestones used in measuring the progress to completion of the
project. Such tasks include design, assembly and configuration of equipment and
system performance tests at factory and at customer sites. Losses, if any, are
recorded when determinable. Unbilled receivables result from completion of tasks
as described above in advance of billing schedules. Deferred revenue arises from
billing schedules in advance of completion of tasks. It is anticipated that all
unbilled receivables from such contracts will be collected within one year.
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 accounting for income taxes requires an asset and liability approach
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. 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 $34.8
million and $23.2 million at December 31, 1999 and 1998, respectively. The
estimated fair value of all other financial instruments at December 31, 1999 and
1998 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, accounts receivable and financial instruments used in hedging
transactions. 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 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.
<PAGE>
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 foreign
currency translation are recorded as a separate component of stockholders'
equity.
FORWARD EXCHANGE CONTRACTS
In the normal course of business, the Company has exposure to foreign
currency fluctuations arising from foreign currency purchases and inter-company
sales, among other things. The Company enters into forward exchange contracts to
neutralize the impact of foreign currency fluctuations on assets and
liabilities. All foreign exchange contracts are designated as and effective as
hedges. Gains and losses on forward exchange contracts are deferred and
recognized in income when the related transactions being hedged are recognized.
The costs of entering into such contracts are not material to the Company's
financial results. The fair value of exchange contracts is determined by
obtaining quoted market prices of comparable contracts at the balance sheet
date, adjusted by interpolation where necessary for maturity differences. The
Company's risk in these contracts is the cost of replacing, at current market
rates, these contracts in the event of default by the other party. These
contracts are executed with credit worthy financial institutions and are
denominated in the currency of major industrial nations.
At December 31, 1999, the Company had $3.1 million of outstanding foreign
exchange contracts to sell Japanese yen, $1.5 million of outstanding foreign
exchange contracts to sell Great Britain pounds and $0.2 million of outstanding
foreign exchange contracts to sell French francs. The estimated fair values of
these contracts at December 31, 1999 were not materially different from the net
carrying values. These contracts mature through January 2000. Unrealized losses
on forward exchange contracts at December 31, 1999 were not material.
At December 31, 1998, the Company had $0.6 million of outstanding foreign
exchange contracts to buy Japanese yen and $1.6 million of outstanding foreign
exchange contracts to sell Japanese yen. The net carrying value and estimated
fair value of those contracts at December 31, 1998 was $1.0 million. Also, at
December 31, 1998, the Company had $4.2 million of outstanding foreign exchange
contracts to sell British pounds. The estimated fair value of those contracts
was $4.2 million. Unrealized losses on forward exchange contracts at December
31, 1998 were not material.
INTANGIBLES
The Company amortizes distribution rights over 15 years and other
intangible assets over 5 years. The Company reviews intangibles and other
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of intangibles and other long-lived assets is measured by
comparison of its carrying amount to future net cash flows the intangibles and
other long-lived assets are expected to generate. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the intangible or other long-lived asset exceeds
its fair market value, as determined by discounted cash flows using a discount
rate reflecting the Company's average cost of funds.
EARNINGS PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that would occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.
<PAGE>
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."
RECENT ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP"') 98-1, "Accounting for the Costs
of Computer Software Developed for Internal Use." SOP 98-1 requires the
capitalization of certain expenditures for software that is purchased or
internally developed, once certain criteria are met. As required, the Company
adopted SOP 98-1 in fiscal year 1999. At December 31, 1999, the Company had
capitalized approximately $1.6 million of costs. Capitalized costs represent
external direct costs as well as direct payroll related costs incurred during
the application development and integration stages of the project in accordance
with the provisions of SOP 98-1. All costs incurred during the preliminary
assessment of the project were expensed as incurred. When the software is placed
into service, such capitalized costs will be amortized over the estimated useful
life of the asset of three years.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities," which requires costs of start-up activities and
organization costs to be expensed as incurred. As required under SOP 98-5, the
Company will expense the start-up costs associated with the merger and spin-off
as they are incurred in 2000.*
In June 1998, the FASB issued Statement of Financial Accounting Standards
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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation. These reclassifications had no effect on net income,
net loss or stockholders' equity.
NOTE 2. 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 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 of the semiconductor business.
NOTE 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
wafer production capacity in the years 1996 to 2001. The agreement with TSMC
provided that TSMC would produce and ship wafers to the Company at specified
prices and required the Company to make two advance payments totaling $49.0
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
<PAGE>
advance payment of $24.5 million. In January 1999, the Company signed a second
amendment to its agreement with TSMC which resulted in a refund to the Company
of $11.7 million and an extension of the term of the agreement to 2003. Advance
payments associated with wafer production capacity rights are amortized over the
shorter of the contract period or the actual delivery of wafers in relation to
the total amount of wafers purchased under the agreement. At December 31, 1999,
remaining production capacity rights were $6.4 million, of which $1.4 million
was included in other current assets and $5.0 million was classified as a
non-current asset.
In the fourth quarter of 1999, the Company signed a production capacity
agreement with United Microelectronics Corporation (UMC) to provide wafer
production capacity in the years 2000 through 2002, for which the Company has
paid a $20 million refundable deposit in January 2000. This deposit allows for
certain discounts on purchased capacity based upon the quantities purchased. The
agreement does not commit the Company to purchase wafers, but does guarantee the
availability of a set capacity of wafers at "not to exceed" prices.
4. SHORT-TERM INVESTMENTS
Short-term investments include the following available-for-sale
securities:
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
(In thousands) COST GAINS LOSSES VALUE
--------------------------------------- ------------ ------------ ----------- ----------
DECEMBER 31, 1999:
<S> <C> <C> <C> <C>
Commercial paper.................. $ 95,322 $ 3 $ (61) $ 95,264
Municipal bonds................... 36,552 4 (202) 36,354
U.S. government agencies.......... 23,397 1 (101) 23,297
Corporate bonds................... 20,564 -- (122) 20,442
--------- ----- ------ ---------
Total short-term investments.. $ 175,835 $ 8 $ (486) $ 175,357
========= ===== ====== =========
DECEMBER 31, 1998:
Commercial paper.................. $ 40,554 $ 20 $ (24) $ 40,550
Municipal bonds................... 32,856 88 (15) 32,929
U.S. government agencies.......... 26,117 7 -- 26,124
--------- ----- ------ ---------
Total short-term investments.. $ 99,527 $ 115 $ (39) $ 99,603
========= ===== ====== =========
</TABLE>
The amortized cost and market value of short-term investments at
December 31, 1999 by contractual maturity are as follows:
<TABLE>
<CAPTION>
AMORTIZED MARKET
(In thousands) COST VALUE
--------------------------------------- -------------- ------------
<S> <C> <C>
Due in 1 year or less.............. $ 131,675 $ 131,522
Due in 1 to 2 years................ 44,160 43,835
---------- ----------
Total short-term investments... $ 175,835 $ 175,357
========== ==========
</TABLE>
During the years ended 1999, 1998 and 1997, net realized gains and losses
on investments were not material.
