1
EXHIBIT 99.3
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
Financial Statements:
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at December 31, 2000 and
1999........................................................ F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998............................ F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2000, 1999 and 1998........ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998............................ F-6
Notes to Consolidated Financial Statements.................. F-7
Financial Statement Schedule:
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.
F-1
2
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, 2000 and 1999, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2000. 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 auditing standards generally accepted
in the United States of America. 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. at
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
San Jose, California
January 18, 2001
(March 26, 2001 as to Note 18)
F-2
3
C-CUBE MICROSYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, DECEMBER 31,
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PAR VALUE AMOUNTS)
Current assets:
Cash and equivalents ...................................................... $ 49,736 $ 123,145
Short-term investments .................................................... 2,798 167,403
Accounts receivable, net of allowances: 2000 -- $4,068, 1999 -- $8,737 .... 23,273 12,516
Inventories ............................................................... 17,505 8,966
Other current assets ...................................................... 21,620 17,395
--------- ---------
Total current assets................................................... 114,932 329,425
Property and equipment -- net ................................................. 17,908 20,355
Production capacity rights .................................................... 23,560 4,985
Distribution rights -- net .................................................... 1,153 1,318
Purchased technology -- net ................................................... 1,466 2,307
Deferred taxes ................................................................ 62,519 2,871
Other assets .................................................................. 1,021 1,526
Net assets of discontinued operations ......................................... -- 101,157
--------- ---------
Total ................................................................. $ 222,559 $ 463,944
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 19,435 $ 24,138
Other accrued liabilities ................................................. 29,979 17,925
Income taxes payable ...................................................... 5,863 2,855
Current portion of long-term obligations .................................. 28,744 727
--------- ---------
Total current liabilities ............................................. 84,021 45,645
Long-term obligations ......................................................... 1,299 18,846
--------- ---------
Total liabilities ..................................................... 85,320 64,491
Minority interest in subsidiary ............................................... 543 471
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000 shares authorized ............... -- --
Common stock, $0.001 par value, 200,000 shares
authorized; shares outstanding: 2000 -- 49,717, 1999 -- 42,441 ........ 136,209 323,756
Accumulated other comprehensive loss ...................................... (1,757) (2,014)
Retained earnings ......................................................... 2,244 77,240
--------- ---------
Total stockholders' equity ............................................ 136,696 398,982
========= =========
Total ................................................................. $ 222,559 $ 463,944
========= =========
See notes to consolidated financial statements.
F-3
4
C-CUBE MICROSYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net revenues ............................................................. $ 265,049 $ 222,148 $ 209,082
--------- --------- ---------
Costs and expenses:
Cost of product revenues ............................................. 119,581 88,235 85,751
Research and development:
Research and development ............................................. 59,553 54,260 52,823
Warrant issuance ..................................................... 12,632 -- --
Selling, general and administrative:
Selling, general and administrative .................................. 47,516 37,238 36,312
Stock-based compensation and merger/spin-off related payroll taxes ... 20,827 -- --
--------- --------- ---------
Total ............................................................ 260,109 179,733 174,886
--------- --------- ---------
Income from operations ................................................... 4,940 42,415 34,196
Other income ............................................................. 7,863 9,229 2,488
--------- --------- ---------
Income before minority interest and extraordinary item ................... 12,803 51,644 36,684
Income tax expense ....................................................... 3,407 14,550 9,806
Income before minority interest and extraordinary item ................... 9,396 37,094 26,878
Minority interest in net income (loss) of subsidiary ..................... 72 442 (337)
Income before extraordinary item ......................................... 9,324 36,652 27,215
Extraordinary gain on repurchase of convertible notes (net of tax) ....... -- -- 3,494
--------- --------- ---------
Income from continuing operations ........................................ 9,324 36,652 30,709
--------- --------- ---------
Discontinued operations:
Income (loss) from discontinued operations of DiviCom (net of tax) ... (10,087) 20,626 15,580
Loss on disposal of DiviCom (net of tax) ............................. (6,190) -- --
--------- --------- ---------
Net income (loss) ........................................................ $ (6,953) $ 57,278 $ 46,289
========= ========= =========
Basic earnings per share:
Income from continuing operations before extraordinary item .......... $ 0.20 $ 0.92 $ 0.73
Extraordinary item (net of tax) ...................................... -- -- 0.09
========= ========= =========
Income from continuing operations .................................... 0.20 0.92 0.82
--------- --------- ---------
Income (loss) from discontinued operations (net of tax) .............. (0.22) 0.52 0.42
Loss on disposal of DiviCom (net of tax) ............................. (0.13) -- --
--------- --------- ---------
Income (loss) from discontinued operations ........................... (0.35) 0.52 0.42
--------- --------- ---------
Net income (loss) per share .......................................... $ (0.15) $ 1.44 $ 1.24
========= ========= =========
Diluted earnings per share:
Income from continuing operations before extraordinary item .......... $ 0.17 $ 0.84 $ 0.72
Extraordinary item (net of tax) ...................................... -- -- 0.09
--------- --------- ---------
Income from continuing operations .................................... 0.17 0.84 0.81
--------- --------- ---------
Income (loss) from discontinued operations (net of tax) .............. (0.19) 0.46 0.38
Loss on disposal of DiviCom (net of tax) ............................. (0.11) -- --
--------- --------- ---------
Income (loss) from discontinued operations ........................... (0.30) 0.46 0.38
--------- --------- ---------
Net income (loss) per share .......................................... $ (0.13) $ 1.30 $ 1.19
========= ========= =========
Shares used in computation:
Basic ................................................................ 47,503 39,891 37,382
========= ========= =========
Diluted .............................................................. 53,853 44,571 40,754
========= ========= =========
See notes to consolidated financial statements.
