<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 17, 2000
REGISTRATION NO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2 TO THE
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------------------
C-CUBE SEMICONDUCTOR INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
DELAWARE 77-0192108
(SATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
1778 MCCARTHY BOULEVARD
MILPITAS, CALIFORNIA 95035
(408) 490-8000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE REGISTERED EACH CLASS IS TO BE REGISTERED
------------------- ------------------------------
<S> <C>
NONE N/A
</TABLE>
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
(TITLE OF CLASS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
C-CUBE SEMICONDUCTOR INC.
CROSS-REFERENCE SHEET
SHOWING LOCATION IN REGISTRATION STATEMENT OF INFORMATION
REQUIRED BY ITEMS ON FORM 10
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING LOCATION
----------------------- --------
<S> <C> <C>
1. Business................................... SUMMARY; RISK FACTORS; REASONS FOR THE
DISTRIBUTION; BUSINESS; UNAUDITED PRO-FORMA
FINANCIAL STATEMENTS; MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS;
ARRANGEMENTS BETWEEN C-CUBE MICROSYSTEMS
AND SEMICONDUCTOR; FINANCIAL STATEMENTS
2. Financial Information...................... SUMMARY; RISK FACTORS; REASONS FOR THE
DISTRIBUTION; BUSINESS; UNAUDITED PRO-FORMA
FINANCIAL STATEMENTS; MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS;
ARRANGEMENTS BETWEEN C-CUBE MICROSYSTEMS
AND SEMICONDUCTOR; FINANCIAL STATEMENTS
3. Properties................................. RISK FACTORS; BUSINESS
4. Securities Ownership of Certain Beneficial
Owners..................................... SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
5. Directors and Executive Officers........... MANAGEMENT
6. Executive Compensation..................... EXECUTIVE COMPENSATION
7. Certain Relationships and Related
Transactions............................... CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS SUMMARY; RISK FACTORS; THE
DISTRIBUTION; REASONS FOR THE DISTRIBUTION;
BUSINESS; MANAGEMENT; SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT;
ARRANGEMENTS BETWEEN C-CUBE MICROSYSTEMS
AND SEMICONDUCTOR; AND DESCRIPTION OF
CAPITAL STOCK
8. Legal Proceedings.......................... LEGAL PROCEEDINGS
9. Market Price of and Dividends of the
Registrant's Common Equity and Related
Stockholder Matters........................ SUMMARY; RISK FACTORS; SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; DESCRIPTION OF CAPITAL STOCK;
DIVIDEND POLICY; ARRANGEMENTS BETWEEN
C-CUBE MICROSYSTEMS AND SEMICONDUCTOR
10. Recent Sales of Unregistered Securities.... RECENT SALES OF UNREGISTERED SECURITIES
11. Description of Registrant's Securities to
be Registered.............................. DESCRIPTION OF CAPITAL STOCK
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING LOCATION
----------------------- --------
<S> <C> <C>
12. Indemnification of Directors and
Officers................................... INDEMNIFICATION OF OFFICERS AND DIRECTORS
13. Financial Statements and Supplementary
Data....................................... SUMMARY; RISK FACTORS; UNAUDITED PRO-FORMA
FINANCIAL STATEMENTS; BUSINESS;
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS; FINANCIAL STATEMENTS;
ARRANGEMENTS BETWEEN C-CUBE MICROSYSTEMS
AND SEMICONDUCTOR
14. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................. NOT APPLICABLE
15. Financial Statements and Exhibits.......... FINANCIAL STATEMENTS; EXHIBITS
</TABLE>
2
<PAGE> 4
INFORMATION STATEMENT
relating to the spin-off of
C-CUBE SEMICONDUCTOR INC.
from C-Cube Microsystems Inc.
We are sending you this information statement to describe the distribution
of shares of common stock of C-Cube Semiconductor Inc. or Semiconductor to the
stockholders of C-Cube Microsystems Inc. In this distribution, you will receive
one share of Semiconductor common stock for each share of C-Cube Microsystems
common stock owned by you at the close of business on [ , 2000]. Your
shares of Semiconductor common stock will be mailed to you on or about
[ , 2000]. All references in this Information Statement to
Semiconductor refer to C-Cube Microsystems' semiconductor business before the
distribution and to C-Cube Semiconductor Inc., a Delaware corporation, after the
distribution.
Although the completion of the distribution is not contingent on the
receipt of an opinion regarding the distribution from any tax advisors, we have
been advised by Ernst & Young that in their opinion, the distribution will
qualify as a tax-free distribution to our stockholders, although C-Cube
Microsystems itself will recognize substantial gain in connection with the
distribution. This opinion is based on certain representations by C-Cube
Microsystems and Semiconductor and is subject to certain limitations and
qualifications, however, and you are urged to read the information set forth
under the caption "Material Federal Income Tax Considerations". This opinion
does not preclude the Internal Revenue Service from successfully asserting that
the distribution is taxable to our stockholders. Accordingly, please consult
your tax advisor with respect to the tax consequences of the distribution to
you.
No C-Cube Microsystems stockholder action is necessary to make the
distribution. You do not need to surrender shares of C-Cube Microsystems common
stock to receive Semiconductor common stock in the distribution. The number of
shares of C-Cube Microsystems common stock you own will not change as a result
of the distribution. Semiconductor has applied to have the Semiconductor common
stock included for quotation on the Nasdaq National Market under the symbol
"CUBE."
Semiconductor was formed in conjunction with C-Cube Microsystems' merger
with Harmonic, Inc. It is a condition to the consummation of the merger between
Harmonic and C-Cube Microsystems that C-Cube Microsystems either spin-off or
sell its semiconductor business, and C-Cube Microsystems intends to distribute
shares of Semiconductor stock to you contingent on the satisfaction of all
conditions to the merger between Harmonic and C-Cube Microsystems. The purpose
of the distribution is to separate the semiconductor business from C-Cube
Microsystems' DiviCom business to (i) enable Harmonic to merge with the DiviCom
business, (ii) allow the semiconductor business to focus on its core strengths
in the design, development, manufacturing and sale of Semiconductor's
semiconductors, software and systems for digital video applications, and (iii)
permit customers, stockholders and other constituencies to better evaluate the
respective businesses. C-Cube Microsystems and Semiconductor have entered into a
series of agreements relating to the distribution and the relationship of
Semiconductor and C-Cube Microsystems thereafter. These agreements are attached
as exhibits to this information statement.
This document provides you with detailed information about Semiconductor
and the distribution. We are enthusiastic about this opportunity for
Semiconductor to better concentrate on its core semiconductor business and
dedicate its resources to the growth of its business. We encourage you to read
this document carefully to learn more about Semiconductor, the distribution and
Semiconductor's future plans.
Sincerely,
--------------------------------------
Alexandre Balkanski
President and Chief Executive Officer
C-Cube Microsystems Inc.
, 2000
3
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 5
Risk Factors................................................ 7
Forward-Looking Statements.................................. 14
The Distribution............................................ 15
Pro Forma Capitalization.................................... 16
Reasons for the Distribution................................ 17
Business.................................................... 19
Where You Can Find More Information......................... 33
Management's Discussion and Analysis........................ 35
Unaudited Pro Forma Financial Statements.................... 49
Pro Forma Condensed Consolidated Balance Sheet.............. 50
Management.................................................. 57
Executive Compensation and Other Matters.................... 60
Stock Ownership of Certain Beneficial Owners and
Management................................................ 63
Arrangements Between C-Cube Microsystems and
Semiconductor............................................. 65
Descriptions of Employee Benefits Plans..................... 71
Certain Relationships and Related Transactions.............. 74
Material Federal Income Tax Considerations.................. 75
Description of the Company's Capital Stock.................. 77
Recent Sales of Unregistered Securities..................... 78
Dividend Policy............................................. 78
Indemnification of Directors and Officers................... 79
Transfer Agent and Registrar................................ 79
Index to Financial Statements............................... F-1
</TABLE>
You should rely only on the information contained in this information
statement regarding the distribution. Semiconductor has not authorized any other
person to provide you with different information. If anyone provides you with
different or inconsistent information, you should not rely on it. Semiconductor
is not making an offer to sell these securities in any jurisdiction where the
offer or sale is not permitted. You should assume that the information appearing
in this information statement is accurate as of the date on the front cover of
this information statement only. Semiconductor's business, financial condition,
results of operations and prospects may have changed since that date.
4
<PAGE> 6
SUMMARY
This summary highlights selected information contained elsewhere in this
information statement. To better understand the distribution and Semiconductor,
you should read the entire information statement carefully, including the risk
factors and financial statements.
WHY THIS INFORMATION STATEMENT WAS SENT TO YOU
This information statement is being delivered by C-Cube Microsystems Inc.
to you because you were an owner of C-Cube Microsystems common stock on
[ , 2000]. This entitles you to receive a distribution of one share of
the common stock of a new company, C-Cube Semiconductor Inc., a Delaware
corporation, for each share of C-Cube Microsystems common stock owned by you on
[ , ]. Although no action is required on your part to
cause this to happen and you do not have to pay cash or other consideration to
receive these shares, the distribution of these shares to you will have certain
tax and other consequences, so please read the information in this document
carefully.
This information statement describes the business of Semiconductor, the
relationship between C-Cube Microsystems and Semiconductor, how this transaction
benefits C-Cube Microsystems and its stockholders and provides other information
to assist you in evaluating the benefits and risks of holding or disposing of
your shares of Semiconductor common stock. Semiconductor has applied to have the
Semiconductor common stock included for quotation on the Nasdaq National Market
under the symbol "CUBE." All references in this Information Statement to
Semiconductor refer to C-Cube Microsystems' semiconductor business before and
after the distribution to C-Cube Semiconductor Inc., a Delaware corporation.
BUSINESS OF SEMICONDUCTOR
Semiconductor designs, develops, has manufactured and sells semiconductors,
software and systems for digital video applications. As a major supplier of such
solutions, Semiconductor has played a significant role in enabling the growth of
digital video. Semiconductor is focused on working with its original equipment
manufacturer customers to enable key applications in its consumer and
communications target markets. In the consumer market, it is focused on playback
and recordable video compact disc or VCD, and digital video disc or DVD as well
as digital VHS players. The communications market targets interactive set-top
boxes, broadcast encoders and other emerging appliances. Users of these products
will be able to record hours of DVD-quality video obtained from any video
source, whether TV, VCR, DV camcorder or analog camcorder. Once they have
recorded the video, they will be able to edit and play back the video on
standard personal computers and store the resulting video to DVD disc, web
pages, e-mail, recordable CD or personal computer hard-disk drives. Please
review the information set forth under the caption "Business" for further
details about Semiconductor's business.
RELATIONSHIP BETWEEN C-CUBE MICROSYSTEMS AND SEMICONDUCTOR
All Semiconductor common stock is being distributed to the C-Cube
Microsystems stockholders as described in this information statement. C-Cube
Microsystems will have no ownership interest in Semiconductor after the
distribution. Semiconductor's board of directors will consist of five to seven
directors. At the outset, all of the Semiconductor directors, with the exception
of Semiconductor's new Chief Executive Officer, will be former directors of
C-Cube Microsystems.
Upon consideration of the proposed merger of C-Cube Microsystems and
Harmonic, Harmonic will succeed to all obligations of C-Cube Microsystems.
Please review the information set forth under the captions "Arrangements
Between C-Cube Microsystems and Semiconductor", "Description of Capital Stock"
and "Recent Sales of Unregistered Securities" for further details about
Semiconductor's relationship with C-Cube Microsystems, its capital structure and
matters related to corporate governance.
5
<PAGE> 7
REASONS FOR THE DISTRIBUTION
The merger agreement with Harmonic contemplates the sale or distribution of
Semiconductor immediately prior to and in connection with the merger. After
thorough consideration, the board of directors of C-Cube Microsystems determined
that a distribution of shares of Semiconductor was in the best interest of the
stockholders of C-Cube Microsystems. The C-Cube Microsystems board of directors
considered a number of factors in determining to recommend approval of the
spin-off of Semiconductor including:
- The necessity of spinning off or selling Semiconductor in order to
complete C-Cube Microsystems' merger with Harmonic;
- The recent proposed valuation of Semiconductor;
- All purchase proposals relating to Semiconductor received by C-Cube
Microsystems; and
- Based on the current financial market conditions and the historical
market information concerning C-Cube Microsystems common stock, the
ability of Semiconductor to become a viable public company and create
substantial stockholder value by, among other things, allowing the
financial community to focus separately on the semiconductor business and
the DiviCom business.
Please review the information set forth under the caption "Reasons for the
Distribution" for further details about the reasons for the distribution.
THE DISTRIBUTION
Each C-Cube Microsystems stockholder will receive one share of
Semiconductor common stock for every [ ] shares of C-Cube Microsystems
common stock held. As of [ , ], C-Cube Microsystems had
[ ] shares of common stock outstanding.
Distribution and Transfer Information. Boston EquiServe, L.P. will act as
the distribution and transfer agent for the distribution. The distribution agent
will mail stock certificates beginning on or about the distribution date.
Record Date, Distribution Date. The record date for the distribution will
be the close of business on [ , 2000]. On the record date, C-Cube
Microsystems will transfer to a custodian all of the shares of Semiconductor
common stock pursuant to an irrevocable custody arrangement. On or about
[ , ], the custodian will deliver the shares to
Semiconductor's transfer agent which will then mail them to the C-Cube
Microsystems stockholders of record as of the record date.
No Fractional Shares. No fractional shares of Semiconductor common stock
will be distributed. Fractional shares of Semiconductor common stock will be
aggregated and sold by Boston EquiServe to provide cash to holders in lieu of
such fractional shares.
Trading Market. Semiconductor has applied to have the Semiconductor common
stock included for quotation on the Nasdaq National Market under the symbol
"CUBE."
INVESTOR CONTACT
Semiconductor and C-Cube Microsystems stockholders with questions about the
distribution should contact Walt Walczykowski, Chief Financial Officer, at
C-Cube Microsystems' principal executive offices at 1778 McCarthy Boulevard,
Milpitas, California 95035; telephone (408) 490-8000. This contact information
will remain the same after the distribution.
6
<PAGE> 8
RISK FACTORS
You should carefully consider the risks described below when evaluating
your ownership of Semiconductor common stock. The risks and uncertainties
described below are not the only ones Semiconductor faces. Additional risks and
uncertainties Semiconductor is presently not aware of or that it currently
considers immaterial may also impair Semiconductor's business operations.
C-CUBE MICROSYSTEMS OPERATED SOLELY AS A SEMICONDUCTOR BUSINESS UNTIL 1996,
WHEN IT ACQUIRED THE DIVICOM BUSINESS. SEMICONDUCTOR MAY INCUR LOSSES AS A
RESULT OF OPERATING SOLELY AS A SEMICONDUCTOR BUSINESS AGAIN.
Since acquiring the DiviCom business in 1996, C-Cube Microsystems
operations have consisted of the semiconductor business and the DivCom systems
business. Semiconductor alone cannot be sure that its operating results will not
be adversely affected by the loss of one or more of the following attributes.
The acquisition has allowed C-Cube Microsystems, among other things:
- The ability to leverage the DiviCom business's expertise in areas related
to C-Cube Microsystems' core competency in digital video compression;
- Increased sales of C-Cube Microsystems products for set-top boxes and an
increased understanding of customer systems requirements;
- The opportunity to jointly develop various communications products;
- The ability to combine the expertise of the two businesses to serve the
digital video networking market;
- The ability to more effectively enable and cost reduce end-to-end video
networking solutions;
- The added benefit of a larger market capitalization due to the addition
of a systems business to a stand-alone semiconductor business; and
- The added diversification of serving the digital video, semiconductor and
communications systems markets.
It is possible that since Semiconductor will not be able to provide a
complete broadcast/set-top solution as it was able to do with the additional
DiviCom products, these customers will seek to find a complete solution
elsewhere. Any loss of the benefits provided by the combination with the DiviCom
business could seriously harm Semiconductor's operating results which would
negatively affect the value of your investment.
SEMICONDUCTOR'S OPERATING RESULTS HAVE VARIED SIGNIFICANTLY IN THE PAST AND ARE
LIKELY TO VARY SIGNIFICANTLY IN THE FUTURE. SEMICONDUCTOR'S STOCK PRICE MAY
DECLINE IF IT FAILS TO MEET THE EXPECTATIONS OF ANALYSTS AND INVESTORS.
Semiconductor's quarterly and annual operating results have been and will
likely continue to be affected by a wide variety of factors that could have a
negative effect on revenue and profitability. These factors include, but are not
limited to:
- The rescheduling or cancellation of orders from our customers at any
time;
- Availability and cost of raw materials, chip manufacturing capacity,
assembly capacity, packages and test capacity from our vendors;
- Fluctuations in chip manufacturing yields;
- Competitive pressures on average selling prices on products supplied by
Semiconductor;
- Changes in governmental policies in various regions in which
Semiconductor does a substantial amount of business;
- Ability to introduce new products and technologies on a timely basis to
meet customer needs;
7
<PAGE> 9
- Competitive products introduced by Semiconductor's competitors;
- Market acceptance of products of both Semiconductor and its customers;
- Loss of strategic relationships in Semiconductor's markets;
- Delay in the emergence of new markets in which Semiconductor products are
used;
- The level of expenditures for research and development, sales,
administration and marketing needed to be successful in Semiconductor's
markets;
- Changes in product or customer mix;
- External factors such as a general economic slowdown in areas of the
world in which Semiconductor does substantial business; and
- The level of orders which are received and can be shipped in any given
quarter.
Further, a significant portion of Semiconductor's expenses is fixed and the
timing of increases in expenses is based in large part on its forecast of future
revenue. As a result, if revenue does not meet Semiconductor's expectations, it
may be unable to quickly adjust expenses to levels appropriate to actual
revenue. Any of the above factors could have an adverse effect on its operating
results.
IF SYSTEMS MANUFACTURERS DO NOT ACCEPT SEMICONDUCTOR'S PRODUCTS OR IF NEW
MARKETS FOR ITS PRODUCTS DO NOT EMERGE, SEMICONDUCTOR'S PRODUCTS COULD BECOME
OBSOLETE AND UNMARKETABLE OR REQUIRE SEMICONDUCTOR TO REDESIGN ITS PRODUCTS,
WHICH COULD BE COSTLY AND TIME-CONSUMING.
To date, Semiconductor has derived substantially all of its product revenue
from:
- sales of products for video playback and karaoke;
- video cards for computers and direct broadcast satellite applications;
- sales of products for development;
- trials and early deployment of broadcast; and
- other applications that are not yet commercially available or are not yet
in volume production.
Semiconductor's ability to generate increased revenue will depend on the
development of new opportunities for digital video compression in the consumer
electronics, computer and communications markets. The markets for
Semiconductor's products change and evolve rapidly, but the potential size of
new market opportunities and the timing of their development is uncertain. Some
of the potential new markets for digital video compression would require
extensive communications infrastructures that are not yet in place and that
would likely be expensive and heavily regulated by governmental entities. These
new markets may never materialize or they might not materialize for some time.
Semiconductor's success in any new market will depend upon whether system
manufacturers select its products for incorporation into the system
manufacturers' products and upon the successful introduction of such products.
A variety of alternate approaches to digital video compression have been
introduced, including other hardware and software-only solutions. Other
companies are designing products around these alternate approaches. In addition,
manufacturers of general purpose microprocessors are positioning their products
as offering digital video compression capability. System manufacturers may use
such processors for video compression applications in place of purchasing
products from Semiconductor. If Semiconductor fails to develop the types of
products that systems manufacturers want in existing markets and in potential
new markets, our revenue may not meet analysts' expectations which may affect
the value of your investment.
IF THE WAFER SUPPLIERS AND SUBCONTRACTORS ON WHICH SEMICONDUCTOR DEPENDS DO NOT
PERFORM, SEMICONDUCTOR WILL NOT BE ABLE TO FILL ORDERS FOR ITS PRODUCTS.
All of Semiconductor's products are currently manufactured to its
specifications by independent chip manufacturers called foundries, and assembly,
test and packaging are subcontracted to third parties. Although Semiconductor
primarily uses three foundries to manufacture its products, the majority of its
products are produced by only one of the foundries and is therefore dependent on
a single foundry for
8
<PAGE> 10
many of its products. This dependence on single foundries subjects Semiconductor
to risks associated with an interruption in supply from any such foundry. These
risks include reduced control over:
- Delivery schedules;
- Quality assurance;
- Manufacturing yields and cost;
- The potential lack of adequate capacity; and
- The potential misappropriation of intellectual property.
Semiconductor obtains semiconductor chip manufacturing capacity through
forecasts that are generated in advance of expected delivery dates and are
binding. For example, certain of Semiconductor's suppliers require it to make
binding forecasts as much as eight months in advance of expected delivery dates.
Semiconductor's ability to obtain the capacity necessary to meet the future
demand for its products is based on its ability to accurately forecast such
future demand. If Semiconductor fails to accurately forecast future demand, it
may be unable to timely obtain an adequate supply of chips necessary to
manufacture the number of products required to satisfy the actual demand. This
obligation to make binding forecasts far in advance of delivery subjects it to
inventory risks, including the risk of obsolescence. Semiconductor may not
continue to accurately forecast the demand for its products and obtain
sufficient capacity. If it is unable to do so, its results of operation would
likely diminish.
In connection with the manufacture of its newer products, Semiconductor
also needs to qualify 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 Semiconductor intends to introduce
require advanced semiconductor processes. Semiconductor has in the past
experienced increased costs and delays in connection with the qualification of
foundries. Such increased costs and delays may adversely affect results of
operation.
COMPETITION IN THE SEMICONDUCTOR INDUSTRY IS INTENSE. IF SEMICONDUCTOR IS UNABLE
TO COMPETE EFFECTIVELY, THE DEMAND FOR, AND/OR THE PRICES OF, OUR PRODUCTS MAY
DECLINE.
The market for Semiconductor's products is intensely competitive and
characterized by declining average selling prices and rapid technological
change. Semiconductor will continue to compete with its principal competitors
including:
- Philips,
- ST-Microelectronics,
- ESS Technology,
- Sony,
- NEC,
- Matsushita Electric Industrial Company (MEI),
- Zoran, and
- IBM Microelectronics.