NOTE 5. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
(In thousands) 1999 1998
------------------------------------ ------------ -----------
<S> <C> <C>
Finished goods.................. $ 11,248 $ 3,566
Work-in-process................. 5,481 6,281
Raw materials................... 2,606 6,226
-------- --------
Total................. $ 19,335 $ 16,073
======== ========
</TABLE>
<PAGE>
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
(In thousands) 1999 1998
------------------------------------------------------ ----------- ----------
<S> <C> <C>
Equipment under capital lease...................... $ 3,225 $ 2,108
Machinery and equipment-- principally computers.... 71,711 52,355
Furniture and fixtures............................. 5,055 4,542
Leasehold improvements............................. 8,358 5,529
-------- --------
Total.................................... 88,349 64,534
Accumulated depreciation and amortization.......... (52,056) (34,912)
-------- ---------
Property and equipment-- net....................... $ 36,293 $ 29,622
======== =========
</TABLE>
NOTE 7. LINE OF CREDIT
At December 31, 1999, the Company had an available bank line of credit of
$30,000,000 which expires May 1, 2001. Borrowings bear interest at LIBOR plus
1.25% or the bank's prime rate (8.50% at December 31, 1999). The line of credit
agreement requires the Company, among other things, to maintain a minimum
tangible net worth, annual net income (no quarterly loss exceeding $3,000,000)
and certain financial ratios. In addition, the bank agreement prohibits the
payment of cash dividends. At December 31, 1999, the Company was in compliance
with these covenants, and there were no outstanding balances under this line.
NOTE 8. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(In thousands) 1999 1998
---------------------------------------------------- ------------ -----------
<S> <C> <C>
Convertible notes (see below).................... $ 17,570 $ 22,790
Capital lease obligations (see Note 9)........... 1,382 717
Other long-term obligations...................... 659 405
-------- --------
19,611 23,912
Current portion.................................. (742) (355)
-------- --------
Long-term portion................................ $ 18,869 $ 23,557
======== ========
</TABLE>
In November 1995, the Company completed a public debt offering of $86.3
million of convertible subordinated notes (the "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.
During 1999, the Company repurchased $3.4 million of the notes at 95.5% of
the principal amount, with accrued interest to the date of repurchase, and
recognized an extraordinary gain of $33,000, net of related income taxes of
$23,000. During 1998, the Company repurchased $63.5 million of the face value of
the notes at 88.4% of the principal amount, with 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 income taxes of $2.4 million.
In December 1999, the Company announced its intention to call the
outstanding balance of all notes at 103.5% of the principal amount.
Subsequently, through January 20, 2000 all note holders elected the option to
convert their notes into shares of the Company's common stock at a price of
$30.70.
<PAGE>
NOTE 9. LEASE COMMITMENTS
Equipment with a cost of $3,225,000 and $2,108,000 and accumulated
depreciation of $1,661,000 and $1,391,000 was leased under capital leases at
December 31, 1999 and 1998, respectively. 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, 1999 are as follows:
<TABLE>
<CAPTION>
(In thousands) OPERATING CAPITAL
---------------------------------------------- --------------- ------------
<S> <C> <C>
2000......................................... $ 4,961 $ 704
2001......................................... 2,997 552
2002......................................... 2,026 196
2003......................................... 1,905 --
2004......................................... 1,127 --
Thereafter................................... 457 --
-------- ------
Total minimum lease payments................. $ 13,473 1,452
========
Amount representing interest................. (70)
------
Present value of minimum lease payments...... 1,382
Current portion.............................. (643)
------
Long-term portion............................ $ 739
======
</TABLE>
Rent expense for operating leases was approximately $5,306,000, $3,586,000
and $3,385,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
NOTE 10. STOCKHOLDERS' EQUITY
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, 1999, no shares of preferred stock had been
issued.
COMMON STOCK
The Company has authorized 34,488,838 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.
EMPLOYEE STOCK OPTION PLANS
The Company's stock option plans (the "Plans") authorize the issuance of
31,639,838 shares of common stock (included in the 34,488,838 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.
On July 14, 1997, the Company repriced 6,429,078 options to $19.94, the
market price on that date. The repriced shares are treated as canceled and
regranted; however, the vesting terms were extended six months.
<PAGE>
Option activity under the Plans was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
------------ -------------
<S> <C> <C>
Outstanding, December 31, 1996 (2,301,108 exercisable at a weighted average price
of $9.36).......................................................................... 9,001,717 $ 24.63
Granted (weighted average fair value of $13.02)....................................... 11,025,405 21.38
Exercised............................................................................. (570,164) (8.47)
Canceled.............................................................................. (7,542,412) (31.90)
----------
Outstanding, December 31, 1997 (3,699,655 exercisable at a weighted average price
of $12.93)......................................................................... 11,914,546 17.80
Granted (weighted average fair value of $11.82)....................................... 5,416,528 18.60
Exercised............................................................................. (1,250,803) (13.14)
Canceled.............................................................................. (1,861,978) (19.95)
----------
Outstanding, December 31, 1998 (3,848,998 exercisable at a weighted average price
of $17.88)......................................................................... 14,218,293 18.23
Granted (weighted average fair value of $16.84)....................................... 5,123,368 25.52
Exercised............................................................................. (3,816,514) (16.28)
Canceled.............................................................................. (2,242,618) (19.81)
----------
Outstanding, December 31, 1999........................................................ 13,282,529 $ 21.34
==========
</TABLE>
Additional information regarding options outstanding as of December 31,
1999 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> <C>
$ 0.14 - $ 3.00 288,942 3.24 $ 1.48 288,942 $ 1.48
6.00 - 14.56 666,715 5.13 8.44 655,886 8.35
14.75 - 19.50 5,878,643 8.65 18.06 1,081,053 17.84
19.56 - 19.94 2,566,907 6.78 19.93 1,194,859 19.93
20.00 - 36.00 2,878,788 8.74 25.93 461,277 23.95
36.38 - 63.00 1,002,534 9.10 45.25 166,981 52.47
--------- ---------
$ 0.14 - $63.00 13,282,529 8.05 $21.34 3,848,998 $17.88
========== =========
</TABLE>
At December 31, 1999, C-Cube exceeded the total number of shares available
for grant by 481,295 shares. C-Cube's 1994 Stock Option Plan has an automatic
refresh on January 1, 2000, equal to 4% of shares outstanding, which will cover
this negative balance.
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 in the plan) to purchase common stock at a price equal to 85% of the
lower of the fair market values as of the beginning of the offering period or
end of the purchase period. Stock issued under the plan was 328,000, 223,000 and
211,000 shares in 1999, 1998 and 1997 at weighted average prices of $17.16,
$15.52 and $20.52, respectively. The weighted average fair market value of the
1999, 1998 and 1997 awards was $7.96, $7.06 and $9.46, respectively. At December
31, 1999, 855,000 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"
<PAGE>
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, 5.80 in 1999, 5.60 in
1998 and 5.50 years in 1997; stock volatility, 68% in 1999, 68% in 1998 and 63%
in 1997; risk free interest rates, 5.5% in 1999, 5.2% in 1998 and 6.1% in 1997;
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 1999, 1998 and 1997 awards had been
amortized to expense over the vesting period of the awards, pro forma net income
would have been $25.7 million ($0.66 per share) in 1999, $15.2 million ($0.52
per share) in 1998 and $18.0 million ($0.54 per share) in 1997. Per share
amounts above represent diluted earnings per share under SFAS 128 (see Note 1).
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 is not required to contribute
and has not contributed to the plan to date.