F-4
5
C-CUBE MICROSYSTEMS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED
COMMON STOCK OTHER RETAINED
--------------------- COMPREHENSIVE EARNINGS
SHARES AMOUNT LOSS (DEFICIT) TOTAL
------ --------- --------- --------- ---------
(IN THOUSANDS)
Balances, December 31, 1997 .......................... 36,787 $ 203,728 $ (1,939) $ (26,327) $ 175,462
------ --------- --------- --------- ---------
Components of comprehensive income:
Net income ....................................... 46,289 46,289
Accumulated translation adjustments .............. 41 41
Unrealized loss on investments ................... (57) (57)
---------
Total comprehensive income ................... 46,273
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 (1,955) 19,962 $ 243,272
------ --------- --------- --------- ---------
Components of comprehensive income:
Net income ....................................... 57,278 57,278
Accumulated translation adjustments .............. 202 202
Unrealized loss on investments ................... (261) (261)
---------
Total comprehensive income ................... 57,219
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 (2,014) 77,240 $ 398,982
------ --------- --------- --------- ---------
Components of comprehensive income (loss):
Net loss ......................................... (6,953) (6,953)
Accumulated translation adjustments .............. (628) (628)
Unrealized gain on investments ................... 885 885
---------
Total comprehensive income (loss) ............ (6,696)
Conversion of convertible debt into common stock ..... 17,026 17,026
Tax benefit from employee stock transactions ......... 86,174 86,174
Common stock issued under stock plans ................ 6,801 110,775 110,775
Proceeds from sale of non-voting common stock ........ 475 9,391 9,391
Warrant issuance ..................................... 12,632 12,632
Accelerated vesting of stock options ................. 17,170 17,170
Transfer of net assets to Harmonic ................... (33,114) (68,043) (101,157)
Additional cash transferred to Harmonic .............. (34,775) (34,775)
Income tax paid on spin-off of DiviCom ............... (431,370) (431,370)
Deferred tax asset related to increase in tax basis on
spin-off of DiviCom ................................ 58,544 58,544
------ --------- --------- --------- ---------
Balances, December 31, 2000 .......................... 49,717 $ 136,209 $ (1,757) $ 2,244 $ 136,696
====== ========= ========= ========= =========
See notes to consolidated financial statements.
F-5
6
C-CUBE MICROSYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
(In Thousands)
Cash flows from operating activities:
Net income (loss) ........................................................ $ (6,953) $ 57,278 $ 46,289
Adjustments to reconcile net income to net cash provided by operating
activities:
Extraordinary gain on repurchase of convertible notes .................. -- -- (3,494)
Gain from sale of marketable securities ................................ (4,607) (33) --
Minority interest in subsidiary ........................................ 72 443 (337)
Depreciation and amortization .......................................... 13,001 15,733 16,306
Deferred income taxes .................................................. (2,009) (7,834) 8,633
Warrant issuance ....................................................... 12,632 -- --
Compensation expense recorded on accelerated vesting of stock options .. 17,170 -- --
Changes in assets and liabilities:
Receivables ......................................................... (10,887) (3,054) 10,190
Inventories ......................................................... (8,585) (692) (145)
Prepaid and other assets ............................................ (10,783) (568) (2,209)
Accounts payable .................................................... (4,514) 12,929 5,460
Income taxes payable ................................................ 3,215 (8,993) 9,646
Deferred contract revenue ........................................... -- (1,731) 1,731
Accrued liabilities ................................................. 12,028 5,782 4,664
--------- --------- ---------
Net cash provided (used) by operating activities ....................... 9,780 69,260 96,734
Net cash provided (used) by discontinued operations .................... 7,455 (29,067) (14,463)
--------- --------- ---------
Net cash provided by operating activities .............................. 17,235 40,193 82,271
--------- --------- ---------
Cash flows from investing activities:
Sales and maturities of short-term investments ........................... 173,109 203,174 51,736
Purchases of short-term investments ...................................... (3,011) (269,060) (104,447)
Capital expenditures ..................................................... (6,799) (17,435) (14,832)
Production capacity rights ............................................... (20,000) 11,700 --
Other assets ............................................................. 85 (3,244) (211)
--------- --------- ---------
Net cash provided (used) by investing activities ......................... 143,384 (74,865) (67,754)
--------- --------- ---------
Cash flows from financing activities:
Bank borrowings .......................................................... 40,000 -- 39,541
Repayment of bank borrowings ............................................. (13,000) -- (39,541)
Loan from Harmonic ....................................................... 117,980 -- --
Repayment of Harmonic loan ............................................... (117,980) -- --
Payment of purchase consideration ........................................ -- -- (1,125)
Payments of capital lease obligations .................................... (564) (295) (387)
Repurchase of convertible subordinated notes ............................. (10) (3,271) (56,099)
Additional cash transferred to Harmonic .................................. (34,775) -- --
Tax benefit from employee stock transactions ............................. 86,174 -- --
Proceeds from sale of non-voting stock ................................... 9,391 -- --
Income tax paid on spin-off of DiviCom ................................... (431,371) -- --
Common stock issued under stock plans .................................... 110,775 67,740 20,111
--------- --------- ---------
Net cash provided (used) by financing activities ......................... (233,380) 64,174 (37,500)
--------- --------- ---------
Exchange rate impact on cash and equivalents ................................. (648) 463 (331)
--------- --------- ---------
Net increase (decrease) in cash and equivalents .............................. (73,409) 29,965 (23,314)
Cash and equivalents, beginning of period .................................... 123,145 93,180 116,494
--------- --------- ---------
Cash and equivalents, end of period .......................................... $ 49,736 $ 123,145 $ 93,180
========= ========= =========
Supplemental schedule of noncash investing and financing activities:
Equipment acquired under lease ........................................... $ 1,251 $ 1,133 $ 861
Conversion of convertible debt into common stock ......................... 17,026 1,813 --
Transfer of net assets to Harmonic ....................................... 101,157 -- --
Deferred tax asset related to increase in tax basis on spin-off of DiviCom 58,544 -- --
Cash paid during the period for:
Interest ............................................................... $ 2,087 $ 1,484 $ 4,410
Income taxes ........................................................... 38,957 13,199 1,092
See notes to consolidated financial statements.