Though C-Cube Microsystems has always faced competition from these
competitors, Semiconductor may be less able to react quickly to competitive
threats without the added joint research and development, complete solution and
financial stability benefits it enjoyed through its combination with DiviCom.
SEMICONDUCTOR DERIVES MUCH OF ITS PRODUCT REVENUE FROM SALES TO EMERGING GLOBAL
MARKETS. WITHOUT THE DIVICOM BUSINESS DIVERSIFICATION, ITS BUSINESS MIGHT BE
MORE SUSCEPTIBLE TO FLUCTUATIONS IN EMERGING MARKET ECONOMIES.
To date, Semiconductor has derived a substantial portion of its revenue
from sales of its VCD products in China. It expects that revenue from VCD
products will decrease as a percentage of total revenue, but continue to account
for a significant portion of its product revenue in 2000. Substantially all of
the growth in the sales of Semiconductor's VCD products over the last several
years has occurred in the
9
<PAGE> 11
Asia-Pacific region. To date, the DiviCom business has derived substantially all
of its revenue from sales of satellite delivery, cable and cable broadcasting
systems. Much of the growth in its sales has occurred in Europe and the United
States. Without DiviCom's growth in sales to Europe and the United States,
Semiconductor's sales growth is less geographically diversified which may limit
its ability to offset the effect of downturns in emerging global markets on its
results of operations.
THE SPIN-OFF OF SEMICONDUCTOR WILL CAUSE SUBSTANTIAL CORPORATE TAX, AND THE IRS
MAY SUCCESSFULLY LATER ASSERT THAT THIS CORPORATE TAX LIABILITY IS HIGHER THAN
ORIGINALLY CALCULATED. SEMICONDUCTOR MAY NEED TO RAISE ADDITIONAL FUNDS TO PAY
ITS TAX OBLIGATIONS IF THOSE OBLIGATIONS ARE HIGHER THAN ANTICIPATED.
Semiconductor will incur a substantial corporate-level tax in connection
with the distribution. It will recognize a taxable gain approximately equal to
the difference between the fair market value of Semiconductor on the date of
distribution, minus our aggregate basis in the assets (net of liabilities) that
we will transfer to Semiconductor before the spin-off, minus certain expenses
related to the transaction. C-Cube Microsystems has estimated, based on certain
assumptions, including an assumed fair market value for the stock of the
spun-off semiconductor business, that this tax liability will be approximately
[$200] million. The actual tax liability may differ significantly from the
estimate based on the facts and circumstances existing at the time of the
distribution. For example, the value of the stock of the spun-off semiconductor
business will likely fluctuate and if such value at the time of the distribution
exceeds the assumed value, the actual tax liability will exceed the estimated
tax liability.
Semiconductor will retain, and transfer to Harmonic, cash reserves in an
amount sufficient to pay this corporate tax liability and taxes attributable to
our pre-closing operations. In addition, Semiconductor has agreed to indemnify
and hold Harmonic harmless from and against these tax liabilities to the extent
they relate to our semiconductor business, including the spin-off, and exceed
the retained cash reserve set aside for the payment of taxes. Under
Semiconductor's tax sharing agreement with Harmonic, Semiconductor will be
liable for any increase in corporate tax liability attributable to the
Semiconductor business or the spin-off (plus certain related costs) that
results, for example, from an IRS audit. If these tax liabilities are
significantly higher than anticipated, Semiconductor may be forced to incur debt
or issue equity to pay its liabilities, and Semiconductor does not know for sure
that these sources of funding will be available. An increase in debt could
negatively impact Semiconductor's financial position and future results of
operations and an issuance of equity could dilute your interest in
Semiconductor.
IN THE EVENT THE DISTRIBUTION OF SEMICONDUCTOR STOCK TO YOU IS TREATED AS A
TAXABLE DISTRIBUTION, YOU MAY BE TREATED AS RECEIVING TAXABLE CAPITAL GAINS OR
TAXABLE ORDINARY INCOME.
Although the completion of the distribution is not contingent on the
receipt of a tax opinion regarding the distribution, Semiconductor has been
advised by Ernst & Young LLP that in their opinion the distribution of
Semiconductor stock to you will be treated as a tax-free distribution, except to
the extent of your receipt of cash instead of fractional shares. This opinion is
subject to certain limitations and qualifications and is based on
representations made by Semiconductor. This opinion represents only the best
judgment of Ernst & Young LLP and is not binding on the IRS or the courts. The
IRS is not precluded from successfully asserting a contrary interpretation. In
addition, subsequent authorities could result in the Ernst & Young opinion being
incorrect. Thus, it is possible that the distribution will be treated as taxable
capital gain or as taxable ordinary income up to the value of the stock
distributed.
SEMICONDUCTOR MAY EXPERIENCE DIFFICULTY ATTRACTING AND RETAINING QUALITY
EMPLOYEES WHICH MAY HURT ITS ABILITY TO OPERATE ITS BUSINESS EFFECTIVELY.
The ability of Semiconductor to maintain its competitive technological
position will depend, in large part, on its ability to attract and retain highly
qualified technical and managerial personnel. Competition for such personnel is
intense, especially in Silicon Valley where Semiconductor's headquarters is
located, and there is a risk that some key employees will depart as a result of
the distribution. In addition, the announcement of the proposed distribution may
impede Semiconductor's ability to attract new employees. While Semiconductor was
combined with the DiviCom business, some employees had a choice of which
10
<PAGE> 12
business to work for. In addition, the combination with the DiviCom business has
resulted in faster growth and greater scale for C-Cube Microsystems. Without
these benefits of a combined business, Semiconductor may not experience the same
success attracting quality employees. Lack of success in attracting such
employees could lead to lower than expected operating results, delays in the
introduction of new products and a negative effect on Semiconductor's ability to
support customers.
SEASONAL TRENDS MAY CAUSE SEMICONDUCTOR'S QUARTERLY OPERATING RESULTS TO
FLUCTUATE, WHICH MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
A significant portion of our sales revenue comes from the consumer and
communications markets, both of which are characterized by seasonal sales. Both
markets tend to experience higher sales in the third and fourth calendar
quarters due to holiday purchases by system manufacturers and relatively less
strong sales in the first and second calendar quarters. Though seasonality
affects Semiconductor less and less due to diversified product lines, seasonal
trends may still cause its operating results to fluctuate which may have an
adverse effect on Semiconductor's stock price.
IF SEMICONDUCTOR IS UNABLE TO ADEQUATELY PROTECT ITS INTELLECTUAL PROPERTY,
THIRD PARTIES COULD USE ITS INTELLECTUAL PROPERTY WITHOUT ITS CONSENT.
Semiconductor's ability to successfully compete is substantially dependent
upon its internally developed technology and intellectual property, which it
protects through a combination of patents, copyright and trade secret law,
confidentiality procedures and licensing arrangements. To that end,
Semiconductor has obtained certain patents and intends to continue to seek
patents on its technology when and where appropriate. Semiconductor may,
however, not be able to adequately protect its proprietary rights. Unauthorized
parties may attempt to obtain and use its proprietary information. Policing
unauthorized use of our proprietary information is difficult, and Semiconductor
does not know whether the steps it has taken will prevent misappropriation,
particularly in foreign countries where the laws may not protect its proprietary
rights as fully as in the United States. For a further discussion of its
intellectual property, please see "Business -- Intellectual Property Rights".
ECONOMIC, POLITICAL AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES AND
OPERATIONS COULD ADVERSELY AFFECT SEMICONDUCTOR'S SALES.
International revenue has accounted for a significant portion of
Semiconductor's net revenue in the past, and Semiconductor believes that
international revenue will continue to account for a significant portion of net
revenue. Semiconductor's success will depend in part upon its ability to manage
international marketing and sales operations and manufacturing relationships.
Semiconductor's international manufacturing and sales are subject to risks
inherent in international transactions including:
- Difficulties in collecting accounts receivable and longer collection
periods;
- Changing and conflicting regulatory requirements;
- Potentially adverse tax consequences;
- Tariffs and general export restrictions;
- Difficulties in staffing and managing foreign operations;
- Political instability;
- Fluctuations in currency exchange rates;
- Natural disasters;
- Seasonal reduction in business activity during the summer months in
Europe and certain other parts of the world; and
- The impact of local economic conditions and practices.
For example, China is a substantial market for consumer electronics
products. As a result, any political or economic instability in China could
significantly reduce demand for products from certain of Semiconductor's major
customers. Another example is the earthquake in Taiwan during the third quarter
of 1999. The earthquake only caused minimal damage at the foundries utilized by
Semiconductor, but chip production capacity in the near future is anticipated to
be tight. Any of the above factors could have a
11
<PAGE> 13
material and adverse effect on Semiconductor's international sales and
operations, which, in turn, could adversely affect its overall business,
operating results and financial condition.
THERE HAS NEVER BEEN A TRADING MARKET FOR SEMICONDUCTOR COMMON STOCK WHICH MAY
CAUSE THE STOCK PRICE TO BE VOLATILE. THIS VOLATILITY MIGHT KEEP YOU FROM
RESELLING YOUR SHARES AT OR ABOVE THE PRICE ON THE DISTRIBUTION DATE.
Prior to the distribution, there has been no public market for
Semiconductor common stock. Semiconductor has applied to have its common stock
included for quotation on the Nasdaq National Market. Based on the trading
patterns of other companies which became publicly traded in similar
transactions, Semiconductor believes the initial trading volume in Semiconductor
common stock will be moderate as investors assess Semiconductor's progress as a
public, stand-alone company. An active, sustained trading market may not,
however, develop.
A number of factors may affect the price and liquidity of the Semiconductor
common stock, including:
- actual or anticipated fluctuations in Semiconductor's operating results;
- changes in expectations as to Semiconductor's future financial
performance or changes in securities analysts' financial estimates; and
- the operating and stock price performance of other comparable companies.
In addition, Semiconductor common stock may be followed by few, if any,
market analysts and there may be few institutions acting as market makers for
the common stock. Either of these factors could adversely affect the liquidity
and trading price of the Semiconductor common stock. Also, the stock market in
general has experienced extreme price and volume volatility that has especially
affected the market prices of securities of many high technology companies. At
times, this volatility has been unrelated to the operating performance of
particular companies. These broad market and industry fluctuations may adversely
affect the trading price of the common stock, regardless of Semiconductor's
actual operating performance.
SEMICONDUCTOR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF ITS
RESULTS AS A SEPARATE COMPANY.
The historical financial information of Semiconductor is shown in the
unaudited pro-forma financial statements at page and does not necessarily
reflect what Semiconductor's financial position, results of operations and cash
flows would have been had it been a separate, stand-alone entity during the
periods presented. In addition, the historical information is not necessarily
indicative of what its results of operations, financial position and cash flows
will be in the future. Semiconductor has not made adjustments to reflect many
significant changes that will occur in its cost structure, funding and
operations as a result of its separation from C-Cube Microsystems, including
changes in its employee base, changes in its legal structure, increased costs
associated with reduced economies of scale, increased marketing expenses related
to establishing a new brand identity and increased costs associated with being a
public, stand-alone company.
For additional information, see "Unaudited Pro Forma Condensed Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Semiconductor's historical consolidated financial
statements and notes thereto.
SEMICONDUCTOR CURRENTLY USES C-CUBE MICROSYSTEMS' INFORMATION SYSTEMS, SOME OF
WHICH REQUIRE C-CUBE MICROSYSTEMS TO TRANSFER LICENSES TO SEMICONDUCTOR OR TO BE
MODIFIED TO SUPPORT SEMICONDUCTOR'S BUSINESS AS A STAND-ALONE ENTITY.
Semiconductor currently uses C-Cube Microsystems' systems to support its
operations, including systems to manage inventory, order processing, human
resources, shipping, accounting, telecommunications
12
<PAGE> 14
and computer networking. While several of the systems currently used by C-Cube
Microsystems are specific to Semiconductor, it has an agreement with C-Cube
Microsystems for Semiconductor to continue to provide certain information
services to C-Cube Microsystems for up to the next two years. Many of the
systems Semiconductor currently uses are proprietary to C-Cube Microsystems and
are very complex. These systems have been modified, and are in the process of
being further modified, to enable Semiconductor to separately track items
related to its business. These modifications, however, may result in unexpected
system failures or the loss or corruption of data.
Any failure or significant downtime in C-Cube Microsystems' or
Semiconductor's own information systems could prevent it from taking customer
orders, shipping products or billing customers and could harm its business. In
addition, C-Cube Microsystems' and Semiconductor's information systems require
the services of employees with extensive knowledge of these information systems
and the business environment in which it operates. In order to successfully
implement and operate its systems, it must be able to attract and retain a
significant number of current C-Cube Microsystems employees to Semiconductor. If
Semiconductor fails to attract and retain the highly skilled personnel required
to implement, maintain, and operate its information systems, Semiconductor's
business could suffer.
SEMICONDUCTOR MUST OBTAIN ASSIGNMENT OF ALL MAJOR CONTRACTS IT WILL ASSUME FROM
C-CUBE MICROSYSTEMS. SOME OF THE PARTIES TO THESE MAJOR CONTRACTS MAY NOT
CONSENT TO THE ASSIGNMENT AT ALL OR WITHOUT ADVERSE CHANGES TO THE EXISTING
COSTS TERMS AND CONDITIONS.
Because Semiconductor is a newly-formed entity, all of the contracts under
which it will operate must be either assigned from C-Cube Microsystems or newly
entered into. The parties to these existing contracts may not be willing to
assign them to Semiconductor at all or they may only be willing to assign them
on terms less favorable than those currently in effect with C-Cube Microsystems.
If any of the parties to these contracts are unwilling to assign them on
favorable terms, Semiconductor's results of operations could be adversely
affected.
SEMICONDUCTOR'S OPERATING RESULTS WOULD SUFFER IF IT WERE FORCED TO DEFEND
AGAINST A PROTRACTED INFRINGEMENT CLAIM OR IF A THIRD PARTY WERE AWARDED
SIGNIFICANT DAMAGES.
There is a substantial risk of litigation regarding intellectual property
rights in the semiconductor industry. A successful claim of patent or other
technology infringement against it and its failure or inability to license the
infringed or similar technology could harm Semiconductor's business. Third
parties could make claims of infringement against it relating to its technology.
Any claims, with or without merit, could:
- Be time-consuming and costly to defend;
- Divert management's attention and resources;
- Cause delays in delivering products;
- Require the payment of monetary damages which may be tripled if the
infringement is found to be willful;
- Result in an injunction which would prohibit us from offering a
particular product; and
- Require us to enter into royalty or licensing agreements which may not be
available on acceptable terms.
SEMICONDUCTOR MAY ENGAGE IN FUTURE ACQUISITIONS THAT RESULT IN INCREASED DEBT,
ASSUMPTION OF LIABILITIES AND OTHER MANAGERIAL CHALLENGES THAT MAY RESULT IN A
NEGATIVE EFFECT ON OPERATIONS.
As part of its overall strategy to enhance or accelerate its product
development efforts, Semiconductor may acquire or invest in complementary
companies, products or technologies or enter into joint ventures or strategic
alliances with other companies. Risks commonly encountered in such transactions
include the difficulty of assimilating the operations and personnel of the
combined companies, the potential disruption of Semiconductor's ongoing
business, the inability to retain key technical and managerial personnel, the
inability of management to maximize the financial and strategic position of
Semiconductor through the
13
<PAGE> 15
successful integration of the acquired business, decreases in reported earnings
as a result of charges for in-process research and development and amortization
of acquired intangible assets, dilution of existing equity holders, difficulty
in maintaining controls, procedures and policies, and the impairment of
relationships with employees and customers as a result of any integration of new
personnel. Semiconductor may not be successful in overcoming these risks or any
other problems encountered in connection with such business combinations,
investments or joint ventures. These transactions may have an adverse effect on
Semiconductor's business, financial condition and results of operations.
SEMICONDUCTOR'S DIRECTORS AND EXECUTIVE OFFICERS MAY HAVE CONFLICTS OF INTEREST
BECAUSE OF THEIR OWNERSHIP OF C-CUBE MICROSYSTEMS COMMON STOCK.
Certain of Semiconductor's directors and executive officers have a
substantial amount of their personal financial portfolios in C-Cube Microsystems
common stock and options to purchase C-Cube Microsystems common stock. Ownership
of C-Cube Microsystems common stock by Semiconductor's directors and officers
after its separation from C-Cube Microsystems could create, or appear to create,
potential conflicts of interest when directors and officers are faced with
decisions that could have different implications for C-Cube Microsystems and
Semiconductor. Specifically, these directors and officers might take action in
their own self interest that might not be the best possible action from
Semiconductor's perspective. For information regarding directors' and officers'
ownership of C-Cube Microsystems common stock, see "Management -- Stock
Ownership of Directors and Executive Officers."
SEMICONDUCTOR IS SUBJECT TO ANTI-TAKEOVER PROVISIONS
Certain provisions of Semiconductor's Certificate of Incorporation and
Bylaws could make it more difficult for a third party to gain control of
Semiconductor, even if a change in control might be beneficial to its
stockholders. This could adversely affect the market price of the common stock.
These provisions include:
- the elimination of the right of stockholders to act by written consent;
- the elimination of the right of stockholders to call special meetings of
the stockholders;
- the creation of a staggered board of directors; and
- the ability of the board of directors to designate and issue preferred
stock without stockholder consent.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are based on our
current expectations, assumptions, estimates and projections about Semiconductor
and its industry. When used in this prospectus, the words "expects,"
"anticipates," "estimates," "intends" and similar expressions are intended to
identify forward looking statements. These statements include, but are not
limited to, statements under the captions "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus.
These forward-looking statements are subject to risks and uncertainties
that could cause actual results to differ materially from those projected. The
cautionary statements made in this prospectus should be read as being applicable
to all related forward looking statements wherever they appear in this
prospectus.
14
<PAGE> 16
THE DISTRIBUTION
The board of directors of C-Cube Microsystems has declared a distribution
to its stockholders, of one share of Semiconductor common stock for every share
of C-Cube Microsystems common stock held on , the record date for
the distribution. As a result of the distribution, all of the then outstanding
Semiconductor common stock will be distributed to C-Cube Microsystems'
stockholders. See "Description of Capital Stock."
Before , C-Cube Microsystems will complete preliminary
internal restructuring transactions related to the Semiconductor business. On
, C-Cube Microsystems will effect the distribution by delivering
all of the Semiconductor common stock to , which will hold such
shares as custodian for the benefit of the C-Cube Microsystems stockholders of
record as of the record date pursuant to an irrevocable custody arrangement. On
or about , the distribution agent will deliver the shares to
Boston EquiServe, C-Cube Microsystems' transfer agent, which will then mail the
shares to the C-Cube Microsystems stockholders of record as of the record date.
No fractional shares will be issued as part of the distribution. The
distribution agent will aggregate undistributed fractional shares and sell such
shares at the earliest practicable date at the then-prevailing market price.
Each person who would be otherwise entitled to receive a fractional share will
instead receive a cash payment equal to such person's proportionate share of the
net proceeds of the sale of such aggregated shares. The receipt of cash instead
of fractional shares will be taxable. Please see "Material Federal Income Tax
Considerations -- Material Federal Income Tax Considerations of the Spin-Off --
Stockholder Tax Considerations."
C-Cube Microsystems' stockholders will not be required to pay any cash or
other consideration for the Semiconductor common stock received in the
distribution. The distribution of the Semiconductor common stock to C-Cube
Microsystems stockholders will, however, have certain tax and other
consequences, as discussed in this document.
The general terms and conditions of the distribution and the arrangements
between Semiconductor and C-Cube Microsystems are set forth in the Separation
and Distribution Agreement, the Tax Sharing Agreement, the Real Estate Matters
Agreement, the Employee Matters Agreement, the Indemnification and Insurance
Matters Agreement, the Master Confidential Disclosure Agreement and the
Transitional Services Agreement. For more information regarding these
agreements, please see "Arrangements between C-Cube Microsystems and
Semiconductor". C-Cube Microsystems will pay the costs and expenses incurred in
connection with the distribution.
15
<PAGE> 17
PRO FORMA CAPITALIZATION
The following table sets forth the capitalization and certain other balance
sheet data of Semiconductor as of September 30, 1999. This information should be
read in conjunction with the pro forma financial information included elsewhere
in this information statement.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------------------------------------
C-CUBE
MICROSYSTEMS, INC. PRO FORMA SEMICONDUCTOR,
HISTORICAL ADJUSTMENTS(1) PRO FORMA AS ADJUSTED
------------------------ -------------- ---------------------
<S> <C> <C> <C>
Cash equivalents and short-term
investments............................ $277,373 $(148,000) $ 129,373
======== ========= =========
Stockholders' Equity:
Preferred Stock........................ $ -- $ -- $ --
Common Stock........................... 270,932 254,500 524,932
Accumulated Other Comprehensive Loss... (1,992) 27 (1,965)
Retained Earnings (Deficit)............ 58,620 (480,003) (421,383)
-------- --------- ---------
Total Stockholders' Equity..... 327,560 (225,976) 101,584
-------- --------- ---------
Total Capitalization.............. $327,560 $(225,976) $ 101,584
======== ========= =========
</TABLE>
- ---------------
(1) Assumes valuation of Semiconductor of $975 million. If the valuation of
Semiconductor were $1.1 billion, cash equivalents and short-term investments
would be $44,373,000 and stockholders' equity would be $16,584,000. See
Unaudited Pro Forma Financial Statements beginning on page 49 for a
description of the pro forma adjustments reflected in the adjusted balances.
16
<PAGE> 18
REASONS FOR THE DISTRIBUTION
The Amended and Restated Agreement and Plan of Merger and Reorganization
with Harmonic contemplates the sale or distribution of the semiconductor
business immediately prior to and in connection with the merger. After thorough
consideration, the board of directors of C-Cube Microsystems determined that a
spin-off of the semiconductor business was in the stockholders' best interest.
The C-Cube Microsystems board of directors considered a number of factors in
determining to recommend approval of the spin-off of the semiconductor business
including:
- The necessity of spinning off Semiconductor in order to complete C-Cube
Microsystems' merger with Harmonic;
- The recent proposed valuation of Semiconductor;
- All purchase proposals relating to Semiconductor received by C-Cube
Microsystems; and
- Based on the current financial market conditions and the historical
market information concerning C-Cube Microsystems common stock, the
ability of Semiconductor to become a viable public company and create
substantial stockholder value by, among other things, allowing the
financial community to focus separately on the semiconductor business and
the DiviCom business.