NOTE 11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------
DEC. 31, DEC. 31, DEC. 31,
(In thousands, except per share amounts) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Numerator:
<S> <C> <C> <C>
Net income before extraordinary item............................. $ 57,245 $ 42,795 $ 44,339
Extraordinary item............................................... 33 3,494 --
-------- -------- --------
Numerator for basic earnings per share........................... 57,278 46,289 44,339
Add back interest expense after tax related to convertible shares.. 750 2,242 3,532
-------- -------- --------
Numerator for diluted earnings per share......................... $ 58,028 $ 48,531 $ 47,871
======== ======== ========
Denominator:
Weighted-average shares - denominator for basic earnings per share 39,891 37,382 36,497
Convertible shares............................................... 645 1,871 2,809
Dilutive common stock equivalents, using treasury stock method... 4,035 1,501 2,377
-------- -------- --------
Denominator for diluted earnings per share....................... 44,571 40,754 41,683
======== ======== ========
Basic earnings per share........................................... $ 1.44 $ 1.24 $ 1.21
======== ======== ========
Diluted earnings per share......................................... $ 1.30 $ 1.19 $ 1.15
======== ======== ========
</TABLE>
<PAGE>
NOTE 12. COMPREHENSIVE INCOME
The Company has presented its comprehensive income in the Statement of
Changes in Stockholders' Equity. The following are the components of accumulated
other comprehensive loss:
<TABLE>
<CAPTION>
DECEMBER 31,
(In thousands) 1999 1998
- --------------------------------------------------------- ----------- ---------
<S> <C> <C>
Unrealized gain (loss) on investments................. $ (478) $ 76
Accumulated translation adjustments................... (1,726) (1,928)
-------- --------
Total............................................. $ (2,204) $ (1,852)
======== ========
</TABLE>
NOTE 13. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(In thousands) 1999 1998 1997
--------------------------- ----------- ----------- ------------
Current:
<S> <C> <C> <C>
Federal............... $ 27,254 $ 10,348 $ 14,336
State................. 3,910 1,598 2,938
Foreign............... 1,970 2,143 2,265
-------- -------- --------
Total.............. 33,134 14,089 19,539
Deferred:
Federal............... (6,591) 4,430 3,105
State................. (1,820) (323) (899)
Foreign............... -- -- 1,150
-------- -------- --------
Total.............. (8,411) 4,107 3,356
-------- -------- --------
Total..................... $ 24,723 $ 18,196 $ 22,895
======== ======== ========
</TABLE>
The tax benefit associated with dispositions from employee stock plans
reduced taxes currently payable by $28,938,000, $1,426,000 and $3,573,000 for
1999, 1998 and 1997, respectively.
Income tax expense differs from the amount computed by applying the
federal statutory income tax rate to income before taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(In thousands) 1999 1998 1997
------------------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Tax expense computed at federal statutory rate...... $ 28,844 $ 21,228 $ 23,445
State income taxes, net of federal effect........... (37) 1,329 1,248
Tax credits......................................... (3,174) (2,609) (2,646)
Foreign operations taxed at different rates......... (2,267) (2,533) 1,068
Non-deductible expenses............................. 720 269 246
Other............................................... 637 512 (466)
--------- --------- ---------
Income tax expense........................ $ 24,723 $ 18,196 $ 22,895
========= ========= =========
</TABLE>
<PAGE>
The components of the net deferred tax asset as of December 31 were as
follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
------------------------------------------------------------ ----------- -----------
Deferred tax assets:
<S> <C> <C>
Accruals and reserves recognized in different periods... $ 12,687 $ 11,719
Net operating loss carryforwards........................ -- 444
Tax credit carryforwards................................ 12,731 --
Deferred revenue........................................ 21 1,700
Tax basis depreciation.................................. 1,515 --
-------- --------
Total............................................ 26,954 13,863
Valuation allowance....................................... -- (444)
-------- --------
Net.............................................. 26,954 13,419
Deferred tax liabilities:
Purchased technology.................................... (1,267) (2,925)
Unrepatriated foreign earnings.......................... (10,756) (3,974)
-------- --------
Total............................................ (12,023) (6,899)
-------- --------
Net deferred tax assets................................... $ 14,931 $ 6,520
======== ========
</TABLE>
At December 31, 1999, the Company has tax credit carryforwards of
approximately $17 million expiring through 2006.
U.S. income taxes were not provided on a cumulative total of approximately
$20 million and $17 million of undistributed earnings from foreign subsidiaries
for the years ending December 31, 1999 and 1998, respectively. The Company
intends to reinvest these earnings indefinitely in foreign operations. It is not
practicable to estimate the income tax liability that might be incurred upon the
remittance of such earnings.
NOTE 14. EXTRAORDINARY ITEM
During 1999, the Company repurchased $3.4 million of the Company's 5.875%
subordinated convertible notes due in 2005 (the "notes") at 95.5% of the
principal amount, with accrued interest to the date of repurchase, and
recognized an extraordinary gain of $33,000, net of related income taxes of
$23,000. During 1998, the Company repurchased $63.5 million of the face value of
the notes at 88.4% of the principal amount, with 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 income taxes of $2.4 million.
NOTE 15. ROYALTIES
The Company is required to pay royalties based on a percentage of the net
sales of products developed under certain development agreements. Royalty
expense was $2,105,000 in 1999, $587,000 in 1998 and $1,960,000 in 1997.
NOTE 16. SEGMENT INFORMATION, GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker. By this definition, C-Cube has two operating
segments: DiviCom, a wholly-owned subsidiary, and Semiconductor, a division of
C-Cube Microsystems Inc. Each of these operating segments requires its own
development and marketing strategies and therefore has separate management
teams. C-Cube acquired DiviCom in 1996 and retained the management team at that
time. DiviCom develops and integrates products and systems that enable the
transmission of digital video, audio and data over satellite, broadcast, cable
and wireless networks. These products and services allow its customers to create
"end-to-end" digital video systems. DiviCom's products include program encoders,
multiplexers, control and automation products and integration services. C-Cube's
semiconductor division provides powerful, highly integrated, standards-based
<PAGE>
digital video compression and decompression semiconductors. This technology has
enabled the development of a significant number of new or enhanced applications
in the consumer electronics and communications markets including VideoCD and DVD
players, desktop video production systems, decoders for digital set-top boxes
and broadcast and professional encoders.
The Company evaluates performance and allocates resources based on profit
or loss from operations before interest, income taxes and extraordinary items.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Revenues are shown net of
elimination of inter-segment revenues. This presentation is consistent with the
Company's internal presentation of financial information to management
SEGMENT PROFIT AND ASSETS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(In thousands) 1999 1998 1997
------------------------------------------------- -------------- ------------- ---------------
Revenues:
<S> <C> <C> <C>
Semiconductor............................... $ 222,148 $ 209,082 $ 218,252
DiviCom..................................... 185,500 142,715 118,760
---------- ---------- ----------
Consolidated net revenues..................... $ 407,648 $ 351,797 $ 337,012
========== ========== ==========
Income from operations:
Semiconductor............................... $ 41,382 $ 33,113 $ 38,648
DiviCom..................................... 30,572 23,302 30,095
---------- ---------- ----------
Consolidated income from operations........... $ 71,954 $ 56,415 $ 68,743
========== ========== ==========
Segment assets:
Semiconductor............................... $ 397,335 $ 259,297 $ 233,959
DiviCom..................................... 98,974 83,874 70,149
---------- ---------- ----------
Consolidated net assets....................... $ 496,309 $ 343,171 $ 304,108
========== ========== ==========
Interest expense:
Semiconductor............................... $ 1,431 $ 3,782 $ 5,619
DiviCom..................................... 131 -- --
---------- ---------- ----------
Consolidated interest expense................. $ 1,562 $ 3,782 $ 5,619
========== ========== ==========
Interest income:
Semiconductor............................... $ 10,352 $ 5,789 $ 3,941
DiviCom..................................... 964 1,852 718
---------- ---------- ----------
Consolidated interest income.................. $ 11,316 $ 7,641 $ 4,659
========== ========== ==========
Depreciation and amortization:
Semiconductor............................... $ 12,919 $ 19,138 $ 13,925
DiviCom..................................... 5,768 3,439 3,471
---------- ---------- ----------
Consolidated depreciation and amortization.... $ 18,687 $ 22,577 $ 17,396
========== ========== ==========
Capital expenditures:
Semiconductor............................... $ 13,462 $ 12,867 $ 7,918
DiviCom..................................... 9,559 7,170 5,654
---------- ---------- ----------
Consolidated capital expenditures............. $ 23,021 $ 20,037 $ 13,572
========== ========== ==========
</TABLE>
<PAGE>
GEOGRAPHIC INFORMATION
Revenues are broken out geographically by the ship-to location of the
customer.