F-6
7
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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 as a leading provider of both digital video
semiconductor solutions that implement international standards for digital
video, including MPEG-1 and MPEG-2.
C-Cube entered into an Amended and Restated Agreement and Plan of Merger
and Reorganization with Harmonic Inc. on December 9, 1999. In accordance with
this agreement, on May 2, 2000, C-Cube's semiconductor division was spun-off
into an independent company, C-Cube Semiconductor Inc., and on May 3, 2000,
C-Cube Microsystems Inc., consisting primarily of its DiviCom division, was
merged with Harmonic Inc. C-Cube Semiconductor Inc. was then renamed C-Cube
Microsystems Inc. (the "Company" or "C-Cube") with the approval of Harmonic,
Inc., to maintain customer continuity and the brand identity of C-Cube's
semiconductor products. The transaction was accounted for as if the
semiconductor division were the continuing entity. Accordingly, as required by
Accounting Principles Board Opinion No. 30 and Emerging Issues Task Force Issue
No. 95-18, the results of operations of the Semiconductor division (the
continuing entity) are reported separately from the results of operations of the
DiviCom division (the discontinued entity). The results of operations in prior
periods have been restated and certain prior period amounts have been
reclassified to conform to the current period presentation. These restatements
and reclassifications had no effect on net income or stockholders' equity.
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 an original 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 leases are amortized over the shorter of their estimated
useful lives or three years. Leasehold improvements are amortized over the lease
term.
F-7
8
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the Securities and Exchange Commission. SAB 101 outlines
the basic criteria that must be met to recognize revenue and provides guidance
for disclosures related to revenue recognition policies. SAB 101 is effective
for the fiscal quarter beginning October 1, 2000. The adoption of SAB 101 did
not have a material impact on the consolidated financial statements.
RESEARCH AND DEVELOPMENT
Research and development expenses include costs and expenses associated
with the development of the Company's design methodology and the design and
development of new products, including initial nonrecurring engineering and
product verification charges from foundries. Research and development is
expensed as incurred.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes," which
prescribes the use of the asset and liability approach whereby deferred tax
liabilities and assets are calculated for the expected future tax consequences
of temporary differences between the financial statement carrying amounts and
the tax bases of assets and liabilities, net operating loss and tax credit
carryforwards.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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
and a promissory note. Cash equivalents and short-term investments are stated at
fair value based on quoted market prices. The estimated fair value of all other
financial instruments at December 31, 2000 and 1999 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
industry. The
F-8
9
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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. At December 31, 2000, 33% and 17% of the Company's accounts
receivables were from two customers. No other customers accounted for more than
10% of accounts receivable. At December 31, 1999, three customers accounted for
greater than 10% of accounts receivable and were 18%, 12% and 12% of the
balance.
The geographic distribution of receivables is as follows:
DECEMBER 31,
--------------------
2000 1999
---- ----
Europe ......................................... 49% 38%
Asia (excluding Japan) ......................... 24 25
Japan .......................................... 12 29
North America .................................. 15 8
---- ----
Total .................................. 100% 100%
==== ====
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. Gains and losses on forward exchange contracts and the related
receivables are recorded in other income. 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 creditworthy financial
institutions and are denominated in the currency of major industrial nations.
At December 31, 2000, the Company had $3.9 million of outstanding
foreign exchange contracts to sell Japanese yen. The estimated fair values of
these contracts at December 31, 2000 were not materially different from the net
carrying values. These contracts mature through January 2001. Unrealized gains
on forward exchange contracts at December 31, 2000 were not material.
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 matured through January 2000.
Unrealized gains on forward exchange contracts at December 31, 1999 were not
material.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting
F-9
10
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS 133 is effective for fiscal years beginning after June 15, 2000. The
Company adopted SFAS 133 on January 1, 2001. The adoption of this statement did
not have a material impact on the consolidated financial statements.