After reviewing C-Cube Microsystems' goals and objectives and considering other
possible methods of enhancing the growth of Semiconductor, C-Cube Microsystems'
management and board of directors concluded that enhancing this business through
the formation of Semiconductor and the distribution would be in the best
interest of C-Cube Microsystems stockholders. C-Cube Microsystems' board of
directors approved the formation of Semiconductor and the distribution after
consultation with C-Cube Microsystems' management and its financial advisor
Credit Suisse First Boston, or CSFB, which has in the past been an advisor to
other companies effecting similar transactions.
In its capacity as financial advisor to C-Cube Microsystems,
representatives of CSFB held discussions with C-Cube Microsystems' management in
December 1999 regarding a potential sale or spin-off of C-Cube Microsystems'
semiconductor business. During the period from October through December 1999,
C-Cube Microsystems' management and its advisors participated in various
meetings and conference calls with respect to the transaction described herein.
At the board meeting on December 14, 1999, representatives of CSFB reviewed with
C-Cube Microsystems' board of directors various potential transactions,
including the transaction described in this information statement.
CSFB, as part of its investment banking business, engages in the valuation
of businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements, and valuations for estate, corporate and other purposes.
C-Cube Microsystems selected CSFB as its financial advisor because it is an
internationally recognized investment banking firm that has substantial
experience in transactions similar to the distribution.
Although CSFB participated in certain of the discussions regarding the
distribution, the terms of the distribution were determined solely by C-Cube
Microsystems' board of directors.
C-Cube Microsystems will account for the merger of the DiviCom business
into Harmonic and the spin-off of the semiconductor business as follows. C-Cube
Microsystems will account for the merger of the DiviCom business into Harmonic
as a sale of the DiviCom business to Harmonic and will record DiviCom as a
discontinued operation. The basis of all remaining assets, liabilities and
stockholder's equity will carryover into the new entity, Semiconductor. The
effect of this will be to account for Semiconductor as though it were a
continuation of C-Cube Microsystems following the sale of the DiviCom business
to Harmonic. Because the legal structure of the merger with Harmonic is a merger
of C-Cube Microsystems, which consists of only the DiviCom business after the
distribution of Semiconductor, with Harmonic, C-Cube Microsystems will cease to
be a registrant and Semiconductor will become a new registrant with the SEC. For
tax and legal purposes, C-Cube Microsystems will report the distribution of
Semiconductor Stock as a taxable event to C-Cube Microsystems (but not to its
stockholders). In connection with the distribution of the stock of
Semiconductor, C-Cube Microsystems will recognize taxable gain generally
17
<PAGE> 19
equal to the difference between the net tax basis of the semiconductor business
and the fair market of the shares of Semiconductor stock distributed.
Semiconductor to the custodian, C-Cube Microsystems will account for the fair
market value of the shares distributed as a distribution and will record as a
taxable gain, the difference between the tax basis of its Semiconductor assets,
reduced by liabilities assumed, and the fair market value of the shares of
Semiconductor common stock. The fair market value of the shares of Semiconductor
common stock will be based on the trading price at the date of distribution.
18
<PAGE> 20
BUSINESS
C-Cube Microsystems Inc. was established as a California corporation in
1988 and reincorporated in Delaware in 1994. In 1996, C-Cube Microsystems
acquired all of the capital stock of DiviCom Inc. After operating for three
years as a combined entity, C-Cube Microsystems Inc.'s semiconductor business is
being spun off to become C-Cube Semiconductor Inc., a Delaware corporation or
"Semiconductor". This spin-off will be contingent on the satisfaction of all
conditions precedent to C-Cube's merger with Harmonic. References herein to
Semiconductor refer to C-Cube Microsystems' semiconductor business before and
after the distribution of shares of C-Cube Semiconductor Inc., a Delaware
corporation.
Semiconductor designs, develops, has manufactured and sells semiconductors,
software and systems for digital video applications. As a major supplier of such
solutions, Semiconductor has played a significant role in enabling the growth of
digital video. Semiconductor is focused on working with its original equipment
manufacturer customers and service providers to enable key applications in its
consumer and communications target markets. In the consumer market, it is
focused on playback and recordable video compact disc or VideoCD and digital
video disc or DVD as well as digital VHS recorders and digital video recorders.
The communications market targets interactive set-top boxes, broadcast encoders
and other emerging appliances. Users of these products will be able to record
hours of DVD-quality video obtained from any video source, whether TV, VCR, DV
camcorder or analog camcorder. Once they have recorded the video, they will be
able to edit and play back the video on standard personal computers and store
the resulting video to DVD disc, web pages, e-mail, recordable compact disc or
personal computer hard-disk drives.
COMPRESSION ENABLES MASS-MARKET APPLICATIONS OF DIGITAL VIDEO
Since the 1930s, video images have been transmitted and stored almost
exclusively using analog formats. Digital video provides several fundamental
benefits over analog video. Unlike analog video, digital video can be
compressed, providing significant storage and transmission efficiencies, and can
be transmitted and reproduced without perceptible image degradation. In the
1980s, the benefits of digital formats led the U.S. consumer audio industry to
convert from analog long-playing records to digital CDs, resulting in tremendous
growth in the market for CD players and displacing the analog formats. In the
1990s, the evolution from analog to digital began transforming the way in which
video is produced, stored, transmitted and viewed.
Representing video in uncompressed digital form requires a large amount of
data, which in the past has made storage or transmission economically
impractical. To transmit a single uncompressed digital video program requires
multiple satellite transponders -- each costing as much as $2 million per year.
The sheer size of uncompressed digital video has relegated it to niche
applications of small volumes.
However, the very nature of video information lends itself to compression.
Any video sequence has inherent redundancies, for example, one frame of a movie
often differs very little from the next successive frame. Through digital
compression techniques, the redundancies in video data can be detected and
eliminated, significantly reducing the overall amount of data needed to recreate
the original image without affecting the image quality. Using video compression
techniques, a single satellite transponder can broadcast 8 to 12 programs
instead of the partial program possible with uncompressed video. Semiconductor
believes that the design and deployment of cost-effective and practical video
compression technology is critical to the development of mass-market
applications.
STANDARDS ENHANCE THE GROWTH OF DIGITAL VIDEO MARKETS
As digital video markets develop, so does the need for standards to ensure
that products from different manufacturers use the same formats for video
information. Throughout its history, Semiconductor has been an active
participant and respected technology pioneer on International Organization for
Standardization committees charged with creating standards for still image and
digital video compression.
Key standards that have driven the growth of digital video include the
joint photographic experts group standard for still-image compression and two
moving pictures experts group or MPEG standards for digital video and audio
compression. The MPEG-1 standard enabled the first digital video consumer
19
<PAGE> 21
products such as VideoCD, while the more recent MPEG-2 standard has become the
accepted compression format in diverse applications such as digital satellite,
cable and terrestrial TV as well as professional video editing, digital VHS and
DVD. The adoption and acceptance of these standards has contributed greatly to
the growth of digital video markets during the 1990s.
ENCODING ALGORITHMS DETERMINE VIDEO QUALITY
As vital as the International Organization for Standardization standards
have been to the development of digital video, they have a built-in limitation.
The standards determine interoperability, not video quality. More specifically,
the standards define the format for compressed video data. An MPEG-compliant
encoder (which is the compression device) will create data that an
MPEG-compliant decoder (which is the decompression device) can reconstruct into
a video image. But the process of encoding necessarily involves discarding some
of the image information to achieve compression. If the encoder is "smart," that
is, if it can correctly determine which information is redundant or
insignificant to the video quality, then the encoded video will be a faithful
representation of the original video and the decoder can create a high-quality
video image. But if the encoder makes poor choices and discards important video
information, then the decoder cannot compensate. The reconstructed image will be
poor in comparison to the original image. Encoder design, therefore, is a
critically important determining factor for video quality.
At the heart of encoder design is the development of encoding algorithms,
the mathematical rules that govern how the large volume of uncompressed video is
reduced to a manageable size without adversely affecting image quality. One of
Semiconductor's core strengths has been its expertise in the development,
testing and refinement of compression algorithms. These mathematical formulas
are proprietary and represent vital intellectual property of Semiconductor. By
incorporating these highly efficient and powerful algorithms into our products,
Semiconductor has consistently been recognized as the industry leader in digital
video encoding. As evidence of this leadership, Semiconductor products perform
the encoding for the majority of digital video television currently being
broadcast. Also, Semiconductor is one of a select group of technology companies
that have been recognized by The National Academy of Television Arts and
Sciences for technical achievement, as shown by their award of a special
technology Emmy(TM) to C-Cube Microsystems' semiconductor business in 1995.
Semiconductor differentiates its products from competitors by offering both
encoding and decoding solutions that are not only fully compliant with the
MPEG-1 and/or MPEG-2 international standards (and therefore interoperable with
equipment from many other suppliers), but at the same time provide superior
image quality (enhancing the viewing experience), are feature rich and are
highly integrated and therefore cost competitive. All Semiconductor products are
programmable, permitting the incorporation of sophisticated system-level
features after the chip design is completed, while lessening design time, risk
and system cost. Semiconductor also develops proprietary product extensions and
features such as RealSonic(TM) home theater sound enhancement and ClearView(TM)
error correction technology.
MARKET TRENDS
Semiconductor addresses two broad industries where digital video is used,
communications and consumer electronics. This section describes some of the
trends affecting these markets.
COMMUNICATIONS
Digital video compression is currently enabling a number of applications
and capabilities in the communications market in diverse segments such as
satellite, cable, telephone and wireless networks.
SATELLITE
The first full-scale digital video transmission systems to achieve full
deployment were a series of direct broadcast satellite networks. By combining
digital video compression technology with high-power Ku-band satellites, direct
broadcast satellite systems typically provide 100 or more channels to a large
geographical area
20
<PAGE> 22
(e.g. the continental U.S.). This expanded service usually imposes a relatively
low cost per subscriber since the only incremental investment needed by
subscribers is the purchase of a small dish and a decoder box.
To compete with other high-speed media, satellite service providers are
beginning direct broadcast satellite deployments using high-speed satellite data
transmission to the home. A disadvantage of this approach is that the return
channel uses a standard modem over telephone lines, thus limiting the
interactive nature of the service.
A major trend in this market during 1998 and 1999 was consolidation through
a number of mergers and acquisitions, for example, the merger of DIRECTV and
USSB operations and the merger of AT&T and TCI operations. At the same time, the
satellite market saw the first trials of high definition television or HDTV
broadcasting.
CABLE
Cable providers are upgrading the level of their services using a variety
of network approaches. Open standards, such as those developed by various
standard-setting organizations, are expected to drive increased cable revenue
opportunities by creating a competitive marketplace for system network equipment
and end-terminal devices.
With the advantage of being able to support high speed, two-way networks
combined with advanced interactive set-top boxes, the revenue base for cable
operators is expected to expand as it grows its client base at the same time as
growing its revenue per client through a broad offering of interactive services
including web browsing and electronic commerce.
Cable is also experiencing consolidation as smaller companies are unable to
make the transition to digital and also as telephony companies seek to get a
foothold in a competitive delivery mechanism into the home for both voice and
video.
CONSUMER ELECTRONICS
Through the use of MPEG compression, video can be stored, reproduced and
distributed on the same media currently in use for other types of digital data,
such as 5-inch (12 cm) CDs that are commonly used for digital audio. Emerging
applications for digital video capture, playback and distribution at the
consumer level are being advanced by the rapid adoption of new consumer-oriented
media formats such as VideoCD players, DVD players, digital VHS and recordable
DVD as well as consumer digital video cameras and camcorders.
DIGITAL VHS AND RECORDABLE DIGITAL VIDEO DISC
In 1999, several original equipment manufacturers demonstrated
consumer-oriented products positioned as VCR replacements. Semiconductor
believes that rapid growth in this market will occur only when single-chip
"codecs", which are an encoder/decoder combination, reach a price point low
enough to enable a recordable unit at prices that will support a mass market.
Once this milestone is achieved, however, the potential for wide consumer
acceptance of digital VCR replacements is expected to be high. 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
VCR recording function with other desirable consumer features such as easy
program recording, timeshifting of programs and DVD playback. Key advantages of
digital-VHS include the ability to record up to 24 hours of video on a single
tape, capability to record HDTV, and compatibility with VHS and Super-VHS, thus
preserving existing consumer video libraries stored in VHS format.
DVD PLAYER
Unlike the VideoCD standard, which is an adaptation of the audio CD, the
DVD standard was defined specifically for the very high-quality playback of
feature-length movies. The DVD format now commercially available provides up to
135 minutes of playing time (270 for double-sided) on a disc the
21
<PAGE> 23
same physical size as an audio CD with four times the image resolution of a
standard VideoCD. DVD uses MPEG-2 compression technology.
VIDEOCD PLAYER
A VideoCD player is essentially an audio CD player with an MPEG-1 decoder
and a video output. While adding this functionality marginally increases the
cost to manufacture a typical CD player, these machines now have the ability to
play movies, music videos and other titles from MPEG-1 encoded CDs. The physical
VideoCD disc format is identical to a standard audio CD and is limited to 72
minutes playing time with video quality that is generally perceived as
comparable to an analog VHS tape. Several thousand VideoCD titles are now
available, including movies, music videos and karaoke titles. The VideoCD format
has thus far received mass-market adoption in China. In 1998, leading Chinese
manufacturers and the Chinese government introduced an enhanced version of
VideoCD known as Chaoji VCD. This enhanced version features improved video
quality that is comparable to DVD video and backward compatibility with VideoCD
titles.
DESKTOP EDITING SYSTEMS
The capabilities of desktop editing systems continue to grow. Sophisticated
features such as the ability to allow a user to edit video and resequence it in
a new format, once the province of professional studios, are now coming to the
consumer and prosumer markets. An important enabling factor is the availability
of low-cost recordable CD drives, which provide a convenient 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.
PRODUCTS
Semiconductor supplies products for two main markets for digital video:
- Communications
- Consumer electronics
COMMUNICATIONS
In most digital video applications, the encoding and decoding functions are
separated. For example, in broadcasting, the video is encoded by one or a small
number of encoders at the transmission facility, while a decoder at the viewer's
home reconstructs the broadcast for viewing. Semiconductor has been, and
continues to be, a major supplier for both encoders and decoders for a full
spectrum of digital video applications. However, Semiconductor has long
recognized that combining the encoding and decoding functions into one
processor, called a codec, creates significant new market opportunities.
Semiconductor invested heavily in the development of a single-chip MPEG-2 codec
architecture and introduced DVxpert, the first product based on the new
architecture, in August 1997. Semiconductor introduced two more codecs in 1998:
DVxpress(TM) for professional and prosumer editing applications and DVxplore(TM)
for recordable digital video applications in PCs and consumer electronics. In
1999, Semiconductor extended the capabilities of the architecture with the
introduction of Semiconductor's high-definition digital video product; the
industry's first codec architecture for HDTV broadcasting and video production
applications.
Broadcast and Distribution Encoders
Encoders in the DVxpert family offer improved image quality, efficient
bandwidth utilization and reliability for broadcasting and professional
applications. The DVxpert broadcast encoders target applications such as
distribution, contribution, DVD authoring and video servers. All DVxpert
encoders use Semiconductor's patented PerfectView(TM) feature, which provides
clear image quality with advanced video capabilities.
One of the big issues broadcasters currently face is the migration to high
definition programming. The Federal Communications Commission has established a
target timeline for United States broadcasters to
22
<PAGE> 24
begin HDTV transmissions, but many infrastructure issues remain uncertain. In
1999, Semiconductor introduced its high-definition digital video product to
address these issues. This product is an MPEG-2 encoder for HDTV broadcast
applications, but also retains the capabilities of the standard definition
DVxpert products, enabling equipment manufacturers to deliver flexible high
definition/standard definition solutions and ease broadcaster's transition
issues.
Encoders for Editing Applications
Professional non-linear editing had been primarily the province of
motion-joint photographic experts group products due to the need for accurate
cuts and special effects. Because MPEG encoders essentially "collapse" some
frames to achieve high levels of compression, industry analysts doubted whether
MPEG could ever achieve the accuracy needed to supplant motion-joint
photographic experts group products for professional needs. However,
Semiconductor showed that MPEG is a viable format for editing with the
introduction of the DVxpress codecs. Based on the same architecture as the
DVxpert product, the DVxpress codecs feature Semiconductor's proprietary
Frame-Accurate MPEG Editing (FAME(TM)) algorithm and dual-stream decoding, two
capabilities for professional editing.
Semiconductor's DVxpress-MX codecs products can support both MPEG and DV,
which is a digital video format used primarily in digital camcorders, to allow
mixed-format editing where, 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 and storage. Panasonic, the
developer of the DV format, and Avid, a leading non-linear editing original
equipment manufacturers, both endorsed the DVxpress-MX codec as a significant
step toward unifying the MPEG and DV worlds. During 1999, many leading providers
of non-linear editing solutions introduced products based on DVxpress-MX,
including Matrox Electronic Systems, Pinnacle Systems, Accom and Fast
Multimedia.
Interactive Set-top Box Decoders
The primary communications application for MPEG-2 decoders is in the
set-top box market. To reconstruct the compressed broadcast program, several
steps are required. First, the MPEG-2 stream must be separated or demultiplexed
into its video and audio portions. Then the video and audio must be
decompressed. Finally, the video signal is combined with other on-screen
information, such as program guides and displayed on a monitor.
Semiconductor has introduced several innovative products in this arena,
starting with the introduction of the CL9100 MPEG-2 video decoder in 1994.
C-Cube Microsystems followed in 1995 by bringing to market the CL9110 Transport
Demultiplexer which was licensed from DiviCom, then a private company. Together,
this two-chip combination performed all the functions needed for digital video
decoding and was instrumental in enabling first-generation designs for digital
set-top boxes.
1996 saw the introduction of the AViA(TM) family of set-top box chips.
Building on the technology and market success of the CL9110 and CL9110 products,
the AViA platform offered high-performance graphics, better quality audio (Dolby
Digital(TM)), interoperability across both wired and wireless networks and a
tighter integration between the individual chips. By offering both high-end and
basic versions, the AViA family allowed original equipment manufacturers to
target their designs for the needs of each deployment in terms of capabilities
and price point.
Recognizing the trends toward the convergence of digital broadcast,
internet access, interactivity and advanced graphics, Semiconductor introduced
the AViA@TV(TM) platform in November 1998. Using AViA@TV products, service
providers can develop 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 Semiconductor's integrated
FlickerFilter(TM), which dramatically improves the visual quality of HTML or the
text language often used to create web sites displayed over video, an important
feature for interactive applications.
23
<PAGE> 25
An important endorsement came when Pace Micro Technology, a leading
European original equipment manufacturer, selected the AViA@TV architecture for
its new set-top box design. The Pace set-tops are incorporated in an interactive
service developed by NTL, the UK's largest Cable TV operator, which plans to
offer interactive data services such as web browsing, e-mail, chat,
pay-per-view, games and home shopping. Similarly, Philips, Europe's largest
consumer electronics company, has designed the product into their 2-way cable
set-top box for MediaOne; the largest cable operator in the United States.
In January of 1999, C-Cube Microsystems acquired the relevant
communications activities of the company formally known as TV/Com in order to
reinforce this successful strategic thrust into the arena of broadband
communications network products. One reason for the selection of TV/Com was that
its products have been successfully deployed in the same networks and set-top
boxes as Semiconductor's MPEG solutions. Through this purchase, Semiconductor
gained access to key people, intellectual property and designs including
modulation and demodulation technology. The combination of these capabilities
with the relevant designs and software from Semiconductor's AViA@TV product
family and expertise in analog design, gives Semiconductor all the necessary
components required to develop state-of-the-art, highly integrated solutions for
interactive digital TV.
With this capability, Semiconductor 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 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.
CONSUMER ELECTRONICS SEMICONDUCTORS
Recordable Digital Video
While DVD playback has achieved increasing success in both consumer players
and personal computer applications, Semiconductor 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. Thus, Semiconductor extended its
DVxpert technology to the consumer world with the DVxplore line of consumer
codecs. DVxplore codecs are the world's first single-chip consumer products to
support both MPEG and DV formats. The initial focus is on the personal computer
market, where original equipment manufacturers use DVxplore codecs to offer
personal content creation, PC/TV and time-shifting applications. Users of these
products are able to record hours of DVD-quality video obtained from any video
source, whether TV, VCR, DV camcorder or analog camcorder. Once they record the
video, they are able to edit and play back the video on standard personal
computers and store the resulting video to optical disc, web pages, e-mail or
hard-disk drives.
VCR replacement products began to appear on the market in 1999, and are
likely to continue to expand in the market over the next few years. For consumer
digital recorders, three types of media have emerged as viable platforms for
recording and playing back digital video: tape digital VHS, optical recordable
DVD and hard disk digital video recorder. Semiconductor is developing products
for all three emerging consumer digital recordable platforms.
DVD Decoders
Semiconductor's ZiVA(TM) 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. Semiconductor addresses a critical concern of
content owners with SecureView(TM) copy protection and decryption technology.
SecureView made ZiVA decoders the first single-chip products to support the DVD
consortium's copy protection scheme.
Semiconductor collaborated with partner Toshiba to develop the ZiVA-PC
decoder targeted specifically at the notebook market, the first DVD hardware
chip with full PC98 compliance. The ZiVA-PC decoder offers one of the industry's
lowest overall system cost for hardware DVD playback, as
24
<PAGE> 26
well as one of the lowest power consumption, while delivering true interactivity
and flawless image quality. In 1999, Semiconductor developed its
third-generation DVD decoder, the ZiVA-3 line, which extended the capabilities
of the ZiVA line in a number of key areas, most particularly the audio features.
Personal computer original equipment manufacturers including Toshiba, Dell and
Gateway adopted ZiVA decoders for DVD-enabled notebook.
VideoCD Decoders
VideoCD is a consumer entertainment format based on MPEG-1 technology.