<TABLE>
<CAPTION>
YEARS ENDED OR AS OF DECEMBER 31,
----------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
- ---------------------------- ------------------------ ----------------------- ------------------------
NET NET NET
REVENUES PROPERTY REVENUES PROPERTY REVENUES PROPERTY
<S> <C> <C> <C> <C> <C> <C>
North America .......... $ 163,545 $ 34,113 $ 132,513 $ 27,462 $ 119,575 $ 22,392
China .................. 83,531 127 120,348 155 123,100 122
Europe ................. 69,416 956 42,441 629 31,464 174
Japan .................. 39,136 436 20,143 483 23,443 480
Other Asia ............. 43,452 661 30,345 893 38,854 393
Rest of World .......... 8,568 -- 6,007 -- 576 --
---------- -------- ---------- -------- --------- --------
Total .............. $ 407,648 $ 36,293 $ 351,797 $ 29,622 $ 337,012 $ 23,561
========== ======== ========== ======== ========= ========
</TABLE>
MAJOR CUSTOMERS
During 1999 and 1998, no customer accounted for 10% or more of the
Company's consolidated revenues. During 1997, one customer of the Company's
semiconductor segment accounted for $67.7 million of the Company's consolidated
revenues.
NOTE 17. SUBSEQUENT EVENT
On February 10, 2000, C-Cube and Thomson Multimedia S.A. ("Thomson"), a
French Societe Anonyme, entered into a Securities Purchase Agreement (the
"Agreement") whereby C-Cube will issue to Thomson 474,747 shares of common stock
and a warrant exercisable for up to 949,494 shares of common stock at a price of
$19.78 per share. The warrant expires in 2007 and becomes exercisable upon
Thomson's satisfaction of certain conditions, including design wins
incorporating C-Cube's silicon, and milestones based on revenues generated from
the sale of the Company's products to Thomson. The Agreement is subject to
customary closing conditions, including the spin-off of the semiconductor
business.
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 following table lists the names, ages and positions held with the
Registrant of all directors and executive officers of the Registrant as of
December 31, 1999. Executive officers serve at the discretion of the Board of
Directors. All directors hold office until the next annual or special meeting of
stockholders or until their successors have been elected and qualified. There
are no family relationships between any director or executive officer and any
other director or executive officer of the Registrant.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Alexandre A. Balkanski, Ph.D......... 39 President, Chief Executive Officer and Director
Umesh Padval......................... 42 President, C-Cube Semiconductor
Tom Lookabaugh, Ph.D................. 38 President, DiviCom
Walt Walczykowski.................... 48 Vice President, Finance and Chief Financial Officer
Fred Brown........................... 55 Senior Vice President of Worldwide Sales
Richard Foreman...................... 45 Vice President, Chief Information Officer and Corporate
Secretary
Donald T. Valentine (1)(2)........... 67 Director and Chairman
Baryn S. Futa (1).................... 45 Director
Donald McKinney...................... 50 Director
Gregorio Reyes (2)................... 58 Director
T.J. Rodgers......................... 51 Director
</TABLE>
-------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Dr. Alexandre Balkanski co-founded the Company in July 1988 as Vice
President. He served as Executive Vice President and Chief Operating Officer
from February 1994 to July 1995. 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 co-founding C-Cube, Dr. Balkanski was the co-founder and President of
Diamond Devices Inc., a semiconductor company specializing in the development of
fast algorithms for signal processing. Dr. Balkanski currently serves on the
board of directors of PMC-Sierra, Inc. 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. Padval joined C-Cube as President of C-Cube's Semiconductor division
in October 1998. He has over 15 years of broad management experience in the
semiconductor industry. His management experience includes business unit,
marketing, sales and engineering positions at VLSI Technology and Advanced Micro
Devices. Prior to joining C-Cube, Mr. Padval served as Senior Vice President and
General Manager of the Consumer Digital Entertainment division at VLSI
Technology, Inc from May 1997 to October 1998. In this position he managed
marketing, engineering, applications and operational aspects of the division
which focused on providing solutions into global digital set-top box
deployments. From August 1994 to May 1997, Mr. Padval served as Vice President
and General Manager for VLSI's Computing Solutions division, which focused on
the PC, workstation, mass storage and peripherals market. Before joining VLSI
Technology, Mr. Padval worked for Advanced Micro Devices where he held variety
of marketing and engineering positions. Mr. Padval currently serves on the board
of directors of Elantec Semiconductor, Inc. Mr. Padval holds a bachelor of
technology from Indian Institute of Technology in Bombay, an M.S. degree from
Pennsylvania State University and an M.S. degree from Stanford University.
Dr. Lookabaugh joined DiviCom as its Vice President of Research and
Business Development in June 1993 and was named Vice President of Marketing in
February 1996. From March 1997 to December 1997, Dr. Lookabaugh served as Senior
<PAGE>
Vice President and General Manager. He was appointed President of DiviCom in
December 1997. Prior to joining DiviCom, Dr. Lookabaugh spent five years with
Compression Labs, Inc., where he assumed project management responsibility on
the development of an MPEG-1 decoder for video on demand, and served as
Executive Director of Research and New Business Technology. Dr. Lookabaugh has a
Ph.D. in Electrical Engineering, an M.S. in Statistics, an M.S. in Engineering
Management, and an M.S. in Electrical Engineering from Stanford University and a
B.S. in Engineering Physics from the Colorado School of Mines.
Mr. Walczykowski joined the Company as Corporate Controller in September
1995, bringing nineteen years of financial management experience. He was
promoted to Vice President of Finance and Chief Financial Officer in July 1998.
Prior to joining C-Cube, Mr. Walczykowski served from January 1989 to August
1995, as Corporate Controller for Zycad Corporation, a provider of technology
and services to designers of integrated circuits and systems. Since starting his
career at Arthur Young and Company in San Francisco, Mr. Walczykowski has held
key positions at several Northern California high tech companies including
Measurex, Dataproducts Corporation, Triad Systems and Friden Alcatel. Mr.
Walczykowski holds an M.B.A. and a B.S. in Accounting from San Jose State
University.
Mr. Brown joined the Company in December of 1993 as Director of Asia
Pacific Sales, and was named Vice President in November 1995. In May 1998, Mr.
Brown was promoted to Vice President, Worldwide Sales and named Senior Vice
President in November 1998. Prior to joining C-Cube, he spent eleven years at
LSI Logic, most recently as Vice President, Asia Pacific Sales located in Hong
Kong. Mr. Brown holds a BSEE degree from Carnegie Institute of Technology (now
Carnegie Mellon University).
Mr. Foreman joined the Company in November 1994 as Director of Information
Technology. In January 1996 he was appointed Vice President, Chief Information
Officer and Corporate Secretary. 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, 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. Valentine has served as Chairman of the Board of Directors since
December 1992. He has been a General Partner of Sequoia Capital, a venture
capital firm, since 1974. Mr. Valentine is also Chairman of the Board of Network
Appliance, Inc. and Vice Chairman of the Board of Cisco Systems, Inc.
Mr. Futa has served on the Board of Directors since February 1994. In July
1996, he founded MPEG LA, LLC, a company which was formed to provide licensing
access to essential MPEG-2, Digital Video Broadcast (DVB) and IEEE 1394
intellectual property to users of those technologies, where he currently serves
as Manager and Chief Executive Officer. From September 1988 to June 1996, he
served as the Executive Vice President and Chief Operating Officer of Cable
Television Laboratories, Inc., a research and development consortium of cable
television system operators.
Mr. McKinney has served on the Board of Directors since February 1997. Mr.