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 (loss) 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.
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." In connection with the merger and
spin-off, the Company recorded stock-based compensation expense, within selling,
general and administrative, of $15.5 million related to the accelerated vesting
of options for certain employees of the Company.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances in order
to conform to the current year presentation.
NOTE 2. DISCONTINUED OPERATION
The results of discontinued operations are presented on two line items
on the face of the Consolidated Statements of Income. For the current year, loss
from operations of DiviCom represents the net loss of DiviCom operations through
the date of merger of $10.1 million. Revenues and taxes for this period were
$36.8 million and $6.8 million, respectively. For the year ended December 31,
1999 revenues and taxes were $185.5 million and $10.2 million. Revenues and
taxes for the year ended December 31, 1998 were $142.7 million and $9.1 million
respectively. Loss on disposal of DiviCom of $6.2 million includes direct costs,
net of taxes, associated with the merger/spin-off transactions that were
incurred by the Company.
F-10
11
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 3. SHORT-TERM INVESTMENTS
Short-term investments are $2.8 million as of December 31, 2000 and
$167.4 million as of December 31, 1999, including the following
available-for-sale securities.
UNREALIZED
AMORTIZED UNREALIZED HOLDING
COST HOLDING GAINS LOSSES MARKET VALUE
--------- ------------- ---------- ------------
(IN THOUSANDS)
December 31, 2000:
U.S. government agencies .............. $ 1,960 $ 40 $ -- $ 2,000
Debt securities ....................... 506 -- (1) 505
Corporate stock ....................... 50 243 -- 293
-------- -------- -------- --------
Total short-term investments .. $ 2,516 $ 283 $ (1) $ 2,798
======== ======== ======== ========
December 31, 1999
Commercial paper ...................... $ 87,368 $ 3 $ (61) $ 87,310
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 .. $167,881 $ 8 $ (486) $167,403
======== ======== ======== ========
As of December 31, 2000, all of the Company's debt investments had
remaining maturities of one year or less.
NOTE 4. INVENTORIES
Inventories consist of:
DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Raw materials........................................... $ 7,213 $ 1,238
Work-in-process......................................... 1,130 3,563
Finished goods.......................................... 9,162 4,165
-------- --------
Total.................................... $ 17,505 $ 8,966
======== ========
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of:
DECEMBER 31,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
Equipment under capital lease........................ $ 4,472 $ 1,230
Machinery and equipment -- principally computers..... 44,863 47,766
Furniture and fixtures............................... 5,845 3,823
Leasehold improvements............................... 6,664 7,548
-------- --------
Total................................... 61,844 60,367
Accumulated depreciation and amortization............ (43,936) (40,012)
-------- --------
Property and equipment -- net........................ $ 17,908 $ 20,355
======== ========
F-11
12
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 6. PRODUCTION CAPACITY RIGHTS
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 $20.0 million
refundable payment in January 2000, classified as non-current asset. This
deposit earns interest at 4% per year, allows for certain discounts on purchased
capacity based upon the quantities purchased and is refundable after 90 days
notice by the Company. 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.
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 minimum number of wafers to be purchased under the agreement. At December
31, 2000, remaining production capacity rights were $5.7 million, of which $2.1
million was included in other current assets and $3.6 million was classified as
a non-current asset.
NOTE 7. LINE OF CREDIT
As of December 31, 2000 the Company had a $27.0 million bank line of
credit ($27.0 million outstanding at December 31, 2000) that expires on May 31,
2002. The first $6.0 million of borrowed funds bear interest at LIBOR plus 2.0%
(8.4% at December 31, 2000), with additional borrowings bearing interest at the
bank's prime rate (9.5% at December 31, 2000). The line of credit agreement
requires that the Company, among other things, maintain a minimum tangible net
worth and certain financial ratios and is collateralized by the current assets
of the Company. At December 31, 2000, the Company was not in compliance with one
of its covenants. The bank has waived compliance with this requirement for the
fiscal year ended December 31, 2000.
On January 4, 2001 the line of credit was revised. Under the terms of
the revised line of credit agreement, $22.0 million bears interest at LIBOR plus
2% (8.4% as of January 4, 2001) and $5.0 million bears interest at the bank's
prime rate (9.0% as of January 4, 2001), with all other loan terms remaining the
same.
F-12
13
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 8. LONG-TERM OBLIGATIONS
Long-term obligations consist of :
DECEMBER 31,
-------- --------
2000 1999
-------- --------
(IN THOUSANDS)
Bank line of credit .............................. $ 27,000 $ --
Convertible notes (see below) .................... -- 17,570
Capital lease obligations (see Note 9) ........... 2,381 1,382
Other long-term obligations ...................... 662 621
-------- --------
30,043 19,573
Current portion .................................. (28,744) (727)
-------- --------
Long-term portion ................................ $ 1,299 $ 18,846
======== ========
In November 1995, the Company completed a public debt offering of $86.3
million of convertible subordinated notes (the "notes") that matured in 2005.
Interest was payable semi-annually at 5.875% per annum. The notes became
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 became redeemable at the option of the
Company at an initial redemption price of 104.7% of the principal amount.
During 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. The price was
equivalent to 103.5% of the principal amount. The loss on conversion of the
notes was not material to the Company.
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.