VideoCD players allow consumers to enjoy movies, documentaries and karaoke
played from a disc similar to an audio compact disc. Semiconductor has been a
leading supplier of MPEG decoders used in VideoCD players throughout the mid-and
late-1990s. Semiconductor pioneered the MPEG-1 market with the introduction in
1992 of the CL450 MPEG-1 Video Decoder, the first commercially available MPEG-1
video decoder. The CL450 found uses in commercial and professional digital
karaoke players. It followed with the CL480 family of VideoCD decoders, products
that boosted Semiconductor to market leadership in the rapidly growing market
for VideoCD players in China in the mid-1990s.
Semiconductor's current VideoCD product is the CL680 Advanced VideoCD
Decoder. The CL680 decoder integrates an NTSC/PAL encoder, improved ClearView
error concealment technology and a new WideSound(TM) feature, which simulates a
surround-sound experience from two stereo channels. By fully utilizing the
microcode architecture of the CL680, Semiconductor was able to integrate the
system functions directly on the CL680, effectively eliminating the need for the
system micro-controller.
Chaoji VCD Decoders
As the VideoCD market matured in China, Chinese customers, original
equipment manufacturers and government agencies all saw a need for a higher
quality video experience. Due to its expertise in both VideoCD and DVD,
Semiconductor was well qualified to help define the new standard. The result of
this effort was the introduction of the Chaoji VCD standard, an extension to
VideoCD that was endorsed by the Chinese government and leading original
equipment manufacturers.
Soon after the adoption of the Chaoji VCD standard, Semiconductor
introduced the CL8800 family of Chaoji VCD decoders to its partner original
equipment manufacturers. The CL8830 decoder is a full-featured product that
features Semiconductor's patented RealSonic(TM) audio technology, offering
significant advances in audio quality for home theater and Karaoke applications.
The CL8820 decoder targets more price-sensitive products that do not demand the
same audio quality as the CL8830 decoder. Both decoders are compatible with
existing VideoCD and audio compact disc formats. In 1999, Semiconductor
introduced the most integrated Chaoji VCD decoder chip, the CL8830A. Leading
Chinese original equipment manufacturers have adopted the CL8800 decoders for
their Chaoji VCD product offerings. In 2000, we believe that the Chaoji VCD
market will continue to encroach on the VCD market as prices for Chaoji VCD
systems decline.
CONSUMER BRANDING PROGRAM
Semiconductor's consumer branding program, begun in 1996, saw continued
success throughout 1999. In 1999, Semiconductor's brand recognition reached an
all-time high in the Chinese market. Its Chinese customers continue to use its
brand as well as its technology as they combine for strong market recognition
and preference. The brand represents quality, reliability and high technology.
The success of Semiconductor's consumer branding program remains predicated on
offering first-to-market technology, superior feature sets and video playback
quality and a roadmap to higher quality, feature-rich digital video products.
CHANGING PRODUCT MIX: DEPENDENCE ON DECODER PRODUCTS
Semiconductor offers a number of products for a variety of applications.
Since the second quarter of 1995, sales of Semiconductor's VCD decoder family of
products have represented a significant percentage
25
<PAGE> 27
of Semiconductor's total net revenues. Semiconductor expects that revenues from
its VCD decoder products including the CL680 and Chaoji VCD families of products
will decrease as a percentage of total revenues, but continue to account for a
significant portion of its product revenues in 2000. Semiconductor expects that
price competition will continue to result in declining average selling prices
for this family of products. Semiconductor has implemented several programs that
have reduced costs associated with these families of products. In the event that
increases in unit sales and other manufacturing efficiencies of these families
of products do not offset decreasing sales prices in the future, Semiconductor's
business and results of operations would be materially and adversely affected.
Semiconductor anticipates that overall gross margin may decrease as a result of
a number of factors including anticipated declines in average selling prices
over time. The timing of volume shipments and the life cycles of Semiconductor's
products are difficult to predict due in large measure to the emerging nature of
the markets for Semiconductor's products, the future effect of product
enhancements by Semiconductor and its current and future competitors. Declines
in demand for Semiconductor's products, particularly the CL680 and Chaoji VCD
families of products, whether as a result of competition, technological change
or otherwise, would have a material adverse effect on Semiconductor's business
and results of operations.
CUSTOMERS
During the nine months ended September 30, 1999, no customer accounted for
10% or more of Semiconductor's net revenue. During 1998, only Malata accounted
for 11% or more of Semiconductor's net revenue. Sales to Sinorex, a distributor,
accounted for 31% and 14% of Semiconductor's net revenues during 1997 and 1996,
respectively. Sales to Samsung accounted for 10% of Semiconductor's net revenue
during 1996.
On February 11, 2000, Semiconductor entered into a Securities Purchase
Agreement with Thomson Multimedia S.A. pursuant to which Thomson agreed, subject
to completion of the distribution and the other conditions set forth in the
agreement, to purchase 474,747 shares of Semiconductor common stock and to
receive a warrant to purchase an additional 949,494 shares of Semiconductor
common stock. See "Recent Sales of Unregistered Securities" for further
information. The exercisability of the warrant will be accelerated in whole or
in part from the seven year anniversary of the distribution based upon Thomson
achieving certain revenue and design win milestones.
RESEARCH AND DEVELOPMENT
Semiconductor believes that the continued introduction of new products in
its target markets is essential to its growth. As of September 30, 1999,
Semiconductor had 286 full-time employees engaged in research and development.
Expenditures for research and development in 1998, 1997 and 1996 were
approximately $52.6 million, $46.5 million and $36.8 million, respectively and
$39.8 million for the nine months ended September 30, 1999.
The markets for Semiconductor's products are characterized by rapidly
changing technology and evolving industry standards. In addition, markets for
Semiconductor's products are characterized by intense price competition. As the
markets for Semiconductor's products develop and competition increases,
Semiconductor 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 Semiconductor's products will decline as such
products mature and as per order unit volumes for such products increase.
Semiconductor'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, Semiconductor currently
intends to announce several new products over the next year, including next
generation MPEG-2 encoders and 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 have a material adverse effect on
Semiconductor's business and results of operations. In addition, Semiconductor
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 Semiconductor's business and results of operations. The success of new
product introductions is dependent on several factors,
26
<PAGE> 28
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 Semiconductor's competitors and market acceptance of
Semiconductor's and its customers' products. As a result, Semiconductor believes
that continued significant expenditures for research and development will be
required in the future. Because of the complexity of its products, Semiconductor
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 Semiconductor 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 Semiconductor's products or technologies obsolete or
noncompetitive, or that Semiconductor's products will be selected for design
into the products of its targeted customers.
SALES AND MARKETING
Semiconductor'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, Semiconductor has established a direct
sales and marketing force and a worldwide network of independent sales
representatives and distributors. In addition, Semiconductor has a team of
application engineers who assist customers with designing in Semiconductor's
products.
In the United States, Semiconductor sells its products through direct sales
channels, independent representatives and distributors. Semiconductor records
revenues from products sales to customers at the time of shipment. Certain of
Semiconductor'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, Semiconductor pays its independent sales
representatives on a commission basis. As of September 30, 1999, Semiconductor
had North American regional sales offices in California and Quebec, and
international sales offices in Hong Kong, the United Kingdom, Korea, China,
Taiwan and Japan. In Japan, Semiconductor sells products through the direct
sales force of C-Cube Microsystems Japan, Inc. and two distributors. C-Cube
Microsystems Japan, Inc. was formed by Semiconductor and Kubota Corporation in
1988 and is currently owned 65% by Semiconductor and 35% by Kubota. The primary
business of C-Cube Microsystems Japan, Inc. is the marketing, sales and support
of Semiconductor's products in Japan. Internationally, Semiconductor has
commissioned sales representatives or distributors in Canada, Denmark, Finland,
France, Germany, Great Britain, Hong Kong, Ireland, India, Israel, Italy, Korea,
Sweden and Taiwan.
INTERNATIONAL BUSINESS ACTIVITIES
During 1998, 1997 and 1996, international revenues accounted for
approximately 82%, 88% and 77% of Semiconductor's net revenues, respectively,
and 80% of net revenues in the first nine months of 1999. Semiconductor believes
that international revenues will continue to account for a significant portion
of net revenues. Semiconductor's success will depend in part upon its ability to
manage international marketing and sales operations. In addition, Semiconductor
purchases a substantial portion of its manufacturing services from foreign
suppliers. Semiconductor'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 Semiconductor's
decoder products. As a consequence, any political or economic instability in
China could significantly reduce demand for Semiconductor's products.
Semiconductor has made and will continue to make significant investments 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. Semiconductor 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,
27
<PAGE> 29
Semiconductor sells certain of its products in international markets and buys
certain products from its foundries in currencies other than the U.S. dollar. As
a result, currency fluctuations could, in the long term, have a material adverse
effect on Semiconductor's business and results of operations. With respect to
international sales that are denominated in U.S. dollars, increases in the value
of the U.S. dollar relative to foreign currencies can increase the effective
price of, and reduce demand for, Semiconductor'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
Semiconductor's current and prospective customers and suppliers are located in
Japan and China, trade sanctions, if imposed, could have a material adverse
effect on Semiconductor'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 Semiconductor's ability to manufacture
or sell its products in foreign markets.
The Asian consumer electronics markets accounted for approximately 74%, 80%
and 72% of total sales in 1998, 1997 and 1996, respectively, and 67% in the
first nine months of 1999 Asia sales are expected to continue to account for a
substantial, though declining, percentage of sales in the future. Most of
Semiconductor's sales in Asia were of decoder chips, which are used in VideoCD
and Chaoji VCD players. Semiconductor believes purchases of VideoCD and Chaoji
VCD players are not as likely to be deferred as are purchases of higher priced
consumer durables and production equipment, which have impacted U.S. export
sales. However, there can be no assurance that Semiconductor 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 Semiconductor generally requires prior to shipment.
MANUFACTURING
Semiconductor has chosen to use independent chip manufacturing facilities
called foundries to fabricate its integrated circuits. Assembly, test and
packaging are also subcontracted to third parties. This approach enables
Semiconductor to concentrate its resources on product design and development,
where Semiconductor believes it has greater competitive advantages.
Semiconductor continually evaluates alternative sources for chip manufacturing,
assembly and test capacity.
During 1998, Semiconductor's devices were fabricated using advanced process
technology with 0.65 micron, 0.5 micron, 0.35 micron, 0.30 micron and 0.25
micron process feature sizes, using either three or four layers of metal
interconnect. In 1999, Semiconductor began using 0.22 micron technology with
five layers of metal interconnect. Fabricated chips are either tested by the
fabrication facility to Semiconductor specifications or Semiconductor takes
receipt of untested chips and works with subcontractor testing facilities. Once
the chips are fully tested and accepted, the dice are assembled into packages by
subcontractors, primarily located in Asia. Semiconductor utilizes multiple
assembly subcontractors for its products.
In the second quarter of 1996, Semiconductor expanded and formalized its
relationship with Taiwan Semiconductor Manufacturing Co., Ltd. to provide chip
production capacity in the years 1996 to 2001. The agreement with Taiwan
Semiconductor Manufacturing Co., Ltd. provided that Taiwan Semiconductor
Manufacturing Co., Ltd. would produce and ship chips to Semiconductor at
specified prices and required Semiconductor to make two advance payments
totaling $49.0 million. An advance payment of $24.5 million was made in June
1996. In May 1997, Semiconductor amended its agreement with Taiwan Semiconductor
Manufacturing Co., Ltd. which resulted in a reduction of Semiconductor's future
chip purchase commitments and the forgiveness of the second advance payment of
$24.5 million. Taiwan Semiconductor Manufacturing Co., Ltd. will apply the June
1996 prepayment against a portion of the chip cost as product is delivered to
Semiconductor. Accordingly, the prepaid amount, which has been allocated between
current and long-term assets, will be amortized to inventory as chips are
received. At September 30, 1999, remaining production capacity rights were $6.4
million dollars of which $1.2 million was included in other current assets and
$5.2 million was classified as a non-current asset.
28
<PAGE> 30
During the fourth quarter of 1999, Semiconductor signed a production
capacity agreement with United Microelectronics Corporation to provide
Semiconductor with chip manufacturing capacity through at least 2002, for which
it made a $20.0 million refundable payment in the first quarter of 2000. This
refundable payment allows for certain discounts on purchased capacity based upon
the quantities purchased. The agreement does not commit Semiconductor to
purchase chips, but does guarantee the availability of a set capacity of chips
at "not to exceed" prices.
Semiconductor 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. Semiconductor'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, Semiconductor 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 Semiconductor to purchase specified quantities of
chips over extended periods, joint ventures or other partnership relationships
with foundries. There can be no assurance that Semiconductor will be able to
make any such arrangement in a timely fashion, or at all, that Semiconductor
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 Semiconductor on acceptable terms, or at all. If Semiconductor were not able
on a timely basis to obtain additional manufacturing capacity, its business and
results of operations would be materially and adversely affected.
Semiconductor sources its integrated circuit products from Matsushita
Electronics Corporation, United Microelectronics Corporation, Taiwan
Semiconductor Manufacturing Co., Ltd. and Yamaha. This dependence on a small
number of foundries subjects Semiconductor to risks associated with an
interruption in supply from these foundries. In connection with the manufacture
of its newer products, Semiconductor needs to continue to evaluate and qualify
additional 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 Semiconductor intends to introduce
require advanced process technology. Semiconductor 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 Semiconductor's business and results of operations.
Semiconductor'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 Semiconductor
intellectual property. Semiconductor obtains manufacturing capacity through
forecasts that are generated in advance of expected delivery dates.
Semiconductor'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 Semiconductor fails to accurately forecast such
future demand, Semiconductor 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 Semiconductor will continue to
accurately forecast the future demand for its products and obtain sufficient
manufacturing capacity in the future.
Semiconductor 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 chip fabrication or assembly problems
will not occur in the future or that any such disruptions will not have a
material adverse effect upon Semiconductor's results of operations. Further,
there can be no assurance that suppliers who have committed to provide product
will do so, or that Semiconductor 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 Semiconductor's customers, which would have a
material adverse effect on Semiconductor's business and results of operations.
In addition, Semiconductor'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 Semiconductor is required, as a result of capacity
constraints in the semiconductor industry or
29
<PAGE> 31
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 Semiconductor sells its products are subject to
extreme price competition. Thus, Semiconductor 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, Semiconductor 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 Semiconductor 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
failure of Semiconductor 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 Semiconductor's gross margins.
COMPETITION
The markets in which Semiconductor competes are intensely competitive and
are characterized by declining average selling prices and rapid technology
change. Semiconductor believes that it competes favorably in the areas of
product definition, system cost, functionality, time-to-market, reliability and
reputation. Semiconductor competes with major domestic and international
companies, most of which have substantially greater financial and other
resources than Semiconductor with which to pursue engineering, manufacturing,
marketing and distribution of their products. Some of these companies own
proprietary video compression technology competitive with Semiconductor's
standards-based systems.
In the market for consumer electronics semiconductors, principal
competitors include ESS Technology, ST-Microelectronics 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 computer segment of the consumer electronics
market, principal Semiconductor competitors include the increasingly powerful
general-purpose 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 and Trident are also potential
competitors. In the market for communications decoders, Semiconductor's
principal competitors include ST-Microelectronics and Philips.
IBM is the principal competitor in the broadcast encoder market, while Sony
is the principal competitor in the consumer encoder market. Semiconductor
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 Semiconductor's
encoder product revenues and margins. Semiconductor may also face increased
competition in the future from new entrants into its markets. As the markets for
Semiconductor's products develop, competition from large semiconductor
companies, such as ST-Microelectronics and Philips, and from vertically
integrated companies such as Sony, MEC, Toshiba and NEC, may increase
significantly. If Semiconductor can offer low-cost hardware solutions, then it
may continue to compete with manufacturers of general-purpose microprocessors
such as Intel, AMD and Motorola in conjunction with software solutions. The
ability of Semiconductor 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 Semiconductor products by effective
utilization of intellectual property laws, product quality, reliability, price
and the efficiency of production, the pace at which customers incorporate
Semiconductor's integrated circuits into their products or technologies, success
of competitors' products and general economic conditions. There can be no
assurance that Semiconductor will be able to compete successfully in the future.
30
<PAGE> 32
A variety of other hardware and software solutions to digital video
compression have been introduced. Competitor companies are designing products
around these and other alternative approaches. In addition, manufacturers of
general-purpose microprocessors, such as Intel, AMD and Motorola and graphics
chip manufacturers 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, Semiconductor's business and results
of operations would be materially and adversely affected.
INTELLECTUAL PROPERTY AND LICENSES
Semiconductor attempts to protect its technology through a combination of
patents, copyrights, trade secret laws, confidentiality procedures and licensing
arrangements. As of September 30, 1999, Semiconductor had 59 issued United
States patents and 43 U.S. patent applications pending and has filed certain
corresponding applications in certain foreign jurisdictions. These patents
expire at various times from 2010 to 2016. Semiconductor intends to continue to
seek patents on its technology where appropriate. Notwithstanding its patent
position, Semiconductor 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 Semiconductor'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 Semiconductor's technology. While Semiconductor
intends to protect its intellectual property rights vigorously, there can be no
assurance that any patents held by Semiconductor will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
competitive advantages to Semiconductor. Moreover, while Semiconductor holds or
has applied for patents relating to the design of its products, Semiconductor's
products are based in part on standards, including MPEG-1, MPEG-2 and joint
photographic experts group, and Semiconductor 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.
From time-to-time Semiconductor receives notices of potential infringement
of third-party rights and there can be no assurance that third parties will not
assert claims against Semiconductor 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 Semiconductor and divert the efforts of Semiconductor's technical and
management personnel, whether or not such litigation is determined in favor of
Semiconductor. In the event of an adverse result in any such litigation,
Semiconductor could be required to pay substantial amounts in damages and to
cease selling the infringing product unless and until Semiconductor 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 Semiconductor
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.
In order to defray the cost of developing its products and to develop
products with specifications meeting customer requirements, Semiconductor has
established development relationships with certain companies. Under these
arrangements, these companies provided Semiconductor with development funding
and/or technical assistance, and participated with Semiconductor in determining
the specifications for the performance requirements of various products. As a
result of these relationships, Semiconductor 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, Semiconductor has agreed to pay royalties to such
customers and generally Semiconductor retains ownership of such products.
31
<PAGE> 33
EMPLOYEES
As of September 30, 1999, Semiconductor had approximately 603 employees,
286 of whom are engaged in, or directly support, Semiconductor's research and
development, 189 of whom are in sales and marketing, 36 of whom are in
operations and 92 of whom are in administration. Semiconductor's employees are
not represented by any collective bargaining agreement, and Semiconductor has
never experienced a work stoppage. Semiconductor believes its employee relations
are good.
Semiconductor'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
Semiconductor's business. Semiconductor is currently seeking certain additional
engineering, marketing and management personnel. Semiconductor's success in the
future will depend in part on the successful assimilation of such new personnel.
Semiconductor also obtains assistance from customers whose engineers participate
in development programs at Semiconductor. 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 Semiconductor.
MERGERS AND ACQUISITIONS
On August 28, 1996, C-Cube Microsystems acquired the DiviCom business.
C-Cube Microsystems paid $65.7 million in cash, issued 2.3 million shares of its
common stock, assumed options exercisable for 264,000 shares of its common stock
and incurred $1.35 million in other costs in exchange for the outstanding shares
of DiviCom stock that C-Cube Microsystems did not already own.
C-Cube Microsystems has entered into an agreement to merge with Harmonic
Inc. after the distribution. The effect of the proposed merger is the
acquisition of C-Cube Microsystems' DiviCom systems business by Harmonic.
PROPERTIES
Semiconductor's principal facilities consist of approximately 182,300
square feet of space in three buildings located in Milpitas, California. This
space is leased pursuant to three agreements that expire on various dates
through April 14, 2005. Semiconductor believes its existing facilities and other
available facilities will be adequate to meet its requirements for at least the
next 12 months.
LEGAL PROCEEDINGS
From time-to-time Semiconductor 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
Semiconductor's financial position or results of operations.
32
<PAGE> 34
WHERE YOU CAN FIND MORE INFORMATION
As a result of the distribution, the Securities Exchange Act of 1934,
requires Semiconductor to file annual, quarterly and other reports with the
Securities and Exchange Commission. Semiconductor intends to provide annual
reports containing audited financial statements to its stockholders in
connection with its annual meetings of stockholders.
Semiconductor filed with the Securities and Exchange Commission a
registration statement, which includes certain exhibits, under the Exchange Act,
for the securities issued pursuant to this information statement. This
information statement contains general information about the contents of
contracts and other documents filed as exhibits to the registration statement.
However, this information statement does not contain all of the information set
forth in the registration statement and the exhibits filed with the registration
statement. You should read the registration statement and the exhibits for
further information about Semiconductor and the distribution.
The SEC allows Semiconductor to "incorporate by reference" information into
this joint proxy statement/prospectus/information statement, which means that
important information may be disclosed to you by referring you to another
document filed separately with the SEC. The information of Semiconductor
incorporated by reference is deemed to be part of this joint proxy
statement/prospectus/information statement, except for information superseded by
information in, or incorporated by reference in, this joint proxy
statement/prospectus/information statement. This joint proxy
statement/prospectus/information statement incorporates by reference the
documents set forth below that have been previously filed with the SEC. The
following documents contain important information about Semiconductor and its
financial condition and operating results and are hereby incorporated by
reference:
- C-Cube Microsystems' Annual Report on Form 10-K for the year ended
December 31, 1998;
- C-Cube Microsystems' Quarterly Report on Form 10-Q for the Quarter Ended
March 31, 1999;
- C-Cube Microsystems' Annual Report Pursuant to Section 15(d) of the
Securities Exchange Act of 1934, as amended, filed on Form 11-K with the
SEC on July 14, 1999;
- C-Cube Microsystems' Quarterly Report on Form 10-Q for the Quarter Ended
June 30, 1999;
- C-Cube Microsystems' Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 1999; and
- C-Cube Microsystems's Current Report on Form 8-K dated October 29, 1999.
Semiconductor has supplied all information contained or incorporated by
reference in this joint proxy statement/prospectus/information statement
relating to Semiconductor.
If you would like to request documents from either company, please do so by
, to receive them before the special meeting.
You should rely only on the information in this document or to which we
have referred you. We have not authorized anyone to provide you with information
that is different. If you are in a jurisdiction where offers to exchange or
sell, or solicitations of offers to exchange or purchase, the securities offered
by this document or the solicitation of proxies is unlawful, or if you are a
person to whom it is unlawful to direct these types of activities, then the
offer presented in this document does not extend to you. The information
contained in this document speaks only as of the date of this document unless
the information specifically indicates that another date applies.