McKinney, the founder of International Network Services, a network service
provider, served as President and Chief Executive Officer and Director of
International Network Services from its date of inception in August 1991 until
January 1996, and has since served as Chairman of the Board and Chief Executive
Officer until July 1998, when he chose to be its Chairman. Mr. McKinney served
as the Vice President of Sales and Marketing of Electronics for Imaging Inc., a
provider of hardware and software products for the digital color imaging market,
from May 1989 to February 1991. Mr. McKinney was the founding Vice President of
Sales, Marketing and Customer Service at Silicon Graphics, Inc. Later Mr.
McKinney opened Silicon Graphics' international operations and subsequently was
General Manager of its OEM Subsystems Division. Mr. McKinney worked for Silicon
Graphics, Inc. from January 1982 to May 1987. Mr. McKinney has also served in
various sales, management and consulting positions at Sequoia Capital,
Chromatics and International Business Machines Corporation.
<PAGE>
Mr. Reyes has served on the Board of Directors since July 1992. Since
August 1994, Mr. Reyes has been a private investor and management consultant.
From September 1990 to August 1994, he served as Chairman and Chief Executive
Officer of Sunward Technologies, Inc., a provider of rigid disk magnetic
recording head products for the data storage industry. From March 1986 to August
1990, Mr. Reyes was Chairman and Chief Executive Officer of American
Semiconductor Equipment Technologies. Since January 1995, Mr. Reyes has served
as Chairman of the Board of Sync Research. Mr. Reyes also serves as a director
of Diamond Multimedia and several privately-held companies.
Mr. Rodgers has served on the Board of Directors since January 1994. He
founded Cypress Semiconductor Corporation in 1983, where he currently serves as
President, Chief Executive Officer and a director.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who beneficially own more than 10% of
the Company's Common Stock during fiscal year 1999 to file initial reports of
ownership and reports of changes in ownership with the Securities and Exchange
Commission. Such persons are required by the Commission's regulations to furnish
the Company with copies of all Section 16(a) forms filed by such persons.
Based solely on the Company's review of such forms furnished to the Company
for fiscal year 1998 and written representations from certain reporting persons,
the Company believes that all Section 16(a) filing requirements applicable to
the Company's executive officers, directors and more than 10% stockholders were
complied with.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation of
the Chief Executive Officer of C-Cube Microsystems and the four other most
highly compensated executive officers of the Company as of December 31, 1999:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM
------------------------------------- COMPENSATION
OTHER ANNUAL AWARDS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION OPTIONS (#) COMPENSATION
--------------------------- ---- ------ -------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Alexandre A. Balkanski......... 1999 312,500 346,500 7,200(2) 200,000 0
President and Chief 1998 216,329 294,250 6,975(2) 200,000 0
Executive Officer 1997 207,500 79,744 5,400(2) 400,000 0
Umesh Padval................... 1999 268,750 258,218 0 100,000 0
President, Semiconductor 1998 55,929(3) 175,000 0 500,000 0
Division
Tom Lookabaugh................. 1999 259,791 150,000 0 100,000 0
President of DiviCom Inc., 1998 232,814 142,906 0 210,600(4) 0
a wholly-owned subsidiary 1997 180,000(5) 45,000 0 127,000(4) 0
of the Company
Frederick Brown IV............. 1999 200,000 92,432 7,200(2) 0 0
Senior Vice President, 1998 173,752(6) 205,557(7) 7,200(2) 95,000 0
Worldwide Sales 1997 150,000(6) 101,992 7,200(2) 100,000 0
Richard Foreman................ 1999 183,028 107,771 0 20,000 0
Vice President, Chief 1998 172,500 88,275 0 20,000 0
Information Officer and 1997 161,250 21,930 0 40,000 0
Corporate Secretary
</TABLE>
- ------
(1) The amounts shown under the Bonus column represents cash bonuses earned for
the indicated fiscal years.
(2) Consists of car allowances.
(3) Mr. Padval was hired as President, Semiconductor Division in October 1998.
(4) Includes options granted to Mr. Lookabaugh's spouse, an employee of the
Company, deemed to be beneficially owned by Mr. Lookabaugh.
(5) Mr. Lookabaugh has served as President of DiviCom Inc. since December 1997.
Mr. Lookabaugh's compensation for the period prior to his appointment to
President of DiviCom includes compensation he received while serving as
Senior Vice President and General Manager of DiviCom from March 1997 to
December 1997.
(6) Mr. Brown has served as Senior Vice President, Worldwide Sales since
November 1998. Mr. Brown's compensation for the period prior to his
appointment to Senior Vice President, Worldwide Sales includes compensation
he received while serving as Vice President, Worldwide Sales from May 1998
to November 1998, and while serving as Vice President, Asia Pacific Sales
for the period prior.
(7) Includes a retention bonus of $100,000, of which $50,000 will be vested on
December 31, 1999 and $50,000 vested on December 31, 2000, provided Mr.
Brown is an employee of the Company on those dates.
The Company does not have employment contracts with any of the persons
named in the Summary Compensation Table, or any defined benefit or actuarial
plan under which benefits are determined primarily by final compensation or
average final compensation and years of service.
<PAGE>
STOCK OPTION GRANTS
The following table provides the specified information concerning grants of
options to purchase the Company's Common Stock made during the year ended
December 31, 1999 to the persons named in the Summary Compensation Table:
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS IN FISCAL 1999
------------------------------------------------------ POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES
OPTIONS OF STOCK PRICE
GRANTED TO EXERCISE APPRECIATION FOR
OPTIONS EMPLOYEES OR BASE OPTION TERM (2)
GRANTED IN FISCAL PRICE EXPIRATION
NAME (#) YEAR ($/SH)(1) DATE 5% ($) 10% ($)
------ ------------ ------------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alexandre A. Balkanski... 200,000 4.1 19.1250 04/02/09 2,405,522 6,096,065
Umesh Padval............. 100,000 2.0 19.1250 04/02/09 1,202,761 3,048,032
Fredrick Brown IV........ 0 0.0 -- -- 0 0
Tom Lookabaugh........... 100,000 2.0 19.1250 04/02/09 1,202,761 3,048,032
Richard Foreman.......... 20,000 0.4 19.1250 04/02/09 240,552 609,606
- ------
</TABLE>
(1) Options were granted at an exercise price equal to the fair market value
per share of C-Cube's Common Stock as of the date of the grant.
<PAGE>
(2) Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts represent hypothetical gains that could
be achieved for the respective options if exercised at the end of the
option term. The assumed 5% and 10% rates of stock price appreciation are
provided in accordance with rules of the Securities and Exchange Commission
and do not represent the Company's estimate or projection of the future
Common Stock price. Actual gains, if any, on stock option exercises are
dependent on the future performance of the Common Stock, overall market
conditions and the option holders' continued employment through the vesting
period. This table does not take into account any appreciation in the price
of the Common Stock from the date of grant to date.
STOCK OPTION EXERCISES
The following table provides the specified information concerning exercises
of options to purchase the Company's Common Stock in the year ended December 31,
1999, and unexercised options held as of December 31, 1999, by the persons named
in the Summary Compensation Table:
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS AT 12/31/99 OPTIONS AT 12/31/99(2)
--------------------------- ---------------------------
SHARES VALUE
ACQUIRED ON REALIZED EXERCISABLE UNEXERCISABLE
NAME EXERCISE ($)(1) EXERCISABLE UNEXERCISABLE ($) ($)
------ ------------ ------------ ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Alexandre A. Balkanski... 249,352 10,510,731 697,733 526,667 28,547,554 20,575,846
Umesh Padval............. 0 0 133,334 466,666 6,260,447 21,802,053
Tom Lookabaugh (3)....... 6,744 153,426 204,167 340,833 8,776,057 14,851,443
Frederick Brown IV....... 0 0 158,247 135,871 7,334,881 5,888,546
Richard Foreman.......... 0 0 148,485 91,515 6,950,897 3,904,103
- ------
</TABLE>
(1) Based upon the market price of the purchased shares on the exercise date
less the option exercise price paid for such shares.