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 9. COMMITMENTS AND CONTINGENCIES
Equipment with a cost of $6.2 million and $5.0 million and accumulated
depreciation of $2.8 million and $0.8 million was leased under capital leases at
December 31, 2000 and 1999, respectively. In addition, the Company rents office
and research facilities under operating lease agreements that expire through
July 2007.
F-13
14
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Future minimum annual operating and capital lease commitments at
December 31, 2000 are as follows:
OPERATING CAPITAL
-------- -------
(IN THOUSANDS)
2001 ...................................... 4,610 1,620
2002 ...................................... 4,150 743
2003 ...................................... 4,016 114
2004 ...................................... 3,853 --
2005 ...................................... 3,312 --
Thereafter ................................ 2,393 --
-------- -------
Total minimum lease payments .............. $ 22,334 2,477
========
Amount representing interest .............. (96)
-------
Present value of minimum lease payments.... 2,381
Current portion............................ (1,697)
-------
Long-term portion.......................... $ 684
=======
Rent expense for operating leases was approximately $3.6 million, $3.0
million and $2.3 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
The Company has been named as a defendant in a securities class-action
complaint filed in the United States district court for the northern district of
California. The plaintiffs in this action purport to represent the class of all
persons who purchased common stock between January 19th, 2000 and May 3, 2000 in
the entity then known as C-Cube Microsystems (see Note 1). The complaint alleges
that the Company is liable for the acts and statements for the entity known as
C-Cube Microsystems prior to May 3, 2000 even though the Company did not legally
exist prior to May 3, 2000. This case is in its early stages and the Company
believes that the allegations contained in the complaint are without merit and
intends to defend the action vigorously.
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.
NOTE 10. STOCKHOLDERS' EQUITY
Preferred Stock
The number of shares of preferred stock authorized to be issued is
10,000,000 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, 2000, no shares of preferred stock had been
issued.
Common Stock
The Company has authorized 25,450,000 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.
F-14
15
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Warrant issuance
On February 10, 2000, C-Cube entered into a Securities Purchase
Agreement ("Agreement") with Thomson Multimedia S.A., a French societe anonyme,
whereby, on May 8, 2000, C-Cube issued and sold to Thomson 474,747 shares of
non-voting common stock at a price of $19.78 per share and issued to Thomson a
warrant to purchase 949,494 shares of common stock. The warrants were fully
vested upon issuance and will become exercisable at a price of $19.78 per share
one week prior to the expiration date of May 8, 2007, or in part prior to the
expiration date upon the achievement of certain milestones. The Company
calculated the fair value of the warrants using the Black-Scholes options
pricing model with the following weighted-average assumptions: expected life, 7
years; stock volatility, 69%; risk-free interest rate, 6.82%, and no dividends
during the expected term. The Company recorded a charge, within research and
development, of $12.6 million in the second quarter of 2000.
Employee Stock Option Plans
The Company's stock option plans (the "Plans") authorize the issuance of
25,000,000 shares of common stock (included in the 25,450,000 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.
Option activity under the Plans was as follows:
WEIGHTED
NUMBER OF AVERAGE EXERCISE
SHARES PRICE
----------- ----------------
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 (4,982,647 exercisable
at a weighted average price of $18.23) ............ 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 (3,848,998 exercisable
at a weighted average price of $17.88) ................ 13,282,529 21.34
Granted (weighted average fair value of $23.31) ....... 20,559,134 31.43
Exercised ............................................. (5,848,395) (17.98)
Canceled .............................................. (11,558,039) (29.36)
----------- ------
Outstanding, December 31, 2000 ........................ 16,435,229 12.77
=========== ======
F-15
16
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Additional information regarding options outstanding as of December 31,
2000 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ---------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------ ----------- ------------ -------------- ----------- --------------
$ 5.80 - $ 7.33 2,204,186 7.56 $ 6.52 415,057 $ 6.53
7.38 - 7.73 3,354,136 7.79 7.62 702,130 7.62
7.76 - 8.09 1,821,910 6.44 8.01 563,120 8.03
8.11 - 12.76 2,394,470 8.12 9.95 530,754 10.04
12.76 - 17.50 2,504,200 9.16 15.56 436,451 14.85
17.56 - 20.42 2,074,115 9.22 18.61 302,399 18.51
20.44 - 40.43 2,082,212 9.20 25.58 291,637 25.16
--------------- ---------- ---- ------ --------- ------
$ 5.80 - $40.43 16,435,229 8.22 $12.77 3,241,548 $11.52
==========
C-Cube's 2000 Stock Option Plans include Employee Stock Option Plan and
Director Option Plan. The Employee Stock Option Plan has an annual increase on
January 1, 2001, equal to 3% of shares outstanding.
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 316,000, 328,000 and
223,000 shares in 2000, 1999 and 1998 at weighted average prices of $17.77,
$17.16 and $15.52, respectively. The weighted average fair market value of the
2000, 1999 and 1998 awards was $24.02, $7.96 and $7.06, respectively. At
December 31, 2000, 1,039,635 shares of common stock were available for issuance
under this plan.