You may read and copy the registration statement and other materials that
Semiconductor files with the Securities and Exchange Commission at the Public
Reference Room of the Securities and Exchange Commission, 450 Fifth Street,
Washington, D.C. 20549 and at the Securities and Exchange Commission's regional
offices at 7 World Trade Center, Suite 1300, New York, New York 10048 and at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies
of these documents, upon payment of a duplication fee, by writing to the
Securities and Exchange Commission's Public Reference Section. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the operation of the Public Reference Rooms. The Securities and Exchange
Commission filings of Semiconductor are also available to the public on the
Securities and Exchange Commission Internet site (http://www.sec.gov).
33
<PAGE> 35
SELECTED FINANCIAL DATA
The following selected consolidated financial data for each of the five
years in the period ended December 31, 1998 have been derived from the audited
consolidated financial statements of the Company included herein. The
consolidated statements of income for the nine month periods ended September 30,
1999 and 1998 and consolidated balance sheet at September 30, 1999 are derived
from the unaudited consolidated financial statements included herein. The
selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this report.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- -------------------
1998 1997 1996 1995 1994 1999 1998
-------- -------- -------- -------- ------- -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Product.............................................. $351,797 $337,012 $319,758 $123,190 $42,026 $291,922 $255,997
Development contracts................................ -- -- -- 1,412 2,993 -- --
-------- -------- -------- -------- ------- -------- --------
Total.............................................. 351,797 337,012 319,758 124,602 45,019 291,922 255,997
-------- -------- -------- -------- ------- -------- --------
Costs and expenses:
Cost of product revenues............................. 160,839 151,333 144,985 59,253 19,574 130,947 116,768
Research and development............................. 74,031 64,204 44,177 14,342 9,774 61,659 55,134
Selling, general and administrative.................. 60,512 52,732 39,002 19,227 11,283 50,677 43,756
Purchased in-process technology...................... -- -- 131,349 3,800 -- -- --
-------- -------- -------- -------- ------- -------- --------
Total.............................................. 295,382 268,269 359,513 96,622 40,631 243,283 215,658
-------- -------- -------- -------- ------- -------- --------
Income (loss) from operations......................... 56,415 68,743 (39,755) 27,980 4,388 48,639 40,339
Interest income (expense), net........................ 4,239 (1,757) (28) 2,059 689 7,084 2,547
-------- -------- -------- -------- ------- -------- --------
Income (loss) before income taxes, minority Interest
and extraordinary item............................... 60,654 66,986 (39,783) 30,039 5,077 55,723 42,886
Income tax expense.................................... 18,196 22,895 32,944 4,933 69 16,717 12,869
-------- -------- -------- -------- ------- -------- --------
Income (loss)before minority interest and
Extraordinary item................................... 42,458 44,091 (72,727) 25,106 5,008 39,006 30,017
Minority interest in net income (loss) of
subsidiary........................................... (337) (248) 318 211 -- 381 (354)
-------- -------- -------- -------- ------- -------- --------
Income (loss) before extraordinary item............... 42,795 44,339 (73,045) 24,895 5,008 38,625 30,371
Extraordinary gain on repurchase of convertible notes
(net of tax)......................................... 3,494 -- -- -- -- 33 3,494
-------- -------- -------- -------- ------- -------- --------
Net income (loss)..................................... $ 46,289 $ 44,339 $(73,045) $ 24,895 $ 5,008 $ 38,658 $ 33,865
======== ======== ======== ======== ======= ======== ========
Basic earnings (loss)per share:(1)
Income (loss) before extraordinary item.............. $ 1.14 $ 1.21 $ (2.15) $ 0.78 $ 0.18 $ 0.98 $ 0.82
Extraordinary item (net of tax)...................... 0.09 -- -- -- -- -- 0.09
-------- -------- -------- -------- ------- -------- --------
Net income (loss).................................... $ 1.24 $ 1.21 $ (2.15) $ 0.78 $ 0.18 $ 0.98 $ 0.91
======== ======== ======== ======== ======= ======== ========
Diluted earnings (loss) per share:(1)
Income (loss) before extraordinary item.............. $ 1.11 $ 1.15 $ (2.15) $ 0.74 $ 0.16 $ 0.91 $ 0.79
Extraordinary item (net of tax)...................... 0.09 -- -- -- -- -- 0.09
-------- -------- -------- -------- ------- -------- --------
Net income (loss).................................... $ 1.19 $ 1.15 $ (2.15) $ 0.74 $ 0.16 $ 0.91 $ 0.88
======== ======== ======== ======== ======= ======== ========
Shares:(1)
Basic................................................ 37,382 36,497 33,928 31,819 28,248 39,368 37,215
======== ======== ======== ======== ======= ======== ========
Diluted.............................................. 40,754 41,683 33,928 35,000 31,433 43,224 40,769
======== ======== ======== ======== ======= ======== ========
PRODUCT GROSS MARGIN DATA:
Net product revenues................................. $351,797 $337,012 $319,758 $123,190 $42,026 $291,922 $255,997
Cost of product revenues............................. 160,839 151,333 144,985 59,253 19,574 130,947 116,768
-------- -------- -------- -------- ------- -------- --------
Product gross margin................................. $190,958 $185,679 $174,573 $ 63,937 $22,452 $160,975 $139,229
======== ======== ======== ======== ======= ======== ========
Product gross margin percentage...................... 54.3% 55.1% 54.6% 51.9% 53.4% 55.1% 54.4%
======== ======== ======== ======== ======= ======== ========
BALANCE SHEET DATA:
Cash and short-term investments...................... $207,827 $166,350 $ 82,246 $144,089 $43,833 $277,373
Working capital...................................... 220,466 208,391 124,487 158,577 48,751 303,811
Total assets......................................... 343,171 304,108 279,515 203,526 67,862 424,967
Short-term debt and current portion of long-term
obligations........................................ 355 608 25,337 3,093 6,908 368
Long-term obligations, net of current portion........ 23,557 87,462 87,700 88,010 2,081 20,150
Stockholders' equity................................. 243,375 175,415 118,572 87,535 53,488 327,560
</TABLE>
- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the computation of net income (loss) per share.
34
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW AND BASIS OF PRESENTATION
While the legal structure of the transaction pursuant to which this
information statement is being filed is an internal restructuring and spin-off
of the semiconductor business and a merger of C-Cube Microsystems, which as
restructured, will consist of the DiviCom business, into Harmonic, for
accounting purposes the merger is being treated as a distribution of DiviCom's
net investment and Semiconductor is being treated as the continuing accounting
entity. This is primarily due to the fact that (i) the historical assets,
revenue, profits and employees of C-Cube Semiconductor, Inc. have been greater
than those of DiviCom, (ii) the corporate management of C-Cube Microsystems will
remain employees of Semiconductor, and (iii) the C-Cube Microsystems
stockholders will receive common stock representing approximately 44% ownership
interest in Harmonic in the merger. Accordingly, the historical financial
information required by the Form 10 is substantially identical to the historical
financial information presented in C-Cube Microsystems' Forms 10-K and 10-Q and
the Management's Discussion and Analysis as presented below is substantially
identical to that in C-Cube Microsystems' Form 10-Q filed for the quarter ended
September 30, 1999 and 10-K filed for the fiscal year ended December 31, 1998
which reflect the historical consolidated operations of Semiconductor and the
DiviCom business.
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E if the Securities
Exchange of 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 below, those described elsewhere in this report and those described in
other reports filed pursuant to the Securities Exchange Act of 1934. Such
forward-looking statements include, but are not limited to those statements
marked with an (*) in this report.
QUARTER ENDED SEPTEMBER 30, 1999
The following table sets forth certain operating data as a percentage of
net revenues for the quarters ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
QUARTER ENDED
SEPTEMBER 30,
--------------
1999 1998
----- -----
<S> <C> <C>
Net revenues................................................ 100.0% 100.0%
Costs and expenses:
Cost of revenues.......................................... 44.6 45.0
Research and development.................................. 20.8 21.9
Selling, general and administrative....................... 17.2 17.6
----- -----
Total............................................. 82.6 84.5
----- -----
Income from operations...................................... 17.4 15.5
Other income, net........................................... 2.6 1.9
----- -----
Income before income taxes, minority interest and
extraordinary item........................................ 20.0 17.4
Income tax expense.......................................... 6.0 5.2
----- -----
Income before minority interest and extraordinary item...... 14.0 12.2
Minority interest in net income of subsidiary............... 0.1 (0.2)
----- -----
Income before extraordinary item............................ 13.8 12.4
Extraordinary gain (net of tax)............................. -- 2.7
----- -----
Net income.................................................. 13.8% 15.1%
===== =====
</TABLE>
35
<PAGE> 37
Merger
On October 27, 1999, C-Cube Microsystems entered into an Agreement and Plan
of Merger and Reorganization with Harmonic Inc., a Delaware corporation
("Harmonic"), pursuant to which, subsequent to the sale or spin-off of C-Cube
Microsystems' semiconductor business, C-Cube Microsystems 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 Microsystems outstanding immediately prior to the consummation of the
Merger. The merger is subject to the approval of the stockholders of each
company, customary closing conditions, including applicable regulatory
clearances, and the spin-off or sale of the semiconductor business. The closing
is anticipated to take place during Q1 2000.* C-Cube Microsystems expects to
incur additional costs during the fourth quarter of 1999 and the first quarter
of 2000 for legal, accounting and other costs related to the Merger.* Readers
are referenced to C-Cube Microsystems' Form 8-K filed with the SEC on October
29, 1999 for more information.
Net Revenues
Net revenues in the third quarter of 1999 were $101.4 million, an increase
of 17.6% over the $86.2 million reported in the corresponding quarter a year
ago. This increase was led by growth in sales of DiviCom's encoder products,
primarily attributable to existing customer upgrades to next generation
products, contract wins in the cable and satellite markets, and higher selling
prices on next generation products due to design improvements and feature and
quality enhancements. The growth in revenues was also attributable to increased
Semiconductor revenues, primarily from increased volumes of DVD decoder chips
used in consumer applications and from increased volumes of codecs for nonlinear
editing and video server applications. These increases were partially offset by
decreases in revenues of VideoCD and Chaoji VCD decoder chips primarily due to
declines in average selling prices.
DiviCom revenues accounted for 48% of consolidated net revenues for the
third quarter of 1999, compared to 44% for the third quarter of 1998. DiviCom
integrates solutions for customers which involve its own and third party
products, with the integrations usually occurring over a number of months.
Difficulty in completing the stages of these integrations on the expected
schedule can adversely affect the timing of revenue recognition.
International revenues accounted for 58% of net revenues for the third
quarter of 1999, compared to 56% for the third quarter of 1998. C-Cube
Microsystems expects that international revenues will continue to represent a
significant portion of net revenues.* C-Cube Microsystems' success will depend
in part upon its ability to manage international marketing and sales operations.
In addition, C-Cube Microsystems purchases a substantial portion of its
manufacturing services from foreign suppliers. The earthquake in Taiwan during
the third quarter of 1999 caused minimal chip damage at C-Cube Microsystems'
manufacturing facilities, but resulted in temporary production delays at such
facilities. As a result, chip production capacity during the fourth quarter of
1999 is anticipated to be constrained; however, C-Cube Microsystems is working
with its existing partner, Taiwan Semiconductor Manufacturing Co., Ltd., with
whom C-Cube Microsystems has a capacity agreement, to assure supply of product
for the next several years.* In addition, C-Cube Microsystems has expanded its
source of supplies by signing a production capacity agreement for a term of up
to three years, with another foundry, United Microelectronics Corporation,
during the fourth quarter of 1999.*
C-Cube Microsystems' international manufacturing and sales are subject to
changes in foreign political and economic conditions and to other risks
including currency or export/import controls, changes in tax laws, tariffs and
freight rates and changes in the ownership and/or leadership of international
customers that may result in delayed or canceled orders. For example, China
continues to be a large market for VideoCD and Chaoji VCD players utilizing
C-Cube Microsystems' decoder products. As a consequence, any political or
economic instability in China could significantly reduce demand for those
products. C-Cube Microsystems has made investments in chip manufacturing
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. C-Cube Microsystems sells products to
customers in Korea and is subject to the risk of economic and political
instability in Korea, including the potential for
36
<PAGE> 38
conflict between North and South Korea. In addition, C-Cube Microsystems sells
certain of its products in international markets and buys certain products from
its chip manufacturing facilities in currencies other than the U.S. dollar and,
as a result, currency fluctuations could have a material adverse effect on
C-Cube Microsystems' business and results of operations. C-Cube Microsystems
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 C-Cube Microsystems' 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 Microsystems' business and results of
operations. Similarly, protectionist trade legislation in either the United
States or foreign countries could have a material adverse effect on C-Cube
Microsystems' ability to manufacture or sell its products in foreign markets.
The Asian markets accounted for approximately 43% of total sales in the
third quarter of 1999 and are expected to continue to account for a substantial,
though declining, percentage of sales in the future.* In the third quarter of
1999, most of C-Cube Microsystems' sales in Asia were of DVD, VideoCD and Chaoji
decoder chips. There can be no assurance that C-Cube Microsystems will not
experience reduced sales of its semiconductor products into Asia because of
declining consumer spending or because of its customers' increasing difficulty
in obtaining letters of credit, which C-Cube Microsystems generally requires
prior to shipment into that region.
Gross Margin
C-Cube Microsystems' gross margin for the third quarter of 1999 was 55.4%
compared to a gross margin of 55.0% for the same period in the prior year. This
moderate improvement was primarily due to a reduction in product transition
costs and a moderate improvement in DiviCom product margins over the third
quarter of 1998. While the selling prices for semiconductor products have
generally declined from the prior year quarter, C-Cube Microsystems was able to
offset the related impact on gross margin by realizing operating efficiencies,
including reduced material costs, refinement of its semiconductor fabrication
process and the reduction of outside manufacturing costs.
DiviCom's business involves transactions which can vary substantially in
the portions of DiviCom manufactured products, third party products and services
included. These variations can cause substantial differences in gross margin
from one contract to another. DiviCom has a number of competitors which are
divisions of larger corporations. Such corporations may decide from time-to-time
to aggressively lower prices of products that compete with DiviCom in order to
sell related products or achieve strategic goals. Such "strategic pricing" by
competitors can place strong pricing pressure on DiviCom products in certain
transactions, resulting in lower selling prices and gross margins for those
transactions.
The markets into which C-Cube Microsystems sells its semiconductor products
are subject to extreme price competition. Thus, C-Cube Microsystems 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
Microsystems 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 Microsystems 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 C-Cube Microsystems 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 Microsystems 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, it may
37
<PAGE> 39
not be able to reduce its costs as rapidly as its competitors who perform their
own manufacturing. Failure of C-Cube Microsystems 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 Microsystems'
gross margins. C-Cube Microsystems anticipates production capacity at its chip
manufacturing facilities to be constrained during the fourth quarter of 1999 and
the first quarter of 2000 due to production delays caused by the earthquake in
Taiwan, which occurred during the third quarter of 1999, and due to higher
projected industry demand for semiconductor products causing a reduction of
available capacity.* As a result, product costs may increase at a rate faster
than C-Cube Microsystems can offset those increases with other cost-saving
measures, which could adversely affect gross margins for semiconductor products
during those periods.*
Research and Development Expenses
In the third quarter of 1999, research and development expenses were $21.1
million, or 20.8% of net revenues, compared with $18.9 million, or 21.9% of net
revenues in the third quarter of 1998. The increase in research and development
expenses primarily represents additional employee-related costs associated with
increases in product engineering staff, reflecting C-Cube Microsystems'
continuing efforts to provide industry leading digital video solutions at the
chip and systems levels.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $17.5 million, or
17.2% of net revenues, in the third quarter of 1999, compared to $15.2 million,
or 17.6% of net revenues, for the same quarter last year. The increase was
primarily due to increased headcount and related expenses, as C-Cube
Microsystems continues to increase its international coverage in sales and
marketing. The increase was also due to higher sales commission expense
resulting from the growth in revenues over the third quarter of 1998.
Other Income (Expense)
Other income, net of other expense, increased to $2.7 million for the third
quarter of 1999, compared to $1.6 million for the third quarter of 1998. The
increase over the prior year quarter is primarily due to higher interest income
earned on higher average cash and investment balances and lower interest expense
on lower average outstanding debt balances.
Income Tax Expense
C-Cube Microsystems' effective tax rate for the third quarters of 1999 and
1998 was 30%. C-Cube Microsystems' effective tax rate is less than the combined
federal and state statutory rate primarily due to tax credits and lower foreign
tax rates.
Extraordinary Item
During the third quarter of 1999, C-Cube Microsystems did not repurchase
any of the outstanding balance of its 5 7/8% Convertible Subordinated Notes (the
"Notes") due 2005. During the third quarter of 1998, C-Cube Microsystems
repurchased $42.8 million of the face value of the Notes at 88.4% of principal
amount, with related accrued interest to the date of repurchase, and recognized
an extraordinary gain of $2.4 million, or $0.06 per diluted share, net of
related income taxes of $1.6 million.
38
<PAGE> 40
NINE MONTHS ENDED SEPTEMBER 30, 1999
The following table sets forth certain operating data as a percentage of
net revenues for the nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------
1999 1998
----- -----
<S> <C> <C>
Net revenues................................................ 100.0% 100.0%
----- -----
Costs and expenses:
Cost of revenues.......................................... 44.9 45.6
Research and development.................................. 21.1 21.5
Selling, general and administrative....................... 17.4 17.1
----- -----
Total............................................. 83.3 84.2
----- -----
Income from operations...................................... 16.7 15.8
Other income, net........................................... 2.4 1.0
----- -----
Income before income taxes, minority interest and
extraordinary item........................................ 19.1 16.8
Income tax expense.......................................... 5.7 5.0
----- -----
Income before minority interest and extraordinary item...... 13.4 11.7
Minority interest in net income (loss) of Subsidiary........ 0.1 (0.1)
----- -----
Income before extraordinary item............................ 13.2 11.9
Extraordinary gain (net of tax)............................. -- 1.4
----- -----
Net income.................................................. 13.2% 13.2%
===== =====
</TABLE>
Production Capacity Rights
In the second quarter of 1996, C-Cube Microsystems expanded and formalized
its relationship with Taiwan Semiconductor Manufacturing Co., Ltd. to provide
additional chip production capacity in the years 1996 to 2001. The agreement
with Taiwan Semiconductor Manufacturing Co., Ltd. provided that Taiwan
Semiconductor Manufacturing Co., Ltd. would produce and ship chips to C-Cube
Microsystems at specified prices and required C-Cube Microsystems to make two
advance payments totaling $49 million. An advance payment of $24.5 million was
made in June 1996. In May 1997, C-Cube Microsystems amended its agreement with
Taiwan Semiconductor Manufacturing Co., Ltd. which resulted in a reduction of
C-Cube Microsystems' future chip purchase commitments and the forgiveness of the
second advance payment of $24.5 million. In January 1999, Taiwan Semiconductor
Manufacturing Co., Ltd. refunded $11.8 million of the advance payment to C-Cube
Microsystems. Taiwan Semiconductor Manufacturing Co., Ltd. will apply the
remaining prepayment against a portion of the chip cost as product is delivered
to C-Cube Microsystems. Accordingly, the prepaid amount, which has been
allocated between current and long-term assets, will be amortized to inventory
as chips are received.
Net Revenues
Net revenues for the nine months ended September 30, 1999 were $291.9
million, a 14.0% increase from $256.0 million in revenues during the nine month
period ending September 30, 1998. This increase was led by growth in sales of
DiviCom's encoder products, primarily attributable to existing customer upgrades
to next generation products, contract wins in the cable and satellite markets,
and higher selling prices on next generation products, due to design
improvements and feature and quality enhancements. Semiconductor revenues were
slightly higher than in the first nine months of 1998; however, the revenue
product mix changed significantly. Revenues from DVD decoder chips used in
consumer applications increased due to higher volume shipments, despite price
reductions resulting from increasing competition. Revenues from encoder and
codec chipsets for broadcast, non-linear editing and video server applications
increased due to higher volume shipments. These increases were largely offset by
a reduction in revenues from VideoCD decoder chips due to reduced shipments and
increased price competition.
39
<PAGE> 41
Gross Margin
C-Cube Microsystems' gross margin percentage increased to 55.1% in the nine
months ended September 30, 1999 from 54.4% in the nine month period in the prior
year. This increase was primarily the result of changes in product mix, as sales
of products with higher gross margins, including DiviCom encoders, DVD decoders
and digital set-top boxes, contributed more to revenues in the first nine months
of 1999 than the first nine months of 1998. While the selling prices for
semiconductor products have generally declined from the prior year, C-Cube
Microsystems was able to offset the related impact on gross margin by realizing
operating efficiencies, including reduced material costs, refinement of its
semiconductor fabrication process and the reduction of outside manufacturing
costs.
Research and Development Expenses
In the first nine months of 1999, research and development expenses were
$61.7 million or 21.1% of net revenues, as compared to $55.1 million, or 21.5%
of net revenues, for the same period in the prior year. The increase in research
and development expenses primarily represents additional employee-related costs
associated with increases in product engineering staff, reflecting C-Cube
Microsystems' continuing efforts to provide digital video solutions at the chip
and systems levels.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $50.7 million, or
17.4% of net revenues in the first nine months of 1999, as compared to $43.8
million, or 17.1% of net revenues for the same period in the prior year. The
increase was primarily due to increased headcount and related expenses, and also
due to higher sales commission expense resulting from the growth in revenues
over the first nine months of 1998.
Other Income (Expense)
Other income, net of other expense, was $7.1 million for the first nine
months of 1999, an increase from $2.5 million reported for the nine months ended
September 30, 1998. The increase is primarily due to higher interest income
earned on higher average cash and investment balances and lower interest expense
on lower average outstanding debt balances during the first nine months of 1999
compared to the same period last year.
Income Tax Expense
C-Cube Microsystems' effective tax rate for the nine months ended September
30, 1999 and 1998 was 30%. C-Cube Microsystems' effective tax rate is less than
the combined federal and state statutory rate primarily due to tax credits and
lower foreign tax rates.