(2) Based upon the market price of $62.25 per share, which was the closing
price per share of Common Stock on the Nasdaq National Market on December
31, 1999, less the option exercise price payable per share.
(3) Includes options held by Mr. Lookabaugh's spouse, an employee of the
Company, deemed to be beneficially owned by Mr. Lookabaugh.
LONG-TERM INCENTIVE COMPENSATION
Grants of stock options are designed to align the interests of executive
officers with those of stockholders. The size of these grants is generally set
at a level which the Committee feels is in proportion with the role and
responsibility of the executive, as well as his or her opportunity to affect the
Company's performance, while also being sufficient to attract the executive to
accept employment with the Company. The Committee makes additional awards based
upon changes in job responsibility and annual performance reviews of each
executive officer and will continue to grant future additional options on a
case-by-case basis.
COMPENSATION OF DIRECTORS
In May 1995, the Board of Directors established a standard compensation for
members of the Board of Directors, whereby each director who is not an employee
of the Company (an "Outside Director") receives an annual retainer of $12,000
plus $1,000 and reimbursement of reasonable travel expenses for each meeting of
the Board of Directors attended. The Company does not pay additional amounts to
directors for committee participation or special assignments of the Board of
Directors.
Directors who are not employees are also automatically granted nonqualified
options to purchase C-Cube's Common Stock under the Company's 1994 Outside
Directors Stock Option Plan (the "Directors Plan"). A total of 450,000 shares of
Common Stock have been reserved for issuance under the Directors Plan. Each
Outside Director holding office on the effective date of the Directors Plan who
did not then hold an option to acquire shares of C-Cube's Common Stock received
an option to purchase 40,000 shares of Common Stock on the effective date of the
Directors Plan. Each person who is newly elected or appointed as an Outside
Director after the effective date of the Directors Plan receives an option to
purchase 40,000 shares of Common Stock on the day immediately following such
initial election or appointment. Thereafter, each Outside Director generally
receives an option to purchase 10,000 shares of Common Stock on each anniversary
date. Options granted under the Directors Plan vest over four years and
generally must be exercised within ten years. Shares of Common Stock underlying
options granted under the Directors Plan vest at the rate of one-fourth (1/4) of
the total number of shares of Common Stock underlying the option one year after
the date of grant and one forty-eighth (1/48) of such shares on the last date of
each full month thereafter until all of the shares of Common Stock underlying
the option have vested. The exercise price of the options in all cases will be
equal to the fair market value per share of the Common Stock on the date of
grant.
CHANGE-IN-CONTROL ARRANGEMENTS
The Company's stock option plans generally provide that in the event of a
transfer of control of the Company, the Board of Directors will arrange with the
surviving, continuing, successor or purchasing corporation, as the case may be
(the "Acquiring Corporation"), to either assume the Company's rights and
obligations under outstanding awards or substitute awards for the Acquiring
Corporation's stock for such outstanding awards. Any awards which are neither
exercised as of the date of the transfer of control nor assumed nor substituted
by the Acquiring Corporation shall terminate effective as of the date of the
transfer of control.
SEVERANCE AGREEMENTS
C-Cube Microsystems has in effect severance compensation agreements with
the following individuals, the costs of which will be borne by the spun-off
semiconductor business. These individuals will benefit from a change in control
(which will occur upon the consummation of the Merger) as follows:
<PAGE>
Alexandre Balkanski's Management Retention and Consulting Agreement
provides that upon a change of control preceded by the spin-off of C-Cube
Microsystems' semiconductor business, if he is terminated other than for cause
in the first twelve months, 100% of the unvested portion of all stock options he
holds will automatically accelerate and become vested. Dr. Balkanski's agreement
also provides that he will remain in a consulting position with the
semiconductor business after the merger and will receive health, dental and
vision benefits as a result.
Umesh Padval's Management and Retention Agreement provides that upon a
change of control, if he is terminated other than for cause in the first twelve
months following the change of control, (i) 100% of the unvested portion of all
stock options he holds will accelerate and become vested, (ii) he will continue
to receive salary at the rate he received prior to his termination until the
earlier of (a) one year from the date of termination, or (b) the date he
commences full-time employment with another company, and (iii) he will continue
to receive health, dental and vision benefits until the earlier of (a) one year
from the date of termination, or (b) the date he commences full-time employment
with another company.
Rick Foreman's Management Retention Agreement provides that upon a change
of control, if he is terminated other than for cause in the first twelve months
following the change of control, (i) the unvested portion of all stock options
he holds that would have vested in the subsequent six month period of time will
accelerate and become vested, (ii) he will continue to receive a salary at the
rate he received prior to his termination under the earlier of (a) six months
from the date of termination, or (b) the date he commences full-time employment
with another company, and (iii) he will continue to receive health, dental and
vision benefits until the earlier of (a) six months from the date of
termination, or (b) the date he commences full-time employment with another
company.
OUTSIDE DIRECTORS OPTIONS
All shares granted to C-Cube's outside directors under their respective
stock option agreements accelerate upon a change in control which will occur
upon consummation of the Merger with Harmonic.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee reviews and approves the compensation of
C-Cube's executive officers and administers the Company's stock option and
purchase plans. Donald T. Valentine and Gregorio Reyes served during the fiscal
year ended December 31, 1999 as members of the Compensation Committee of the
Board of Directors. No member of the Compensation Committee has a relationship
that would constitute an interlocking relationship with executive officers or
directors of another entity.
<PAGE>
REPORT OF THE BOARD OF DIRECTORS AND COMPENSATION
COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee of the Company's Board of Directors (the
"Committee") has the exclusive authority to establish the cash compensation for
all executive officers of the Company, including the Chief Executive Officer.
The Committee also administers the Company's stock option and purchase plans and
makes grants to executive officers under such plans. The Committee makes general
recommendations regarding the plans to the Board and reviews grants to executive
officers. The Committee and the Board consult with management and approve the
compensation offered to newly hired executives at the time offers are made to
them. Thereafter, on an annual basis at the time of each executive officer's
performance review, the Committee and the Board meets to review and approve the
compensation of each individual executive officer.
The goals of the Committee and the Board are to:
o attract, retain and motivate highly qualified employees and executive
officers who contribute to the long-term success of the Company
o align the compensation of executives with business objectives and
performance
o align incentives for executive officers with the interests of
stockholders in maximizing stock value
Through 1994, it had been the Committee's objective to provide
compensation exclusively through fixed salaries and long-term stock-based
incentive awards which serve to align the interests of the executive officers
and stockholders. The Committee had set salaries at levels which, in the
Committee members' experience, were at or below the median level for technology
companies that are comparable to the Company in age, number of employees and
revenue. Commencing with fiscal year 1995, the Committee and the Board adopted
the Management and Key Employee Performance Bonus Plan which provides for an
annual variable performance award payable in cash tied to specific measures of
the Company's financial performance as well as individual performance based upon
individual performance objectives. The Committee and the Board adopted this
change in order to provide strong performance-based incentives.
As a result of federal tax law, the Company is not allowed a federal
income tax deduction for compensation paid to certain executive officers to the
extent that compensation exceeds $1 million per officer in any fiscal year. No
officer of the Company has received compensation in excess of $1 million to
date. The Committee and the Board will continue to monitor this issue and will
formulate a policy with respect to this limitation on deductibility if and when
appropriate.