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees"
and its related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements which are
granted with exercise prices equal to the fair market value at grant date.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) requires the disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method as
of the beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 5.8 in 2000, 5.8 in 1999
and 5.6 in 1998; stock volatility, 49% in 2000, 68% in 1999 and 68% in 1998;
risk free interest rates, 5.2% in 2000, 5.5% in 1999 and 5.2% in 1998; and no
dividends during the expected term. The Company's
F-16
17
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
calculations are based on a single option valuation approach and forfeitures are
recognized as they occur. If the computed fair values of the 2000, 1999 and 1998
awards had been amortized to expense over the vesting period of the awards, pro
forma net income (loss) would have been $(56.0) million ($(1.04) per share) in
2000, $25.7 million ($0.66 per share) in 1999 and $15.2 million ($0.52 per
share) in 1998. 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.
F-17
18
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Numerator:
Continuing operations:
Income from continuing operations before extraordinary item ............ $ 9,324 $ 36,652 $ 27,215
Extraordinary item ..................................................... -- -- 3,494
-------- -------- --------
Numerator for basic earnings per share from continuing operations ...... 9,324 36,652 30,709
Add back interest expense after tax related to convertible shares ...... -- 750 2,242
-------- -------- --------
Numerator for diluted earnings per share from continuing operations .... 9,324 37,402 32,951
Discontinued operations:
Income from discontinued operations of DiviCom (net of tax) ............ (10,087) 20,626 15,580
Loss on disposal of DiviCom (net of tax) ............................... (6,190) -- --
-------- -------- --------
Numerator for diluted earnings per share from discontinued operations .. $(16,277) $ 20,626 $ 15,580
======== ======== ========
Denominator:
Weighted-average shares -- denominator for basic earnings per share ...... 47,503 39,891 37,382
Convertible shares ....................................................... -- 645 1,871
Dilutive common stock equivalents, using treasury stock method ........... 6,350 4,035 1,501
-------- -------- --------
Denominator for diluted earnings per share ............................... 53,853 44,571 40,754
-------- -------- --------
Basic earnings per share from continuing operations .......................... $ 0.20 $ 0.92 $ 0.82
======== ======== ========
Basic earnings per share from discontinued operations ........................ $ (0.35) $ 0.52 $ 0.42
======== ======== ========
Basic earnings per share ..................................................... $ (0.15) $ 1.44 $ 1.24
======== ======== ========
Diluted earnings per share from continuing operations ........................ $ 0.17 $ 0.84 $ 0.81
======== ======== ========
Diluted earnings per share from discontinued operations ...................... $ (0.30) $ 0.46 $ 0.38
======== ======== ========
Diluted earnings per share ................................................... $ (0.13) $ 1.30 $ 1.19
======== ======== ========
Options to purchase 4,956,000 shares have been excluded from the
computation as their effect would have been anti-dilutive.
F-18
19
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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:
DECEMBER 31,
-------------------
2000 1999
------- -------
(IN THOUSANDS)
Unrealized gain (loss) on investments.................. $ 407 $ (478)
Accumulated translation adjustments.................... (2,164) (1,536)
------- -------
Total.................................................. $(1,757) $(2,014)
======= =======
NOTE 13. INCOME TAXES
The provision for income taxes is as follows:
YEARS ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
-------- -------- --------
Current: (IN THOUSANDS)
Federal ..................... $ 6,115 $ 5,761 $ 8,625
State ....................... (3,214) 826 1,332
Foreign ..................... 1,262 1,970 2,143
-------- -------- --------
Total ............... 4,163 8,557 12,100
======== ======== ========
Deferred:
Federal ..................... (722) (152) (2,166)
State ....................... (34) 6,145 (128)
Foreign ..................... -- -- --
-------- -------- --------
Total ............... (756) 5,993 (2,294)
-------- -------- --------
Total ....................... $ 3,407 $ 14,550 $ 9,806
======== ======== ========
The tax benefit associated with dispositions from employee stock plans
reduced taxes currently payable by $86.2 million, $28.9 million and $1.4 million
for 2000, 1999 and 1998, respectively.
The Company incurred a tax liability of $431.4 million as a result of
separating DiviCom from C-Cube. DiviCom was subsequently merged into Harmonic,
Inc. The liability reduced stockholders' equity.
F-19
20
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Income tax expense differs from the amount computed by applying the
federal statutory income tax rate to income before taxes as follows:
YEARS ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Tax expense computed at federal statutory rate............ $ 4,416 $ 18,075 $ 12,839
State income taxes, net of federal effect................. 149 (532) 382
Tax credits............................................... (8,049) (2,191) (1,574)
Foreign operations taxed at different rates............... (1,563) (2,267) (2,533)
Non-deductible expenses................................... -- 267 --
Repatriation of foreign subsidiary earnings............... 7,746 -- --
Other..................................................... 708 1,198 692
-------- -------- --------
Income tax expense........................................ $ 3,407 $ 14,550 $ 9,806
======== ======== ========
The components of the net deferred tax asset as of December 31 were as
follows:
2000 1999
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Accruals and reserves recognized in different periods. $ 5,879 $ 5,076
Tax credit carryforwards ............................. 10,240 12,731
Deferred revenue ..................................... 204 163
Purchased technology ................................. -- 655
Tax basis depreciation and amortization .............. 46,712 2,098
-------- --------
Total .................................... 63,035 20,723
-------- --------
Deferred tax liabilities:
Unrepatriated foreign earnings ....................... -- (10,757)
-------- --------
Total .................................... -- (10,757)
-------- --------
Net deferred tax assets ................................. $ 63,035 $ 9,966
======== ========
At December 31, 2000, the Company has tax credit carryforwards of
approximately $14 million expiring through 2007.