Extraordinary Item
During the nine months ended September 30, 1999, C-Cube Microsystems
repurchased $3.4 million of the face value of C-Cube Microsystems' 5 7/8%
Convertible Subordinated Notes due 2005 at 95.5% of the principal amount, with
related accrued interest to the date of repurchase, and recognized an
extraordinary gain of approximately $33,000 (zero effect per diluted share), net
of related income taxes of approximately $23,000. During the nine months ended
September 30, 1998, C-Cube Microsystems repurchased $63.5 million of the face
value of the notes at 88.4% of the principal amount, with related accrued
interest to the date of repurchase, and recognized an extraordinary gain of $3.5
million, or $0.09 per diluted share, net of related taxes of $2.4 million.
FACTORS THAT MAY AFFECT FUTURE RESULTS
On October 27, 1999, C-Cube Microsystems entered into an Agreement and Plan
of Merger and Reorganization with Harmonic Inc., a Delaware corporation
("Harmonic"), pursuant to which, subsequent
40
<PAGE> 42
to the sale or spin-off of C-Cube Microsystems' semiconductor business, C-Cube
Microsystems has agreed to merge with and into Harmonic (the "Merger"). The
consummation of the Merger and the sale or spin-off of the semiconductor
business may have a material effect on C-Cube Microsystems' financial statements
taken as a whole, as the execution of these transactions may contribute to
C-Cube Microsystems' 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 Microsystems 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 Microsystems' product offerings with Harmonic's products in
a way that enhances the performance of the combined business or product line.
Successful integration of the companies depends on a variety of factors,
including the hiring and retention of key employees, management of
geographically separate facilities, and the integration or coordination of
different research and development and product manufacturing facilities. The
success of the semiconductor business may depend on a variety of factors,
including the hiring and retention of key employees and management team and
business infrastructure reorganization. All of these efforts require varying
levels of management resources, which may temporarily adversely impact business
operations.
C-Cube Microsystems' 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
chip manufacturing capacity and raw materials, fluctuations in yield, loss of
any strategic relationships, C-Cube Microsystems' ability to introduce new
products and technologies on a timely basis, unanticipated problems in the
performance of C-Cube Microsystems' next generation or cost-reduced products,
the ability to successfully introduce products in accordance with original
equipment manufacturer design requirements and design cycles, new product
introductions by C-Cube Microsystems' competitors, market acceptance of products
of both C-Cube Microsystems 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 C-Cube Microsystems.*
In the second half of 2000, Semiconductor expects to derive significant
revenue from its next generation DVD decoder products.* There can be no
assurance that these products will be successfully developed or will achieve
market acceptance. The failure of any of these products to be successfully
introduced and achieve market acceptance could have a material adverse effect on
Semiconductor's business and results of operations.
In addition, C-Cube Microsystems' 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 C-Cube Microsystems 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, C-Cube Microsystems has shipped a substantial portion of its
product in the last month of a given quarter. A significant portion of C-Cube
Microsystems' expenses are fixed in the short term, and the timing of increases
in expenses is based in large part on C-Cube Microsystems' forecast of future
revenues. As a result, if revenues do not meet C-Cube Microsystems'
expectations, it may be unable to quickly adjust expenses to levels appropriate
to actual revenues, which could have a material adverse effect on C-Cube
Microsystems' business and results of operations.
41
<PAGE> 43
C-Cube Microsystems' dependence on the Asian consumer electronics market
has started to decline, and C-Cube Microsystems 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
C-Cube Microsystems' revenues and net income. In particular, C-Cube Microsystems
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 C-Cube Microsystems' sales
shifts towards the U.S. and Europe, C-Cube Microsystems 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, C-Cube Microsystems' 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 C-Cube Microsystems' common stock.
The market price of C-Cube Microsystems' common stock has fluctuated
significantly since its initial public offering in April 1994. The market price
of the common stock could be subject to significant fluctuations in the future
based on factors such as announcements of new products by C-Cube Microsystems or
its competitors, quarterly fluctuations in C-Cube Microsystems' financial
results, quarterly fluctuations in other semiconductor or digital video
networking companies' financial results, changes in analysts' estimates of
C-Cube Microsystems' financial performance, general conditions in the
semiconductor and digital video networking industries, conditions in the
financial markets and general conditions in the global economy which might
adversely affect consumer purchasing. In addition, the stock market in general
has experienced extreme price and volume fluctuations, which have particularly
affected the market prices for many high technology companies and which have
often been unrelated to the operating performance of the specific companies. The
market price of C-Cube Microsystems' common stock has declined substantially
from its historic highs, and may continue to experience significant fluctuations
in the future.
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 were $277.4 million at
September 30, 1999 compared to $207.8 million at the end of 1998. Working
capital increased to $303.8 million at September 30, 1999 from $220.5 million at
December 31, 1998.
42
<PAGE> 44
C-Cube Microsystems' operating activities generated cash of $50.5 million
in the nine months ended September 30, 1999, primarily from net income and a
refund of $11.8 million prepaid production capacity rights, partially offset by
a $23.8 million increase in accounts receivable. Receivable days outstanding
increased from 35 days at December 31, 1998 to 54 days at September 30, 1999
primarily due to DiviCom's growing contribution to consolidated revenues, as a
substantial portion of DiviCom's revenues are generated under long-term
contracts which generally have longer payment terms than the semiconductor
business. During the fourth quarter of 1999, the Company signed a production
capacity agreement with United Microelectronics Corporation for which C-Cube
Microsystems paid a $20 million refundable deposit to United Microelectronics
Corporation during the first quarter of 2000.
C-Cube Microsystems' investing activities, exclusive of sales and
maturities of $188.6 million and purchases of $248.0 million of short-term
investments, used cash of $19.8 million, primarily for $17.1 million capital
expenditures.
Cash provided by financing activities was $37.3 million, primarily from
proceeds of $40.6 million from sales of stock pursuant to employee stock plans,
partially offset by $3.3 million used to repurchase a portion of C-Cube
Microsystems' Convertible Subordinated Notes.
At September 30, 1999, C-Cube Microsystems had an available bank line of
credit of $30.0 million which expires in May 2001. Borrowings bear interest at
LIBOR plus 1.25% or the bank's prime rate (8.25% at September 30, 1999). The
line of credit agreement requires that C-Cube Microsystems, among other things,
maintain a minimum tangible net worth, a minimum annual net income (no quarterly
loss exceeding $3 million) and certain financial ratios. In addition, this
agreement prohibits the payment of cash dividends. At September 30, 1999, C-Cube
Microsystems was in compliance with these covenants, and there were no
outstanding balances under this line.
Based on current plans and business conditions, C-Cube Microsystems 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 C-Cube Microsystems' cash requirements for at least the next 12 months.*
However, there can be no assurance that C-Cube Microsystems will not be required
to seek other financing sooner or that such financing, if required, will be
available on terms satisfactory to C-Cube Microsystems, or at all. In addition,
C-Cube Microsystems has considered and will continue to consider various
possible transactions with foundries to secure additional foundry capacity,
which could include, without limitation, equity investments, prepayments,
non-refundable deposits or loans in exchange for guaranteed capacity, "take or
pay" contracts that commit C-Cube Microsystems to purchase specified quantities
of chips over extended periods, joint ventures or other partnership
relationships.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Readers are referenced to "Part II, Item 7A. Quantitative and Qualitative
Disclosures about Market Risk", in the Company's most recent Annual Report on
Form 10-K, filed with the SEC on March 23, 1999, as there have been no material
changes since that filing.
43
<PAGE> 45
YEAR ENDED DECEMBER 31, 1998
The following table sets forth certain operating data for C-Cube
Microsystems as a percentage of net revenues for the years ended December 31,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0%
----- ----- -----
Costs and expenses:
Cost of product revenues.................................. 45.7 44.9 45.3
Research and development.................................. 21.0 19.1 13.8
Selling, general and administrative....................... 17.2 15.6 12.2
Purchased in-process technology........................... -- -- 41.1
----- ----- -----
Total............................................. 84.0 79.6 112.4
----- ----- -----
Income (loss) from operations............................... 16.0 20.4 (12.4)
Interest income (expense), net.............................. 1.2 (0.5) --
----- ----- -----
Income (loss) before income taxes, minority interest and
extraordinary item........................................ 17.2 19.9 (12.4)
Income tax expense.......................................... 5.2 6.8 10.3
----- ----- -----
Income (loss) before minority interest and extraordinary
item...................................................... 12.1 13.1 (22.7)
Minority interest in net income (loss) of subsidiary........ (0.1) (0.1) 0.1
----- ----- -----
Income (loss) before extraordinary item..................... 12.2 13.2 (22.8)
Extraordinary gain on repurchase of convertible notes (net
of tax)................................................... 1.0 -- --
----- ----- -----
Net income (loss)........................................... 13.2% 13.2% (22.8)%
===== ===== =====
</TABLE>
Acquisitions
On August 28, 1996, C-Cube Microsystems acquired DiviCom Inc., a digital
video networking company. C-Cube Microsystems paid $65.7 million in cash, issued
2.3 million shares of its common stock, assumed options exercisable for 264,000
shares of its common stock and incurred $1.35 million in other costs in exchange
for the outstanding shares of DiviCom stock that C-Cube Microsystems did not
already own. C-Cube Microsystems assumed net liabilities of $1.9 million,
purchased technology of $14.2 million, which will be amortized over five years,
and wrote off $131.3 million of in-process technology.
C-Cube Microsystems incurred acquisition-related charges of $133 million in
the third quarter of 1996, which included the in-process technology write-off
and bonuses paid to DiviCom employees.
The acquisition of DiviCom was accounted for as a purchase and therefore
DiviCom's financial results from the date of acquisition, August 28, 1996, are
included in C-Cube Microsystems' consolidated financial results.
Net Revenues
Net revenues increased 4.0% to $351.8 million in 1998 compared to $337.0
million in 1997. Revenue from C-Cube Microsystems' family of encoder products
increased due to growth in sales of communications products, which was led by
DiviCom and increased sales of C-Cube Microsystems' 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 C-Cube Microsystems' AViA and ZiVA families of decoder chips and the
wider acceptance of the DVD format. C-Cube Microsystems 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.
44
<PAGE> 46
In 1997, net revenues increased 5% to $337.0 million compared to $319.8
million in 1996. Revenue from C-Cube Microsystems' family of encoder products
increased primarily due to sales of encoder systems developed by DiviCom, which
was acquired in the third quarter of 1996. See "Acquisitions." C-Cube
Microsystems also began volume shipments of its MPEG-2 DVD decoder chips used
primarily in DVD-ROMs on PCs. Revenue from MPEG-1 decoder chips used in VideoCD
players which are sold primarily in China, decreased from the prior year due to
price reductions made in response to competition. The decreased prices for these
products were partially offset by an increase in unit volumes.
The sales returns allowance at December 31, 1998 was $13.1 million, up 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 allowance at December 31, 1998
is to cover price protection, pricing adjustments and stock rotation credits to
distributors.
The sales returns allowance at December 31, 1997 was $6.7 million, down
from $11.5 million at December 31, 1996. During 1997, additions to the sales
returns allowance were $3.3 million and deductions were $8.1 million. The
deductions to the allowance were primarily due to price protection credits given
to distributors in the first quarter of 1997 as C-Cube Microsystems
significantly reduced the selling prices of its MPEG-1 decoder chips in response
to competitive pressures.
During 1998, no individual customer accounted for 10% or more of net
revenues. Sales to Sinorex, a distributor, accounted for 20% and 12% of C-Cube
Microsystems' net revenues during 1997 and 1996, respectively.
International revenues accounted for 62%, 65% and 67% of net revenues in
1998, 1997 and 1996, respectively. International revenues were a significant
portion of total revenues primarily due to volume shipments of the CL480, CL680
and CL8800 families of products in Asia for VideoCD and Chaoji VCD players in
the consumer market. C-Cube Microsystems sells products and supports customers
internationally through subsidiaries in Hong Kong and Japan. C-Cube Microsystems
expects that international revenues will continue to represent a significant
portion of net revenues. C-Cube Microsystems' 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."
Gross Margin
C-Cube Microsystems' gross margin percentage decreased to 54.3% in 1998
from 55.1% in 1997. This decrease is 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.
C-Cube Microsystems has been able to reduce product material costs through the
negotiation of lower foundry chip prices, the adoption of finer geometry
fabrication processes and the redesign of products to reduce die size. C-Cube
Microsystems' gross margin percentage increased to 55.1% in 1997 from 54.6% in
1996. This improvement is due primarily to lower product transition costs,
reduced product costs and a shift in product mix to higher margin encoder
products.
The markets into which C-Cube Microsystems sells its products are subject
to extreme price competition. Thus, C-Cube Microsystems expects to continue to
experience declines in the selling prices of its products over the life cycle of
each product. In particular, C-Cube Microsystems 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 Microsystems 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 C-Cube Microsystems 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.
45
<PAGE> 47
C-Cube Microsystems 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, C-Cube Microsystems may not be able to
reduce its costs as rapidly as its competitors who perform their own
manufacturing. Failure of C-Cube Microsystems 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 C-Cube Microsystems'
gross margins.
Research and Development Expenses
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 the prior year is 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. In 1997, research and development expenses were
$64.2 million or 19.1% of net revenues, compared to $44.2 million or 13.8% of
net revenues in 1996. The increase in absolute research and development expenses
from the prior year primarily represents the inclusion of DiviCom's operations
for a full year in 1997, compared to the 1996 period subsequent to the August
28, 1996 date of acquisition. The increase over 1996 was also due to additional
employee-related costs associated with increased staffing, reflecting C-Cube
Microsystems' continuing efforts to provide industry leading digital video
solutions at the chip and systems levels. C-Cube Microsystems anticipates that
absolute levels of research and development expenses will continue to increase
in future periods.
Selling, General and Administrative Expenses
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 was primarily due to increased
travel, staffing and related expenses partially offset by decreased commissions
to distributors. Selling, general and administrative expenses increased to $52.7
million or 15.6% of net revenues in 1997 compared to $39.0 million or 12.2% of
net revenues for 1996. The increase in spending was primarily due to the
inclusion of DiviCom's operations for a full year in 1997, compared to the 1996
period subsequent to the August 28, 1996 date of acquisition. The increase over
1996 was also due to increased headcount and related expenses, increased travel
costs and higher advertising costs. C-Cube Microsystems 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 $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 income and other decreased to
$4.3 million in 1997 compared to $5.9 million in 1996 primarily due to lower
average balances in cash and investments in 1997 compared to 1996. 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 C-Cube Microsystems' convertible
subordinated notes. Interest expense and other remained consistent at $6.0
million in 1997 and 1996 and consisted primarily of interest paid on the $86.3
million principal of convertible subordinated notes issued in the fourth quarter
of 1995.
Income Tax Expense
C-Cube Microsystems provided $18.2 million for income taxes in 1998 on
income before taxes, minority interest and extraordinary items of $60.7 million,
for an effective tax rate of 30%. In 1997, C-Cube Microsystems provided $22.9
million on income before taxes and minority interest of $67.0 million, for an
effective tax rate of 34%. In 1996, C-Cube Microsystems provided $32.9 million
on a loss before income taxes and minority interest of $39.8 million, as the
write-off of purchased in-process
46
<PAGE> 48
technology in 1996 was not tax deductible. The effective tax rate in 1996 was
36% excluding the 1996 purchased in-process technology charge. The effective tax
rates for 1998, 1997 and 1996 are less than the combined federal and state
statutory rate primarily due to tax credits and lower foreign taxes.
Extraordinary Item
During 1998, C-Cube Microsystems repurchased $63.5 million of the face
value of C-Cube Microsystems' 5.875% subordinated convertible notes due in 2005
at 88.4% of the principal amount, with accrued interest to the date of
repurchase. Upon repurchase of the notes, C-Cube Microsystems recognized
extraordinary gains 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
C-Cube Microsystems' quarterly and annual operating results have been, and
will continue to be, affected by a wide variety of factors that could have a
material adverse effect on revenues and profitability during any particular
period, including the level of orders which are received and can be shipped in a
quarter, the rescheduling or cancellation of orders by its customers,
competitive pressures on selling prices, changes in product or customer mix,
availability and cost of foundry capacity and raw materials, fluctuations in
yield, loss of any strategic relationships, C-Cube Microsystems' ability to
introduce new products and technologies on a timely basis, unanticipated
problems in the performance of C-Cube Microsystems' next generation or
cost-reduced products, the ability to successfully introduce products in
accordance with original equipment manufacturer design requirements and design
cycles, new product introductions by C-Cube Microsystems' competitors, market
acceptance of products of both C-Cube Microsystems and its customers, supply
constraints for other components incorporated into its customers' products,
fluctuations in the Japanese yen and Great Britain pound to U.S. dollar exchange
rates, and the level of expenditures in manufacturing, research and development
and sales, general and administrative functions.
In addition, C-Cube Microsystems' operating results are subject to
fluctuations in the markets for its customers' products, particularly the
consumer electronics market, which has been extremely volatile in the past, and
the satellite broadcast and wireless cable markets, which are in an early stage,
creating uncertainty with respect to product volume and timing. C-Cube
Microsystems has devoted a substantial portion of its research and development
efforts in recent quarters to develop chips used in DVD systems. C-Cube
Microsystems' DVD products are subject to the new product risks described in the
preceding paragraph, including in particular C-Cube Microsystems' ability to
timely introduce these products and the market's acceptance of them, which could
have a materially adverse affect on its operating results. Furthermore, to the
extent C-Cube Microsystems 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, C-Cube Microsystems has
generally shipped a substantial portion of its product in the last month of a
given quarter. A significant portion of C-Cube Microsystems' expenses are fixed
in the short term, and the timing of increases in expenses is based in large
part on C-Cube Microsystems' forecast of future revenues. As a result, if
revenues do not meet C-Cube Microsystems' expectations, it may be unable to
quickly adjust expenses to levels appropriate to actual revenues, which could
have a material adverse effect on C-Cube Microsystems' business and results of
operations.
Due to C-Cube Microsystems' dependence on the consumer electronics market,
the substantial seasonality of sales in that market could impact C-Cube
Microsystems' revenues and net income. In particular, C-Cube Microsystems
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 from mid-first quarter until mid-third
quarter. If the future geographic mix of C-Cube Microsystems' sales shifts
towards the U.S. and Europe, C-Cube Microsystems would anticipate higher
revenues and net income in the third and fourth calendar quarters as system
manufacturers in these areas make purchases in preparation for the holiday
season, and comparatively less revenues and net income in the first and second
calendar quarters.
47
<PAGE> 49
The economic crisis in Asia has been 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 C-Cube Microsystems' products are used.
As a result of the foregoing, C-Cube Microsystems' 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 C-Cube Microsystems' common stock. See
"Concentration of Credit Risk" and "Product and Geographic Risks" in Note 1 of
Notes to Consolidated Financial Statements.
The market price of C-Cube Microsystems' common stock has fluctuated
significantly since the initial public offering in April 1994. The market price
of the common stock could be subject to significant fluctuations in the future
based on factors such as announcements of new products by C-Cube Microsystems or
its competitors, quarterly fluctuations in C-Cube Microsystems' financial
results or other semiconductor companies' financial results, changes in
analysts' estimates of C-Cube Microsystems' financial performance, general
conditions in the semiconductor and digital video networking industries,
conditions in the financial markets and general conditions in the global economy
which might adversely affect consumer purchasing. In addition, the stock market
in general has experienced extreme price and volume fluctuations, which have
particularly affected the market prices for many high technology companies and
which have often been unrelated to the operating performance of the specific
companies. The market price of C-Cube Microsystems' common stock has declined
substantially from historic highs, and may continue to experience significant
fluctuations in the future.
48
<PAGE> 50
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The historical financial statements have not been restated to give
retroactive effect to the sale of the DivCom business because that transaction
is subject to stockholder approval and therefore does not meet the measurement
date criteria for discontinued operations. The unaudited pro forma financial
statements have been prepared to give effect to the sale of the DivCom business
as if the transaction had taken place on January 1, 1996.
The following unaudited pro forma financial statements are presented for
illustrative purposes only and are not necessarily indicative of the financial
position or results of operations of future periods or the results that actually
would have been realized had the Semiconductor business been a separate company
during the specified periods. The pro forma financial statements, including the
notes thereto, are qualified in their entirety by reference to, and should be
read in conjunction with, the historical consolidated financial statements of
C-Cube Microsystems, including the notes thereto, included herein.
The following pro forma financial statements give effect to the proposed
spin-off of the DiviCom business. The financial statements of the Semiconductor
business exclude the results of operations and financial position of the DiviCom
business, which will be spun-off. The pro forma adjustments are preliminary and
based on management's estimates. In addition, management is in the process of
assessing and formulating its business plans. Management does not know the exact
amount of the restructuring costs but does not believe that they will be
material. Based on the timing of the closing of the transaction, the
finalization of the integration plans and other factors, final pro forma
adjustments may differ materially from those presented in these pro forma
financial statements.
Two balance sheets have been presented to give effect to a range of
possible results. Presentation (A) shows the estimated effect assuming a $975
million valuation of the Semiconductor business. Presentation (B) shows the
estimated effect assuming a $1.1 billion valuation of the Semiconductor
business. 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.
The pro forma balance sheets assume that the spin-off took place on
September 30, 1999. The pro forma statement of operations assumes the spin-off
took place as of the beginning of January 1, 1996.