BASE SALARY AND BONUS
For fiscal year 1999, the base salary of each executive officer was set
based upon the results of the executive's performance review. Each executive is
reviewed annually by the Chief Executive Officer and other members of management
and given specific objectives, with the objectives varying based upon the
executive's position and responsibilities and the specific objectives for that
position for the coming year. At the next annual review, the management of the
Company reviews the performance of the executive versus the objectives. The
results of this review are then reported to the Compensation Committee along
with management's compensation recommendation and the Committee then determines
whether base salary should be adjusted for the coming year.
The annual management bonus for each executive officer is a function of a
target bonus multiplied by (1) a factor for the officer's performance, and (2) a
factor for the Company's financial performance. Performance is measured on an
annual basis. The target bonus for each officer is based upon his or her job
responsibilities within the organization.
<PAGE>
CHIEF EXECUTIVE OFFICER COMPENSATION
The salary for the Company's President and Chief Executive Officer,
Alexandre A. Balkanski, was $312,500 for fiscal year 1999. Dr. Balkanski was
also given a bonus of $346,500 and granted options to purchase 200,000 shares.
In making its decision, the Committee reviewed, in addition to the factors
considered for each executive officer as described above, Dr. Balkanski's
experience and significant contributions to the Company's performance during
1999, which include the Company's product expansion in the digital video
marketplace and the continued growth of DiviCom's broadcast systems business.
The Committee members also rely upon their experience with the compensation
levels of similarly situated chief executive officers in determining Dr.
Balkanski's total compensation and endeavor to keep his total compensation
competitive within the Company's industry.
BOARD OF DIRECTORS COMPENSATION COMMITTEE
Donald T. Valentine T.J. Rodgers Donald T. Valentine
Alexandre A. Balkanski Baryn S. Futa Gregorio Reyes
Gregorio Reyes Donald McKinney
<PAGE>
COMPANY PERFORMANCE
Set forth below is a line graph comparing the annual cumulative total
return on the Company's Common Stock with the cumulative total return of the
Nasdaq Stock Market Index and the Nasdaq Electronic Components Index for the
five years ended December 31, 1999. The graph assumes $100 was invested in each
investment on December 31, 1994, and that dividends are reinvested. Historical
results are not necessarily indicative of future investment returns.
COMPARISON OF CUMULATIVE TOTAL RETURN
[C-CUBE MICROSYSTEMS INC., NASDAQ ELECTRONIC COMPONENTS STOCKS INDEX
AND THE NASDAQ STOCK MARKET INDEX PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER
1994 1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Nasdaq Stock Market (US)................ 100 141 174 213 300 542
Nasdaq Electronics Components Stocks.... 100 166 286 300 464 910
C-Cube Microsystems Inc................. 100(1) 658 389 178 286 655
- ------
</TABLE>
(1) These results are adjusted for the Company's 2 to 1 stock split, effective
December 19, 1995.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of February 4, 2000,
with respect to the beneficial ownership of the Company's Common Stock by (i)
all persons known by C-Cube Microsystems to be the beneficial owners of more
than 5% of the outstanding common stock of C-Cube Microsystems, (ii) each
director of the Company, (iii) the Chief Executive Officer and the four other
most highly compensated executive officers of the Company as of December 31,
1999, whose salary and incentive compensation for the fiscal year ended December
31, 1999 exceeded $100,000, and (iv) all executive officers and directors of the
Company as a group:
<TABLE>
<CAPTION>
SHARES OWNED
---------------------------------------
NUMBER OF PERCENTAGE
FIVE-PERCENT STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS (1) SHARES OF CLASS
- ---------------------------------------------------------------
---------------- ----------------
FIVE-PERCENT STOCKHOLDERS:
<S> <C> <C> <C>
Entities affiliated with J. & W. Seligman & Co. Incorporated (2).. 4,574,900 9.9%
100 Park Avenue - 8th Floor
New York, New York 10017
Capital Group International, Inc. (3)............................. 2,646,110 5.7%
11100 Santa Monica Blvd.-- 15th Floor
Los Angeles, California 90025
DIRECTORS AND EXECUTIVE OFFICERS:
Alexandre A. Balkanski (4)........................................ 1,302,141 2.8%
Donald T. Valentine (5)........................................... 1,129,083 2.4%
Tom Lookabaugh (6)................................................ 304,579 *
Frederick Brown IV (7)............................................ 183,253 *
Umesh Padval (8).................................................. 169,643 *
Richard Foreman (9)............................................... 168,022 *
T. J. Rodgers (10)................................................ 142,613 *
Walter Walczykowski (11).......................................... 82,730 *
Baryn S. Futa (12)................................................ 70,626 *
Donald McKinney (13).............................................. 40,101 *
Gregorio Reyes (14)............................................... 39,971 *
All executive officers and directors as a group
(11 persons) (15)............................................ 3,632,762 7.9%
- ---------
* Represents less than 1%
</TABLE>
(1) The persons named in this table have the sole voting and investment power
with respect to all shares shown as beneficially owned by them, subject to
community property laws where applicable and to the information contained
in the footnotes to this table. Unless otherwise indicated, the business
address of each of the beneficial owners listed in this table is 1778
McCarthy Boulevard, Milpitas, California 95035.
(2) Based on a filing with the Securities and Exchange Commission dated October
7, 1999, reporting beneficial ownership as of October 7, 1999. This joint
filing was made by J. & W. Seligman & Co. Incorporated (JWS) on behalf of
Seligman Communications and Information Fund, Inc. (the Fund) and William
C. Morris. The filing states that Mr. Morris is the owner of the majority
of outstanding voting securities of JWS, and that JWS is the investment
advisor to the Fund; therefore, the 4,574,900 shares held by JWS are deemed
to be beneficially owned by Mr. Morris.
(3) Based on a filing with the Securities and Exchange Commission dated
February 10, 2000, reporting beneficial ownership as of December 31, 1999,
according to the Schedule 13G, Capital Group does not have investment power
or voting power over any of the securities reported; however, Capital Group
may be deemed to beneficially own such securities by virtue of Rule 13d-3
under the Act.
<PAGE>
(4) Includes 764,400 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.
(5) Includes 44,168 shares subject to options that are presently exercisable or
will become exercisable within 60 days of February 4, 2000. Mr. Valentine
is a general partner of certain entities affiliated with Sequoia Capital
and, therefore, may be deemed to beneficially own the 920,687 shares of
Common Stock held by such entities. However, Mr. Valentine disclaims
beneficial ownership of all such shares held by entities affiliated with
Sequoia Capital, except those shares as to which he has a direct pecuniary
interest.
(6) Includes 236,781 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.
(7) Includes 172,004 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.
(8) Includes 166,667 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.
(9) Includes 118,454 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.
(10) Includes 136,251 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.
(11) Includes 79,783 shares subject to options that are presently exercisable or
will become exercisable within 60 days of February 4, 2000.
(12) Includes 70,624 shares subject to options that are presently exercisable or
will become exercisable within 60 days of February 4, 2000.
(13) Includes 38,749 shares subject to options that are presently exercisable or
will become exercisable within 60 days of February 4, 2000.
(14) Includes 34,168 shares subject to options that are presently exercisable or
will become exercisable within 60 days of February 4, 2000.
(15) Includes an aggregate of 1,862,049 shares subject to options that are
presently exercisable or will become exercisable by all executive officers
and directors as a group within 60 days of February 4, 2000, including
those shares listed in footnotes 3-14.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company granted a nonqualified stock option to Donald T. Valentine in
February 1993 but through an oversight, failed to deliver the option to Mr.