U.S. income taxes were not provided on a cumulative total of
approximately $6 million and $20 million of undistributed earnings from foreign
subsidiaries for the years ending December 31, 2000 and 1999, 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 1998, the Company repurchased $63.5 million of the face value of
the Company's 5.875% subordinated convertible notes due 2005 (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.
F-20
21
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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 $1.6 million, $1.8 million and $0.6 million in 2000, 1999, 1998,
respectively.
NOTE 16. GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
The company operates in primarily one industry segment: the development
and marketing of powerful, highly integrated, standards-based 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.
Geographic Information
Revenues are broken out geographically by the ship-to location of the
customer.
YEARS ENDED OR AS OF DECEMBER 31,
----------------------------------------------------------
2000 1999 1998
------------------ ------------------ ------------------
NET NET NET
REVENUES PROPERTY REVENUES PROPERTY REVENUES PROPERTY
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
North America.................... $ 34,133 $ 17,106 $ 39,363 $ 19,118 $ 38,253 $ 17,661
China............................ 65,265 367 78,818 563 119,536 916
Europe........................... 72,138 110 33,147 156 16,633 78
Japan............................ 33,465 281 35,064 436 15,953 483
Other Asia....................... 56,394 41 34,452 78 18,630 93
Rest of World.................... 3,654 3 1,304 4 77 39
-------- -------- -------- -------- -------- --------
Total.................... $265,049 $ 17,908 $222,148 $ 20,355 $209,082 $ 19,270
======== ======== ======== ======== ======== ========
Major Customers
During 2000, two customers of the Company accounted for $29.9 million
and $28.1 million, each 11% of the Company's revenues. In 1999, there was no
customer accounted for 10% or more of net revenues. In 1998, one customer of the
company accounted for $21.9 million, or 10% of the Company's revenue.
F-21
22
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 17. QUARTERLY DATA (UNAUDITED)
2000
--------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
Net revenues .......................................... $ 73,982 $ 69,022 $ 61,043 $ 61,002
-------- -------- -------- --------
Costs and expenses:
Cost of product revenues ............................ 34,627 31,051 27,149 26,754
Research and development:
Research and development ............................ 14,877 15,453 15,070 14,154
Warrant issuance .................................... -- -- 12,632 --
Selling, general and administrative:
Selling, general and administrative ................. 13,301 12,568 10,897 10,748
Stock based compensation and merger/spin-off
related payroll taxes ............................. -- -- 17,414 3,413
-------- -------- -------- --------
Total ........................................... 62,805 59,072 83,162 55,069
-------- -------- -------- --------
Income (loss) from operations ......................... 11,177 9,950 (22,119) 5,933
Other income (expense), net ........................... (34) 4,020 101 3,775
-------- -------- -------- --------
Income (loss) before income taxes
and minority interest ............................... 11,143 13,970 (22,018) 9,708
Income tax expense (benefit) .......................... 2,969 3,664 (5,847) 2,621
-------- -------- -------- --------
Income (loss) before minority
interest ............................................ 8,174 10,306 (16,171 7,087
Minority interest in net income (loss) of subsidiary... (96) (96) 257 7
-------- -------- -------- --------
Income (loss) from continuing operations .............. 8,270 10,402 (16,428) 7,080
Discontinued operations
Income (loss) from discontinued operations of
DiviCom (net of tax) .............................. -- -- (11,639) 1,552
Gain (loss) on disposal of DiviCom (net of tax) ..... -- -- 1,158 (7,348)
-------- -------- -------- --------
Net income (loss) ..................................... $ 8,270 $ 10,402 $(26,909) $ 1,284
======== ======== ======== ========
Basic earnings (loss) per share:(1)
Income (loss) from continuing operations .............. 0.17 0.21 (0.35) 0.16
Income (loss) from discontinued operations
(net of tax) ........................................ -- -- (0.25) 0.04
Income (loss) on disposal of DiviCom
(net of tax) ........................................ -- -- 0.02 (0.17)
-------- -------- -------- --------
Net income (loss) per share per share ................. $ 0.17 $ 0.21 $ (0.58) $ 0.03
-------- -------- -------- --------
Diluted earnings per share:(1)
Income (loss) from continuing operations .............. 0.16 0.19 (0.35) 0.14
Income (loss) from discontinued operations
(net of tax) ........................................ -- -- (0.25) 0.03
Gain (loss) on disposal of DiviCom (net of tax) ....... -- -- 0.02 (0.15)
-------- -------- -------- --------
Net income (loss) per share per share ................. $ 0.16 $ 0.19 $ (0.58) $ 0.02
======== ======== ======== ========
Basic shares used in computation(1) ................... 49,597 49,328 47,203 43,884
======== ======== ======== ========
Diluted shares used in computation(1) ................. 51,511 53,528 47,203 49,449
======== ======== ======== ========
Gross margin percentage ............................... 53.2% 55.0% 55.5% 56.1%
1999
-----------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE AMOUNTS)
Net revenues .......................................... $ 64,047 $ 52,307 $ 47,507 $ 58,287
-------- -------- -------- --------
Costs and expenses:
Cost of product revenues ............................ 25,140 20,749 18,700 23,646
Research and development:
Research and development ............................ 14,421 13,464 13,062 13,313
Warrant issuance .................................... -- -- -- --
Selling, general and administrative:
Selling, general and administrative ................. 10,244 9,139 8,436 9,419
Stock based compensation and merger/spin-off
related payroll taxes ............................. -- -- -- --
-------- -------- -------- --------
Total ........................................... 49,805 43,352 40,198 46,378
-------- -------- -------- --------
Income (loss) from operations ......................... 14,242 8,955 7,309 11,909
Other income (expense), net ........................... 3,112 2,488 1,937 1,692
-------- -------- -------- --------
Income (loss) before income taxes
and minority interest ............................... 17,354 11,443 9,246 13,601
Income tax expense (benefit) .......................... 4,954 3,090 2,604 3,902
-------- -------- -------- --------
Income (loss) before minority
interest ............................................ 12,400 8,353 6,642 9,699
Minority interest in net income (loss) of subsidiary... 61 148 261 (28)
-------- -------- -------- --------
Income (loss) from continuing operations .............. 12,339 8,205 6,381 9,727
Discontinued operations
Income (loss) from discontinued operations of
DiviCom (net of tax) .............................. 6,281 5,828 5,284 3,233
Gain (loss) on disposal of DiviCom (net of tax) ..... -- -- -- --
-------- -------- -------- --------
Net income (loss) ..................................... $ 18,620 $ 14,033 $ 11,665 $ 12,960
======== ======== ======== ========
Basic earnings (loss) per share:(1)
Income (loss) from continuing operations .............. 0.30 0.20 0.16 0.25
Income (loss) from discontinued operations
(net of tax) ........................................ 0.15 0.15 0.13 0.08
Income (loss) on disposal of DiviCom
(net of tax) ........................................ -- -- -- --
Net income (loss) per share per share ................. $ 0.45 $ 0.35 $ 0.29 $ 0.33
-------- -------- -------- --------
Diluted earnings per share:(1)
Income (loss) from continuing operations .............. 0.26 0.19 0.15 0.24
Income (loss) from discontinued operations
(net of tax) ........................................ 0.14 0.13 0.12 0.08
Gain (loss) on disposal of DiviCom (net of tax) ....... -- -- -- --
-------- -------- -------- --------
Net income (loss) per share per share ................. $ 0.40 $ 0.32 $ 0.27 $ 0.32
======== ======== ======== ========
Basic shares used in computation(1) ................... 41,459 40,097 39,338 38,668
======== ======== ======== ========
Diluted shares used in computation(1) ................. 47,424 45,021 42,925 41,344
======== ======== ======== ========
Gross margin percentage ............................... 60.7% 60.3% 60.6% 59.4%
- --------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the computation of net income per share.
F-22
23
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 18. SUBSEQUENT EVENTS
On March 26, 2001 the Company entered into an Agreement and Plan of
Reorganization (the "Reorganization Agreement") with LSI Logic Corporation
("LSI") and Clover Acquisition Corp. ("Merger Sub"), a wholly-owned subsidiary
of LSI. Under the terms of the Reorganization Agreement, Merger Sub will
commence an exchange offer (the "Offer") to exchange 0.79 shares of common
stock, par value $0.01 per share, of LSI (the "LSI Common Stock"), for each
outstanding share of C-Cube common stock, par value $0.001 per share. Holders of
C-Cube common stock tendering their shares in the Offer will receive cash in
lieu of any fractional shares of LSI Common Stock to which they would otherwise
be entitled. The consummation of the Offer is subject to, among other things, at
least a majority of shares of our common stock (including for purposes of the
calculation of the majority of shares, certain outstanding options and warrants
to purchase C-Cube shares) being validly tendered and not withdrawn prior to the
expiration of the Offer and the expiration or termination of the waiting periods
under the Hart-Scott-Rodino Antitrust Improvements Act and applicable foreign
antitrust laws. Pursuant to the Reorganization Agreement, following the
completion of the Offer and the satisfaction or waiver of certain other
conditions, Merger Sub will be merged into us (the "Merger") and C-Cube will be
the surviving corporation. In the Merger, each outstanding share of C-Cube
common stock (other than shares held by C-Cube as treasury stock, by LSI or
Merger Sub and by stockholders who perfect appraisal rights under Delaware law,
which will be available if Merger Sub owns ninety percent (90%) or more of the
outstanding shares of C-Cube common stock following the consummation of the
Offer) will be converted into the right to receive the same consideration as
paid to C-Cube stockholders who tendered their common stock in the Offer. In the
event that a third party makes a proposal to acquire C-Cube or if the no
solicitation provisions contained in the Reorganization Agreement are materially
breached, and thereafter the Reorganization Agreement is terminated, under
certain circumstances C-Cube will be required to pay a $33 million termination
fee to LSI. The closing is anticipated to take place during the second quarter
of 2001. Based on the closing price of LSI common stock on March 23, 2001, the
last trading day prior to the announcement of the transaction, the transaction
was valued at approximately $878 million. The transaction is expected to be
accounted for under the purchase method of accounting and to qualify as a
"tax-free" reorganization for federal income tax purposes.
F-23