49
<PAGE> 51
PRESENTATION (A)
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
C-CUBE SEMICONDUCTOR
MICROSYSTEMS, INC. PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
------------------ ----------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-term
investments........................... $277,373 $(148,000)(1)(2)(3) $ 129,373
Accounts receivable, net of allowances... 61,046 (52,504)(1) 8,542
Inventories.............................. 12,373 (9,948)(1) 2,425
Deferred income taxes.................... 11,723 (9,190)(1)(5) 2,533
Other current assets..................... 14,914 (6,174)(1) 8,740
-------- --------- ---------
Total current assets............. 377,429 (225,816) 151,613
Property and equipment -- net.............. 33,881 (14,063)(1) 19,818
Production capacity rights................. 5,164 -- 5,164
Distribution rights -- net................. 1,359 -- 1,359
Purchased technology -- net................ 5,139 (2,595)(1) 2,544
Other assets............................... 1,995 (499)(1) 1,496
-------- --------- ---------
Total............................ $424,967 $(242,973) $ 181,994
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 24,356 $ (11,592)(1) $ 12,764
Accrued liabilities...................... 31,195 9,385(1)(4) 40,580
Income taxes payable..................... 12,162 (6,649)(1) 5,513
Deferred revenue......................... 5,537 (5,537)(1) --
Current portion of long-term
obligations........................... 368 (11)(1) 357
-------- --------- ---------
Total current liabilities........ 73,618 (14,404) 59,214
Long-term obligations...................... 20,150 (48)(1) 20,102
Deferred income taxes...................... 3,230 (2,545)(1) 685
-------- --------- ---------
Total liabilities................ 96,998 (16,997) 80,001
-------- --------- ---------
Minority interest in subsidiary............ 409 -- 409
Stockholders' equity:
Preferred stock.......................... -- -- --
Common stock............................. 270,932 254,000(2) 524,932
Accumulated other comprehensive loss..... (1,992) 27(1) (1,965)
Retained earnings (deficit).............. 58,620 (480,003)(1)(2)(3)(4)(5) (421,383)
-------- --------- ---------
Total stockholders' equity....... 327,560 (225,976) 101,584
-------- --------- ---------
Total............................ $424,967 $(242,973) $ 188,994
======== ========= =========
</TABLE>
- ---------------
(A) Based on a $975 million valuation of the Semiconductor business.
50
<PAGE> 52
PRESENTATION (B)
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
C-CUBE SEMICONDUCTOR
MICROSYSTEMS, INC. PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
------------------ ----------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-term
investments........................... $277,373 $(233,000)(1)(2)(3) $ 44,373
Accounts receivable, net of allowances... 61,046 (52,504)(1) 8,542
Inventories.............................. 12,373 (9,948)(1) 2,425
Deferred income taxes.................... 11,723 (9,190)(1)(5) 2,533
Other current assets..................... 14,914 (6,174)(1) 8,740
-------- --------- ---------
Total current assets............. 377,429 (310,816) 66,613
Property and equipment -- net.............. 33,881 (14,063)(1) 19,818
Production capacity rights................. 5,164 -- 5,164
Distribution rights -- net................. 1,359 -- 1,359
Purchased technology -- net................ 5,139 (2,595)(1) 2,544
Other assets............................... 1,995 (499)(1) 1,496
-------- --------- ---------
Total............................ $424,967 $(327,973) $ 96,994
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 24,356 $ (11,592)(1) $ 12,764
Accrued liabilities...................... 31,195 9,385(1)(4) 40,580
Income taxes payable..................... 12,162 (6,649)(1) 5,513
Deferred revenue......................... 5,537 (5,537)(1) --
Current portion of long-term
obligations........................... 368 (11)(1) 357
-------- --------- ---------
Total current liabilities........ 73,618 (14,404) 59,214
Long-term obligations...................... 20,150 (48)(1) 20,102
Deferred income taxes...................... 3,230 (2,545)(1) 685
-------- --------- ---------
Total liabilities................ 96,998 (16,997) 80,001
-------- --------- ---------
Minority interest in subsidiary............ 409 -- 409
Stockholders' equity:
Preferred stock.......................... -- -- --
Common stock............................. 270,932 254,000(2) 524,932
Accumulated other comprehensive loss..... (1,992) 27(1) (1,965)
Retained earnings (deficit).............. 58,620 (565,003)(1)(2)(3)(4)(5) (506,383)
-------- --------- ---------
Total stockholders' equity....... 327,560 (310,976) 16,584
-------- --------- ---------
Total............................ $424,967 $(327,973) $ 96,994
======== ========= =========
</TABLE>
- ---------------
(B) Based on a $1.1 billion valuation of the Semiconductor business.
51
<PAGE> 53
PRO FORMA STATEMENT OF CONSOLIDATED INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
C-CUBE SEMICONDUCTOR
MICROSYSTEMS, INC. PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
------------------ ----------- -------------
<S> <C> <C> <C>
Net revenues:................................. $291,922 $(133,821)(1) $158,101
-------- --------- --------
Costs and expenses:
Cost of product revenues.................... 130,947 (67,852)(1) 63,095
Research and development.................... 61,659 (21,820)(1) 39,839
Selling, general and administrative......... 50,677 (20,595)(1)(4) 30,082
-------- --------- --------
Total............................... 243,283 (110,267) 133,016
-------- --------- --------
Income from operations........................ 48,639 (23,554) 25,085
Other income:
Interest income and other................... 7,084 (967)(1) 6,117
Interest expense and other.................. -- -- --
-------- --------- --------
Total............................... 7,084 (967) 6,117
Income before income taxes, minority interest
and extraordinary item...................... 55,723 (24,521) 31,202
Income tax expense............................ 16,717 (8,109)(1) 8,608
-------- --------- --------
Income before minority interest and
extraordinary item.......................... 39,006 (16,412) 22,594
Minority interest in net income of
subsidiary.................................. 381 -- 381
-------- --------- --------
Income before extraordinary item.............. 38,625 (16,412) 22,213
======== ========= ========
Basic earnings per share:
Income before extraordinary item............ $ 0.98 $ 0.56
======== ========
Diluted earnings per share:
Income before extraordinary item............ $ 0.91 $ 0.53
======== ========
Shares:
Basic....................................... 39,368 39,368
======== ========
Diluted..................................... 43,224 41,835
======== ========
</TABLE>
52
<PAGE> 54
PRO FORMA STATEMENT OF CONSOLIDATED INCOME
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
C-CUBE SEMICONDUCTOR
MICROSYSTEMS, INC. PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
------------------ ----------- -------------------
<S> <C> <C> <C>
Net revenues:................................ $351,797 $(142,715)(1) $209,082
-------- --------- --------
Costs and expenses:
Cost of product revenues................... 160,839 (75,088)(1) 85,751
Research and development................... 74,031 (21,449)(1) 52,582
Selling, general and administrative........ 60,512 (22,559)(1) 37,953
-------- --------- --------
Total.............................. 295,382 (119,096) 176,286
-------- --------- --------
Income from operations....................... 56,415 (23,619) 32,796
Other income:
Interest income and other.................. 8,511 (1,784)(1) 6,727
Interest expense and other................. (4,272) 33 (4,239)
-------- --------- --------
Total.............................. 4,239 (1,751) 2,488
Income before income taxes, minority interest
and extraordinary item..................... 60,654 (25,370) 35,284
Income tax expense........................... 18,196 (8,880)(1) 9,316
-------- --------- --------
Income before minority interest and
extraordinary item......................... 42,458 (16,490) 25,968
Minority interest in net loss of
subsidiary................................. (337) -- (337)
-------- --------- --------
Income before extraordinary item............. 42,795 (16,490) 26,305
======== ========= ========
Basic earnings per share:
Income before extraordinary item........... $ 1.14 $ 0.70
======== ========
Diluted earnings per share:
Income before extraordinary item........... $ 1.11 $ 0.68
======== ========
Shares:
Basic...................................... 37,382 37,382
======== ========
Diluted.................................... 40,754 38,729
======== ========
</TABLE>
53
<PAGE> 55
PRO FORMA STATEMENT OF CONSOLIDATED INCOME
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
C-CUBE SEMICONDUCTOR
MICROSYSTEMS, INC. PRO FORMA PRO FORMA AS
HISTORICAL ADJUSTMENTS ADJUSTED
------------------ ----------- -------------
<S> <C> <C> <C>
Net revenues:.................................... $337,012 $(118,760)(1) $218,252
-------- --------- --------
Costs and expenses:
Cost of product revenues....................... 151,333 (59,965)(1) 91,368
Research and development....................... 64,204 (17,659)(1) 46,545
Selling, general and administrative............ 52,732 (15,423)(1) 37,309
-------- --------- --------
Total.................................. 268,269 (93,047) 175,222
-------- --------- --------
Income from operations........................... 68,743 (25,713) 43,030
Other income (expense):
Interest income and other...................... 4,291 (826)(1) 3,465
Interest expense and other..................... (6,048) -- (6,048)
-------- --------- --------
Total.................................. (1,757) (826) (2,583)
Income before income taxes and minority
interest....................................... 66,986 (26,539) 40,447
Income tax expense............................... 22,895 (9,760)(1) 13,135
-------- --------- --------
Income before minority interest.................. 44,091 (16,779) 27,312
Minority interest in net loss of subsidiary...... (248) -- (248)
-------- --------- --------
Net income....................................... $ 44,339 $ (16,779) $ 27,560
======== ========= ========
Earnings per share:
Basic.......................................... $ 1.21 $ 0.76
======== ========
Diluted........................................ $ 1.15 $ 0.71
======== ========
Shares:
Basic.......................................... 36,497 36,497
======== ========
Diluted........................................ 41,683 38,549
======== ========
</TABLE>
54
<PAGE> 56
PRO FORMA STATEMENT OF CONSOLIDATED OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
C-CUBE SEMICONDUCTOR
MICROSYSTEMS, INC. PRO FORMA PRO FORMA AS
HISTORICAL ADJUSTMENTS ADJUSTED
------------------ ----------- -------------
<S> <C> <C> <C>
Net revenues:.................................... $319,758 $ (47,127)(1) $272,631
-------- --------- --------
Costs and expenses:
Cost of product revenues....................... 144,985 (22,817)(1) 122,168
Research and development....................... 44,177 (7,549)(1) 36,628
Selling, general and administrative............ 39,002 (4,666)(1) 34,336
Purchased in-process technology................ 131,349 (131,349)(1) --
-------- --------- --------
Total.................................. 359,513 (166,381) 193,132
-------- --------- --------
Income (loss) from operations.................... (39,755) 119,254 79,499
Other income (expense):
Interest income and other...................... 5,934 (61)(1) 5,873
Interest expense and other..................... (5,962) -- (5,962)
-------- --------- --------
Total.................................. (28) (61) (89)
Income (loss) before income taxes and minority
interest....................................... (39,783) 119,193 79,410
Income tax expense............................... 32,944 (4,714)(1) 28,230
-------- --------- --------
Income (loss) before minority interest........... (72,727) 123,907 51,180
Minority interest in net income of subsidiary.... 318 -- 318
-------- --------- --------
Net income (loss)................................ $(73,045) $ 123,907 $ 50,862
======== ========= ========
Earnings (loss) per share:
Basic.......................................... $ (2.15) $ 1.50
======== ========
Diluted........................................ $ (2.15) $ 1.37
======== ========
Shares:
Basic.......................................... 33,928 33,928
======== ========
Diluted........................................ 33,928 39,572
======== ========
</TABLE>
55
<PAGE> 57
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. To carve out results of operations and assets and liabilities associated with
the DiviCom business. Expense amounts exclude allocations of general and
administrative expenses in accordance with EITF 87-24.
2. To adjust for estimated cash inflows from the exercise of stock options of
$115 million and the estimated cash outflows associated with the transfer of
cash to Harmonic upon the consummation of the merger agreement. The cash
inflows were calculated based on the number and exercise price of vested
options that are required to be exercised as part of the merger/spin-off
transaction. Regarding cash outflow to DiviCom, the merger agreement
specifies that DiviCom will have $60 million in cash after the
merger/spin-off is completed.
3. To record the taxes estimated to be incurred upon the distribution of
Semiconductor. Estimated taxes under Presentation (A) are $203 million and
under Presentation (B) are $288 million.
4. To record estimated direct expenses of $22 million related to the merger.
5. In connection with the distribution and certain internal restructuring
transactions, Semiconductor may realize a tax basis step up in certain
assets. To the extent there is a tax basis step-up in such assets,
Semiconductor will record a deferred tax asset with an offset in equity that
is not yet recorded in these proforma adjustments.
56
<PAGE> 58
MANAGEMENT
The following table lists the names, ages and positions of all directors
and executive officers of Semiconductor as of the distribution date. There are
no family relationships between any director or executive officer and any other
director or executive officer of Semiconductor. Executive officers serve at the
discretion of the board of directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Umesh Padval............................. 41 President, Chief Executive Officer and Director
Fred Brown............................... 55 Senior Vice President of Worldwide Sales
Fermi Wang, Ph.D......................... 46 Vice President, Home Media Division
Ray Newstead............................. 53 Vice President, Broadband Network Division
Didier Le Gall, Ph.D..................... 45 Vice President, Research and Development and Chief
Technology Officer
Walt Walczykowski........................ 50 Chief Financial Officer
Alexandre A. Balkanski, Ph.D............. 39 Director
Baryn S. Futa............................ 44 Director
Donald McKinney.......................... 49 Director
Gregorio Reyes........................... 58 Director
T. J. Rodgers............................ 51 Director
Donald T. Valentine...................... 67 Director and Chairman
</TABLE>
Mr. Padval begins to serve as President, Chief Executive Officer and
Director as of the distribution date. Mr. Padval joined C-Cube Microsystems as
President of C-Cube Microsystems' 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
Microsystems, 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 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.
Mr. Brown joined C-Cube Microsystems in December of 1993 as Director of
Asia Pacific Sales, and was named Vice President in November 1995. Mr. Brown was
promoted to Vice President, Worldwide Sales in May 1998 and Senior Vice
President in November 1998. Prior to joining C-Cube Microsystems, 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).
Dr. Wang joined C-Cube Microsystems in 1992 and was named to his current
position in 1999. He had previously headed the PC/CODEC Strategic Business Unit,
where he helped enable playback and recordability of digital video in desktop
and portable computers. Prior to joining C-Cube, Dr. Wang worked on video
compression algorithms for Vitel Semiconductor. As head of one of C-Cube's two
Strategic Business Units, Dr. Wang has responsibility for C-Cube's
market-leading MPEG solutions for DVDs and VCDs. He has also overseen
development of C-Cube's exclusive one-chip CODEC solution for applications such
as digital video recorders, and is one of the architects of C-Cube's next
generation technology.
Mr. Newstead joined C-Cube Microsystems in 1999 from NEC Corporation where
he had been Vice President and General Manager of the Microprocessor Group. In
this position, he focused on consumer
57
<PAGE> 59
market applications including digital set top box and HDTV as well as
communications and digital imaging markets. He had responsibility for the
design-in of MIPS processors and chipset solutions for customers including
General Instrument, ATT, Sony, Philips, Cisco, Bay Networks, Ascend, Lucent and
Compaq. With 25 years of industry experience, he has held marketing and
executive management positions at IDT, National Semiconductor and Adaptec. Ray
was also a founder and CEO of ATI International. In his position at C-Cube, Mr.
Newstead heads one of the company's two Strategic Business Units. He is
responsible for the company's initiatives in Broadband areas including set-top
box applications, streaming media on the Web and video over the Internet. He
holds a bachelor's degree in management from Rochester Institute of Technology.
Dr. Le Gall joined C-Cube in 1990. In his current role, he has overall
responsibility for C-Cube's Research and Development Program, which has been
responsible for Emmy award-winning technology breakthroughs in digital
television technology. Prior to joining C-Cube, Dr. Le Gall managed the Visual
Communications Group at Bell Communications Research (Bellcore), where he led
projects in areas such as HDTV compression. He also worked for Thomson-CSF's
Medical Imaging Division. Dr. Le Gall holds a Ph.D. in electrical engineering
from UCLA and a master's degree in physics and mathematics from Ecole Centrale
de Lyon in France.
Mr. Walczykowski joined C-Cube Microsystems 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 Microsystems, 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.
Dr. Alexandre Balkanski co-founded C-Cube Microsystems in July 1988 and
served as President and Chief Executive Officer from July 1995 until the
distribution date. He had previously served as C-Cube Microsystems' Executive
Vice President and Chief Operating Officer. Prior to joining C-Cube
Microsystems, Dr. Balkanski co-founded and served as President of Diamond
Devices, a semiconductor company specializing in Digital Signal Processing
(DSP). Dr. Balkanski was elected to the Board of Directors of C-Cube
Microsystems in April 1993. He serves as an outside director on the board of
PMC-Sierra, Inc., a semiconductor company. Dr. Balkanski has 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. 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 intellectual property to users of the technology,
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.
58
<PAGE> 60
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.
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.
59
<PAGE> 61
EXECUTIVE COMPENSATION AND OTHER MATTERS
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 Semiconductor as of December 31, 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
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
Frederick Brown IV.......... 1999 200,000 92,432 7,200(2) 0 0
Senior Vice President, 1998 173,752(4) 205,557(5) 7,200(2) 95,000 0
Worldwide Sales 1997 150,000(4) 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
Walter Walczykowski......... 1999 175,565 111,037 0 30,000 0
Vice President, Finance
and 1998 151,016(6) 62,130 0 100,284 0
Chief Financial Officer 1997 122,382(6) 20,606 0 13,327 0
</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) 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.
(5) Includes a retention bonus of $100,000, of which $50,000 will be vested on
December 31, 1999 and $50,000 vested on December 31, 2000, provided Mr.
Brown is an employee of the Company on those dates.
(6) Mr. Walczykowski has served as Vice President, Finance and Chief Financial
Officer since July 1998. Mr. Walczykowski's compensation for the period
prior to his appointment to Vice President of Finance and Chief Financial
Officer includes compensation he received while serving as Senior Director
of Finance from April 1998 to July 1998, and while serving as Corporate
Controller for the period prior.
The Company does not have employment contracts with any of the persons
named in the Summary Compensation Table, or any defined benefit or actuarial
plan under which benefits are determined primarily by final compensation or
average final compensation and years of service.
60
<PAGE> 62
STOCK OPTION GRANTS
The following table provides the specified information concerning grants of
options to purchase the Company's Common Stock made during the year ended
December 31, 1999 to the persons named in the Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS IN FISCAL 1999
---------------------------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE
OPTIONS AT ASSUMED ANNUAL RATES OF
GRANTED TO EXERCISE STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES OR BASE FOR OPTION TERM(2)
GRANTED IN FISCAL PRICE EXPIRATION --------------------------
NAME (#) YEAR ($/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
Richard Foreman............. 20,000 0.4 19.1250 04/02/09 240,552 609,606
Tom Lookabaugh.............. 100,000 2.0 19.125 04/02/09 1,202,761 3,048,032
Walter Walczykowski......... 30,000 0.6 19.1250 04/02/09 360,828 914,410
</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.
(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.
61
<PAGE> 63
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:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY
OPTIONS AT 12/31/99(2)
NUMBER OF UNEXERCISED ---------------------------
SHARES VALUE OPTIONS AT 12/31/99
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
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
Tom Lookabaugh(3)......... 6,744 153,426 204,167 340,833 8,776,057 14,851,443
Walter Walczykowski....... 0 0 69,460 104,151 2,971,747 4,482,202
</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, a former employee of the
Company, deemed to be beneficially owned by Mr. Lookabaugh.
62
<PAGE> 64
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 Semiconductor, (iii) the Chief Executive Officer and the four other
most highly compensated executive officers of Semiconductor 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
Semiconductor as a group:
<TABLE>
<CAPTION>
SHARES OWNED
-----------------------
NUMBER OF PERCENTAGE
FIVE-PERCENT STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS (1) SHARES OF CLASS
- --------------------------------------------------------------- --------- ----------
<S> <C> <C>
FIVE-PERCENT STOCKHOLDERS:
Entities affiliated with J. & W. Seligman & Co.
Incorporated(2)............................................. 4,574,900 10.0%
100 Park Avenue -- 8th Floor
New York, New York 10017
DIRECTORS AND EXECUTIVE OFFICERS:
Alexandre A. Balkanski(3)..................................... 1,302,141 2.8%
Donald T. Valentine(4)........................................ 1,129,083 2.5%
Frederick Brown IV(5)......................................... 183,253 *
Umesh Padval(6)............................................... 169,643 *
Richard Foreman(7)............................................ 168,022 *
T. J. Rodgers(8).............................................. 142,613 *
Walter Walczykowski(9)........................................ 82,730 *
Baryn S. Futa(10)............................................. 70,626 *
Donald McKinney(11)........................................... 40,101 *
Gregorio Reyes(12)............................................ 39,971 *
All executive officers and directors as a group (10
persons)(13)................................................ 3,328,183 7.2%
</TABLE>
- ---------------
* Represents less than 1%
(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) Includes 764,400 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.
(4) 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.
(5) Includes 172,004 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.
63
<PAGE> 65
(6) Includes 166,667 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.
(7) Includes 118,454 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.
(8) Includes 136,251 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.
(9) Includes 79,783 shares subject to options that are presently exercisable or
will become exercisable within 60 days of February 4, 2000.
(10) Includes 70,624 shares subject to options that are presently exercisable or
will become exercisable within 60 days of February 4, 2000.
(11) Includes 38,749 shares subject to options that are presently exercisable or
will become exercisable within 60 days of February 4, 2000.
(12) Includes 34,168 shares subject to options that are presently exercisable or
will become exercisable within 60 days of February 4, 2000.
(13) Includes an aggregate of 1,625,268 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 3-12.
64
<PAGE> 66
ARRANGEMENTS BETWEEN C-CUBE MICROSYSTEMS AND SEMICONDUCTOR
We have provided below a summary description of the master separation and
distribution agreement, effective as of , or the separation
agreement, and the key related agreements. You should read the full text of
these agreements, which have been filed with the Securities and Exchange
Commission as exhibits to the registration statement of which this prospectus is
a part.
MASTER SEPARATION AND DISTRIBUTION AGREEMENT
The master separation and distribution agreement contains the key
provisions relating to the separation and the distribution.
The Separation. The separation is scheduled to occur on or around
. On or before the separation date, C-Cube Microsystems and
Semiconductor will sign the general assignment and assumption agreement which
provides for the transfer to Semiconductor (or companies to be owned by
Semiconductor) of assets and liabilities from C-Cube Microsystems, effective on
the separation date. C-Cube Microsystems will deliver additional agreements
governing various interim and ongoing relationships between C-Cube Microsystems
and us following the separation date. The ancillary agreements include:
- a general assignment and assumption agreement;
- an employee matters agreement;
- a tax sharing agreement;
- a transitional services agreement;
- a real estate matters agreement;
- a master confidential disclosure agreement; and
- an indemnification and insurance matters agreement.
To the extent that the terms of any of these ancillary agreements conflict with
the separation agreement, the terms of these agreements govern. These agreements
are described more fully below.