Valentine in a timely manner. As a result, Mr. Valentine incurred less favorable
tax consequences when he exercised the option than he would have incurred had
the option been timely issued by the Company and exercised immediately
thereafter by Mr. Valentine. The Company, however, gained from this oversight by
receiving a tax benefit. To rectify this matter, in June 1994, the Company
entered into a tax agreement with Mr. Valentine pursuant to which the Company
(i) made payments to Mr. Valentine of $192,267, the amount necessary to
compensate him for the adverse tax consequences, (ii) guaranteed a loan from a
bank to Mr. Valentine in the amount of $279,647 and (iii) made payments to Mr.
Valentine in an amount sufficient to compensate Mr. Valentine for the interest
thereon (approximately $24,000 in 1998). The results of this arrangement have
not adversely affected the Company's cash flow, and the Company believes that
overall consequences of this arrangement to the Company's financial performance
in any period were not significant.
<PAGE>
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 60 of this Form 10-K.
(b) Reports on From 8-K
On October 29, 1999, C-Cube filed a report on Form 8-K relating to
changes in control of registrant with forward-looking statements
relating to the fourth quarter of 1999 and the first quarter of
2000, as presented in a press release dated October 27, 1999.
<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)
<PAGE>
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)
10.37 Sublease agreement with LSI Logic Corporation dated January 8,
1997. (13)
10.38 Amendment to Option Agreement dated May 30, 1997 with Taiwan
Semiconductor Manufacturing Co., Ltd. (14)
10.39 Amendment to Lease Agreement with APT-IND/APTS Realty, Inc. dated
September 2, 1997. (15)
10.40 Amendment to Loan Agreement with Comerica Bank-California dated
October 10, 1997. (15)
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors.
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 granted 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. 000-23596)
(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. 000-23596)
(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. 000-23596)
(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. 000-23596)
(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. 000-23596)
(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. 000-23596)
<PAGE>
(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. 000-23596)
(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. 000-23596)
(13) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q filed
May 15, 1997 (File No. 000-23596)
(14) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q filed
December 22, 1998, as amended (File No. 000-23596)
(15) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q filed
November 14, 1997 (File No. 000-23596)
(16) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-K filed
March 27, 1998 (File No. 000-23596)
(17) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q filed
May 15, 1998 (File No. 000-23596)
(18) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q filed
August 14, 1998 (File No. 000-23596)
(19) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q filed
November 16, 1998 (File No. 000-23596)
(20) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-K405
filed March 23, 1999 (File No. 000-23596)
(21) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q filed
May 14, 1999 (File No. 000-23596)
(22) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q filed
August 13, 1999 (File No. 000-23596)
(23) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 8-K filed
October 29, 1999 (File No. 000-23596)
(24) Incorporated by reference to the corresponding Exhibit
previously filed as an Exhibit to Registrant's Form 10-Q filed
November 12, 1999 (File No. 000-23596)
<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: April 27, 2000 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Donald T. Valentine Director and
(DONALD T. VALENTINE) Chairman of the Board April 27, 2000
President,
/s/ Alexandre A. Balkanski, Ph.D. Chief Executive Officer
(ALEXANDRE A. BALKANSKI, PH.D.) and Director
(Principal Executive Officer) April 27, 2000
Vice President, Finance
/s/ Walt Walczykowski and Chief Financial Officer
(WALT WALCZYKOWSKI) Principal Financial and
Accounting Officer) April 27, 2000
/s/ Gregorio Reyes Director April 27, 2000
(GREGORIO REYES)
/s/ T.J. Rodgers Director April 27, 2000
(T.J. RODGERS)
/s/ Baryn S. Futa Director April 27, 2000
(BARYN S. FUTA)
/s/ Donald McKinney Director April 27, 2000
(DONALD MCKINNEY)
</TABLE>
<PAGE>
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, 1999 and 1998, and for each of the three
years in the period ended December 31, 1999, and have issued our report thereon
dated January 20, 2000. Our audits also included the consolidated financial
statement schedule of C-Cube Microsystems Inc., listed in the Index at Item
14(a)(2). 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 20, 2000
<TABLE>
<CAPTION>
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ADDITIONS
--------------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND OTHER FROM AT END
(In thousands) OF PERIOD EXPENSES ACCOUNTS RESERVES OF PERIOD
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999:
<S> <C> <C> <C> <C> <C>
Sales returns allowance............. $ 13,124 $ 2,439 $ -- $ 8,798 $ 6,765
Allowance for doubtful accounts..... 3,910 300 -- -- 4,210
Warranty............................ 1,558 97 -- 348 1,307
YEAR ENDED DECEMBER 31, 1998:
Sales returns allowance............. $ 6,740 $12,553 $ -- $ 6,169 $13,124
Allowance for doubtful accounts..... 3,435 479 -- 4 3,910
Warranty............................ 1,573 316 -- 331 1,558
YEAR ENDED DECEMBER 31, 1997:
Sales returns allowance............. $11,529 $ 3,297 $ -- $ 8,086 $ 6,740
Allowance for doubtful accounts..... 2,563 1,010 -- 138 3,435
Warranty............................ 1,859 547 -- 833 1,573
</TABLE>
EXHIBIT 21-1
LIST OF SUBSIDIARIES OF THE REGISTRANT:
DiviCom Inc. (incorporated in Delaware)
DiviCom Limited (organized under the laws of Barbados), a subsidiary of
DiviCom Inc.
DiviCom International Limited (organized under the laws of Bermuda), a
subsidiary of DiviCom Inc.
DiviCom Asia Pacific Limited (organized under the laws of Hong Kong Special
Administrative Region of the People's Republic of China), a subsidiary of
DiviCom International Limited
DiviCom Europe SAS (organized under the laws of France), a subsidiary of
DiviCom International Ltd.
C-Cube Microsystems France (organized under the laws of France), a subsidiary
of C-Cube Microsystems Inc.
C-Cube U.S. Inc. (incorporated in Delaware)
C-Cube Microsystems International Ltd. (organized under the laws of Bermuda)
C-Cube International Limited (organized under the laws of the Hong Kong Special
Administrative Region of the People's Republic of China), a subsidiary of
C-Cube Microsystems International Ltd.
C-Cube Microsystems (Asia Pacific) Limited (organized under the laws of the
Hong Kong Special Administrative Region of the People's Republic of China)
C-Cube Japan, Inc. (organized under the laws of Japan)
C-Cube Semiconductor Inc. (incorporated in Delaware)
*Media Computer Technologies, Inc. (incorporated in California)
*Discontinued operation
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statement Nos. 333-75755, 333-81718, 333-89474, 333-19777,
333-14799, 333-03877, 333-03881, 333-03677 and 333-02812 of
C-Cube Microsystems Inc. on Form S-8 of our reports dated
January 20, 2000 (February 10, 2000 as to Note 17),
appearing in this Annual Report on Form 10-K of C-Cube
Microsystems Inc. for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
San Jose, California
April 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 144,296
<SECURITIES> 175,357
<RECEIVABLES> 74,850
<ALLOWANCES> 10,974
<INVENTORY> 19,335
<CURRENT-ASSETS> 445,627
<PP&E> 88,349
<DEPRECIATION> 52,056
<TOTAL-ASSETS> 496,309
<CURRENT-LIABILITIES> 78,177
<BONDS> 0
0
0
<COMMON> 323,756
<OTHER-SE> 75,036
<TOTAL-LIABILITY-AND-EQUITY> 496,309
<SALES> 407,648
<TOTAL-REVENUES> 407,648
<CGS> 181,891
<TOTAL-COSTS> 181,891
<OTHER-EXPENSES> 153,803
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,611
<INCOME-PRETAX> 82,410
<INCOME-TAX> 24,723
<INCOME-CONTINUING> 82,410
<DISCONTINUED> 0
<EXTRAORDINARY> 33
<CHANGES> 0
<NET-INCOME> 57,278
<EPS-BASIC> 1.44
<EPS-DILUTED> 1.30
</TABLE>