Cash to be Transferred to Semiconductor. C-Cube Microsystems will provide
to Semiconductor all cash of C-Cube Microsystems and its subsidiaries (other
than Semiconductor) other than the following amounts which will be retained by
C-Cube Microsystems:
- sixty million dollars ($60,000,000);
- cash to pay all taxes of C-Cube Microsystems and its subsidiaries accrued
through the separation date (but not including taxes related to the
spin-off of Semiconductor);
- cash in an amount sufficient to pay the fees and expenses associated with
the transactions contemplated by the merger agreement, including, but not
limited to, the fees and expenses of C-Cube Microsystems' investment
bankers, attorneys, accountants and other professional advisors;
- cash to pay the corporate tax liability arising in connection with the
spin-off of Semiconductor; and
- cash in an amount sufficient to make all severance payments to any
employee of C-Cube Microsystems who will not be employed by either
Semiconductor or Harmonic after the merger.
The Distribution. On or prior to the date the distribution is effective,
C-Cube Microsystems intends to distribute the shares of common stock of
Semiconductor that C-Cube Microsystems holds to C-Cube Microsystems stockholders
on a pro rata basis. C-Cube Microsystems may, in its sole discretion, change the
distribution date. C-Cube Microsystems intends to consummate the distribution
only if the following conditions are met (any of which may be waived by C-Cube
Microsystems):
- all required government approvals must be in effect; and
- no legal restraints must exist preventing the distribution.
65
<PAGE> 67
Covenants Between C-Cube Microsystems and Semiconductor. In addition to
signing documents that transfer control and ownership of various assets and
liabilities of C-Cube Microsystems relating to our business, we have agreed with
C-Cube Microsystems to enter into additional service level agreements, exchange
information, engage in certain auditing practices and resolve disputes in
particular ways.
Information Exchange. Both C-Cube Microsystems and we have agreed to share
information with each other, at no cost to the requesting party, for the
following purposes, unless the sharing would be commercially detrimental:
- Each party has agreed to maintain adequate internal accounting to allow
the other party to satisfy its own reporting obligations and prepare its
own financial statements.
- Each party will retain records that may be beneficial to the other party
for a specified period of time. If the records are going to be destroyed,
the destroying party will give the other party an opportunity to retrieve
all relevant information from the records.
- Each party will do its best to provide the other party with personnel,
directors, officers or agents who may be used as witnesses in legal
proceedings.
Dispute Resolution. If problems arise between us and C-Cube Microsystems,
we have agreed to the following procedures:
- The parties will make a good faith effort to first resolve the dispute
through negotiation.
- If negotiations fail, the parties agree to attempt to resolve the dispute
through non-binding mediation.
- If mediation fails, the parties can resort to litigation. In addition,
nothing prevents either party acting in good faith from initiating
litigation at any time if failure to do so would substantially
disadvantage the party.
Termination of the Agreement. Both C-Cube Microsystems and Semiconductor
must agree to terminate the separation agreement and all ancillary agreements at
any time between the closing of this offering and the distribution.
GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT
The general assignment and assumption agreement identifies the assets
C-Cube Microsystems will transfer to us and the liabilities we will assume from
C-Cube Microsystems in the separation. The agreement also describes when and how
these transfers and assumptions will occur.
Asset Transfer. Effective on the separation date, C-Cube Microsystems will
transfer the following assets to us, except as provided in an ancillary
agreement or other agreement:
- all assets reflected on our unaudited consolidated balance sheet as of
September 30, 1999, minus any assets disposed of after September 30,
1999;
- all written off, expensed or fully depreciated assets that would have
appeared on our balance sheet as of September 30, 1999 if we had not
written off, expensed or fully depreciated them;
- all assets that C-Cube Microsystems acquired after September 30, 1999
that would have appeared in our financial statements as of the separation
date if we prepared such financial statements using the same principles
we used in preparing our balance sheet dated September 30, 1999;
- all assets that our business primarily uses as of the separation date but
are not reflected in our balance sheet as of September 30, 1999 due to
mistake or omission;
- all claims or other rights of C-Cube Microsystems or the Semiconductor
business that primarily relate to the Semiconductor business;
66
<PAGE> 68
- all rights under all contracts in which C-Cube Microsystems is a party or
by which any of its assets is bound;
- all computers, desks, equipment and other assets used primarily by
employees of C-Cube Microsystems who will become our employees due to the
separation;
- all accounts receivable and other rights to payment for goods and
services payable to C-Cube Microsystems as of the separation date;
- all rights in the trade and service marks and domain names incorporating
or based on the name "C-CUBE";
- all Intellectual Property owned or transferable by C-Cube Microsystems or
Semiconductor that arises out of the activities of, or that is primarily
related to, Semiconductor, including all Intellectual Property listed on
Schedule to this agreement, and all rights to sue for,
recover and retain any damages from any third party's infringement of any
such Intellectual Property rights;
- cash or cash equivalents, bank accounts, lock boxes and other deposit
arrangements;
- all outstanding shares of all subsidiaries conducting Semiconductor
business that are currently owned directly by C-Cube Microsystems;
- specified rights under existing insurance policies; and
- other specified assets.
Excluded Assets. The general assignment and assumption agreement also
provides that C-Cube Microsystems will not transfer certain assets to us,
including the C-Cube Microsystems registered intellectual property as set forth
in the merger agreement related to the DiviCom business.
Assumption of Liabilities. Effective on the separation date, we will
assume the following liabilities from C-Cube Microsystems, except as provided in
an ancillary agreement or other agreement:
- all liabilities reflected as liabilities on our unaudited consolidated
balance sheet as of September 30, 1999, minus any liabilities that were
discharged after such date of the balance sheet;
- all liabilities of C-Cube Microsystems that arise after September 30,
1999, that would have appeared in our financial statements as of the
separation date if we prepared such financial statements using the same
principles we used in preparing our balance sheet of Semiconductor as of
September 30, 1999;
- all liabilities that are primarily related to or primarily arise out of
our business, or the operation of any business conducted by us, at the
separation date but are not reflected in our balance sheet as of
September 30, 1999 due to mistake or omission;
- any liability of C-Cube Microsystems or Semiconductor that primarily
related to the semiconductor business, including any liability for
corporate taxes incurred in connection with the spin-off and any
liability for taxes attributable to our pre-merger operations;
- all liabilities (other than taxes) primarily resulting from the operation
of our business, or resulting from any asset that C-Cube Microsystems
transferred to us;
- all liabilities arising out of specified terminated, divested or
discontinued businesses and operations specifically set forth in the
merger agreement;
- all fees and expenses of C-Cube Microsystems incurred in connection with
the merger;
- all accounts payable and other obligations of payment for goods or
services purchased, leased or otherwise received in the conduct of the
semiconductor business;
- all employee compensation liabilities relating to employees of the
semiconductor business;
67
<PAGE> 69
- all severance payments and related liabilities arising out of the
termination of employees that will not continue to be employed by either
Semiconductor or Harmonic; and
- other specified liabilities.
Excluded Liabilities. The general assignment and assumption agreement
provides that we will not assume specified liabilities, including:
- all liabilities to the extent that it is covered by a C-Cube Microsystems
insurance policy under which the Semiconductor business is not entitled
to benefits;
- all liabilities of pre-spin-off taxes not attributable to the
semiconductor business that result from audits or similar adjustments;
and
- all agreements and obligations of C-Cube Microsystems under the
agreements governing the distribution.
Terms of Other Ancillary Agreements Govern. To the extent that another
ancillary agreement expressly provides for the transfer of an asset or an
assumption of a liability, the terms of such other ancillary agreement will
determine the manner of the transfer and assumption.
Obtaining Approvals and Consents. The parties agree to use all reasonable
efforts to obtain any required consents, substitutions or amendments required to
novate or assign all rights and obligations under any contracts that will be
transferred in the separation.
Nonrecurring Costs and Expenses. Any nonrecurring costs and expenses that
are not allocated in the separation agreement or any other ancillary agreement
shall be the responsibility of the party that incurs the costs and expenses.
INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT
General Release of Pre-Separation Claims. Effective as of the separation
date, we will release C-Cube Microsystems and its affiliates, agents, successors
and assigns, and C-Cube Microsystems will release us, and our affiliates,
agents, successors and assigns, from any liabilities arising from events
occurring on or before the separation date, including events occurring in
connection with the activities to implement the separation, the merger and the
distribution. This provision will not impair a party from enforcing the
separation agreement, any ancillary agreement or any arrangement specified in
any of these agreements.
Indemnification. The indemnification and insurance matters agreement also
contains provisions governing indemnification. In general, we have agreed to
indemnify C-Cube Microsystems and its affiliates, agents, successors and assigns
from all liabilities arising from:
- our business, any of our liabilities or any of our contracts; and
- any breach by us of the separation agreement or any ancillary agreement.
C-Cube Microsystems has agreed to indemnify us and our affiliates, agents,
successors and assigns from all liabilities arising from:
- C-Cube Microsystems' business other than the businesses transferred to us
pursuant to the separation; and
- any breach by C-Cube Microsystems of the separation agreement or any
ancillary agreement.
The indemnifying party will make all indemnification payments net of
insurance proceeds that the indemnified party receives. The agreement also
contains provisions governing notice and indemnification procedures.
68
<PAGE> 70
Employee Matters Agreement
Semiconductor and C-Cube Microsystems will enter into an employee matters
agreement to allocate assets, liabilities and responsibilities relating to
current and former employees of Semiconductor and their participation in the
benefit plans, including stock plans, that C-Cube Microsystems currently
sponsors and maintains.
All eligible Semiconductor employees will continue to participate in the
C-Cube Microsystems benefit plans on comparable terms and conditions to those
for C-Cube Microsystems employees until Semiconductor establishes comparable
benefit plans for current and former, as applicable, Semiconductor employees.
Semiconductor intends to establish these plans no later than the time of the
distribution.
Once Semiconductor establishes its own corresponding benefit plans,
Semiconductor may modify or terminate each such plan in accordance with the
terms of the plan and Semiconductor policies. No Semiconductor benefit plan will
provide benefits that overlap benefits under the corresponding C-Cube
Microsystems benefit plan at the time of the distribution. Each Semiconductor
benefit plan will provide that all service, compensation and other benefit
determinations that, as of the distribution, were recognized under the
corresponding C-Cube Microsystems benefit plan will be taken into account under
that Semiconductor benefit plan.
Each Semiconductor benefit plan will assume any liabilities under the
corresponding C-Cube Microsystems benefit plan for Semiconductor active and
former employees. Assets relating to the employee liabilities will also be
transferred to Semiconductor or the related Semiconductor plans and trusts and
other funding vehicles associated with Semiconductor's benefit plans.
Options. All vested options to purchase C-Cube Microsystems common stock
held by Semiconductor employees will terminate on the date of the separation.
All unvested options to purchase C-Cube Microsystems common stock held by
Semiconductor employees will be replaced with substitute options to purchase
Semiconductor common stock, also referred to as spin-off Semiconductor options.
The number of shares and the exercise price of options to purchase C-Cube
Microsystems common stock that convert into spin-off Semiconductor options will
be adjusted using a conversion formula. The conversion formula will be based on
the closing per-share price of C-Cube Microsystems common stock immediately
prior to the distribution, and the first trading per-share price of
Semiconductor common stock on the distribution. The resulting spin-off
Semiconductor options will maintain the original vesting provisions and option
period.
All options held by non-employee directors of C-Cube Microsystems who will
become non-employee directors of Semiconductor will accelerate immediately prior
to the merger with Harmonic and become exercisable for all of the shares of
C-Cube Microsystems common stock then subject to the option. Immediately upon
the merger, each such non-employee director option will terminate.
Stock Purchase Plan. We anticipate that Semiconductor employees will
continue to participate in the C-Cube Microsystems stock purchase plan until the
distribution. On or before the distribution Semiconductor will adopt a stock
purchase plan that is comparable to the C-Cube Microsystems stock purchase plan.
Tax Sharing Agreement
C-Cube Microsystems, Semiconductor and Harmonic have entered into a tax
sharing agreement providing for each of the party's obligations concerning
various tax liabilities. Consistent with the Merger Agreement, the tax sharing
agreement provides that Semiconductor will pay all federal, state, local and
foreign taxes attributable to for any taxable period or portion of a taxable
period ending on or prior to the Effective Time and all taxes related to the
distribution of the Semiconductor stock. Further, Semiconductor is obligated to
indemnify C-Cube Microsystems and Harmonic for all increases in taxes related to
the Semiconductor business prior to the spin-off or taxes incurred in connection
with the spin-off.
The tax sharing agreement further provides for cooperation with respect to
tax matters, the exchange of information and the retention of records which may
affect the income tax liability of either party.
69
<PAGE> 71
Real Estate Matters Agreement
The real estate matters agreement addresses real estate matters relating to
the C-Cube Microsystems properties that C-Cube Microsystems will transfer to or
share with Semiconductor. The agreement describes the manner in which C-Cube
Microsystems will transfer to or share with Semiconductor various leased
properties, including the following types of transactions:
- assignments to Semiconductor of C-Cube Microsystems's leases for
specified leased properties; and
- subleases back to C-Cube Microsystems by Semiconductor of portions of
specified leased properties to be assigned to us.
The real estate matters agreement includes a description of each property
to be transferred to or shared with Semiconductor for each type of transaction.
The standard forms of the proposed transfer documents (e.g., assignment and
sublease) are contained in schedules.
The real estate matters agreement also requires both parties to use
reasonable efforts to obtain any landlord consents required for the proposed
transfers of leased sites, including C-Cube Microsystems paying commercially
reasonable consent fees and negotiating other commercially reasonable amendments
to the leases, if required by the landlords, and Semiconductor agreeing to
provide the security required under the applicable leases.
The real estate matters agreement further provides that Semiconductor will
be required to accept the transfer of all sites allocated to Semiconductor, even
if a site has been damaged by a casualty before the separation date. Transfers
with respect to leased sites where the underlying lease is terminated due to
casualty or action by the landlord prior to the separation date will not be
made, and neither party will have any liability related thereto.
The real estate matters agreement also gives the parties the right to
change the allocation and terms of specified sites by mutual agreement based on
changes in the requirements of the parties. The real estate matters agreement
provides that all reasonable costs required to effect the transfers (including
landlord consent fees and landlord attorneys' fees) will be paid by C-Cube
Microsystems.
Master Transitional Services Agreement
Semiconductor will enter into a transitional services agreement with C-Cube
Microsystems covering the provision of various transitional services, including
telecommunications, networks, enterprise applications and other services by
Semiconductor to C-Cube Microsystems and, if necessary in certain circumstances,
vice versa. Except for the items for which substantially all of the use is by or
for the benefit of the DiviCom business, all infrastructure hardware and
software (including, but not limited to, telecommunications, networks, servers,
desktop computers and enterprise applications, unless prohibited by a third
party) shall be owned by Semiconductor. The services to be provided will
generally be provided for a fee equal to the actual direct and indirect costs of
providing the services plus 10%. The transition services agreement will
generally have a term of [two years] or less from the date of separation.
70
<PAGE> 72
DESCRIPTIONS OF EMPLOYEE BENEFITS PLANS
2000 STOCK PLAN
Semiconductor intends to adopt a 2000 stock plan to provide for the grant
of incentive stock options to employees, including officers and employee
directors, and for the grant of nonstatutory stock options to employees,
directors and consultants. The total number of shares of our common stock that
Semiconductor will reserve for issuance under the 2000 stock plan equals
25,000,000 shares, plus annual increases will be added to the 2000 stock plan,
beginning in 2001, equal to the lesser of 2,000,000 shares, 3% of the
outstanding shares or a lesser amount determined by the board of directors.
Administration
Semiconductor's board of directors or a committee of the board of directors
will administer the 2000 stock plan. The administrator of our 2000 stock plan
will have the power to determine among other things:
- the terms of the options granted, including the exercise price of the
option;
- the number of shares subject to each option;
- the exercisability of each option; and
- the form of consideration payable upon the exercise of each option.
Options
The exercise price of all incentive stock options granted under the 2000
stock plan must be at least equal to the fair market value of the common stock
on the date of grant. The exercise price of nonstatutory stock options granted
under the 2000 stock plan is determined by the administrator, but with respect
to nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Internal Revenue Code,
the exercise price must be at least equal to the fair market value of
Semiconductor common stock on the date of grant. With respect to any participant
who owns stock possessing more than 10% of the voting power of all classes of
the our outstanding capital stock, the exercise price of any incentive stock
option granted must be at least equal 110% of the fair market value on the grant
date and the term of such incentive stock option must not exceed five years. The
term of all other options granted under the 2000 stock plan may not exceed ten
years.
During any fiscal year, each optionee may be granted options to purchase a
maximum of [500,000] shares. In addition, in connection with an optionee's
initial employment with Semiconductor, such optionee may be granted an option
covering an additional [500,000] shares.
Options granted under the 2000 stock plan must generally be exercised
within three months after the end of optionee's status as an employee, director
or consultant of Semiconductor, or within twelve months after such optionee's
termination by death or disability, but in no event later than the expiration of
the option's term. Upon the death of an optionee, vesting and exercisability of
the optionee's options will accelerate on the date of death as to that number of
shares which would have become vested and exercisable if optionee had remained
employed until the date one year following the date of death.
Transferability of Options
Unless determined otherwise by the administrator, options granted under the
2000 stock plan are generally not transferable by the optionee, and each option
and stock purchase right is exercisable during the lifetime of the optionee only
by such optionee.
Adjustments upon Certain Transfers of Control
The 2000 stock plan provides that in the event of a transfer of control of
Semiconductor, which includes certain mergers or consolidations of Semiconductor
or a sale of all or substantially all of Semiconductor's assets or stock, each
option shall be assumed or an equivalent option substituted for by
71
<PAGE> 73
the successor corporation. If the outstanding options are not assumed or
substituted for by the successor corporation, the options will terminate.
Amendment and Termination of the 2000 Stock Plan
The administrator will have the authority to amend, suspend or terminate
the 2000 stock plan, so long as no such action affects any shares of common
stock previously issued and sold or any option previously granted under the 2000
stock plan. Unless terminated sooner, the 2000 stock plan will terminate
automatically ten years from the date of its adoption.
2000 EMPLOYEE STOCK PURCHASE PLAN
Semiconductor intends to adopt a 2000 employee stock purchase plan to
encourage employee stock ownership. The total number of shares of Semiconductor
common stock that will be reserved for issuance under the 2000 employee stock
purchase plan equals [500,000] shares, plus annual increases will be added to
the 2000 employee stock purchase plan, beginning in 2001, equal to the lesser of
[500,000] shares, [1%] of the outstanding shares or a lesser amount determined
by Semiconductor's board of directors.
Structure of the 2000 Employee Stock Purchase Plan
The 2000 employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, contains consecutive, overlapping,
twenty-four month offering periods. Each offering period includes four six-month
purchase periods. The offering periods generally start on the first trading day
on or after February 1 and August 1 of each year, except for the first such
offering period which will commence on the first trading day following the
distribution and continue until January 31, 2002.
Eligibility
Employees are eligible to participate if they are customarily employed by
Semiconductor or any participating subsidiary for at least 20 hours per week and
more than five months in any calendar year. However, employees may not be
granted an option to purchase stock under the 2000 employee stock purchase plan
if they either:
- immediately after grant, own stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
- hold rights to purchase stock under our employee stock purchase plans
which exceeds $25,000 worth of stock for each calendar year.
Purchases
The 2000 employee stock purchase plan permits participants to purchase our
common stock through payroll deductions of up to [10%] of the participant's
"compensation." Compensation is defined as the participant's base straight time
gross earnings, commissions, overtime, profit sharing and bonuses, but exclusive
of payments for shift premium, incentive compensation, incentive payments and
other compensation. The maximum number of shares a participant may purchase
during a single purchase period is [10,000] shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the 2000 purchase plan is generally 85% of the lower of the fair
market value of the common stock either:
- the day before the beginning of the offering period; or
- on the day of the purchase.
In the event the fair market value at the end of a purchase period is less
than the fair market value at the beginning of the offering period, the
participants will be withdrawn from the current offering period following
exercise and automatically re-enrolled in a new offering period. The new
offering period will use
72
<PAGE> 74
the fair market value as of the day before the start of the new offering period
to determine the purchase price for future purchase periods. Participants may
end their participation at any time during an offering period, and they will be
paid their payroll deductions to date. Participation ends automatically upon
termination of employment with Semiconductor.
Transferability of Rights
Rights granted under the 2000 employee stock purchase plan are not
transferable by a participant other than by will, the laws of descent and
distribution, or as otherwise provided under the 2000 employee stock purchase
plan.
Merger or Asset Sale
The 2000 employee stock purchase plan provides that, in the event we merge
with or into another corporation or there is a sale of substantially all of our
assets, each outstanding option may be assumed or substituted for by the
successor corporation. If the successor corporation refuses to assume or
substitute for the outstanding options, the offering period then in progress
will be shortened and a new exercise date will be set.
Amendment and Termination of the 2000 Employee Stock Purchase Plan
The 2000 employee stock purchase plan will terminate in 2010. Our board of
directors has the authority to amend or terminate the 2000 employee stock
purchase plan, except that no such action may adversely affect any outstanding
rights to purchase stock under the 2000 employee stock purchase plan.
2000 DIRECTOR OPTION PLAN
We intend to adopt a 2000 director option plan to help attract and retain
non-employee directors. The total number of shares of our common stock that we
will reserve for issuance under the 2000 stock plan equals [450,000] shares.
Administration
Our board of directors or a committee of the board of directors will
administer the 2000 director option plan.
Option Grants
The 2000 director option plan provides for an automatic initial grant of an
option to purchase [40,000] shares of our common stock to each non-employee
director on the date which the later of the following events occur:
- the effective date of the 2000 director option plan, if such non-employee
director does not then hold an option to acquire shares of our stock; or
- the date when a person first becomes a non-employee director.
After the initial grant, a non-employee director will automatically be
granted subsequent options to purchase [10,000] shares of our common stock each
year on his or her anniversary date, if on such date he or she is serving as a
non-employee director of Semiconductor. If a non-employee director holds office
on the effective date of the 2000 director option plan then his or her
anniversary date is the anniversary of the effective date of the director option
plan.
Any non-employee director may waive his or her option grant by filing an
irrevocable election with Semiconductor.
Each initial option grant and each subsequent option grant shall have a
term of 10 years. Generally, each option grant will vest as to 25% of the shares
subject to the option on the anniversary of its date of grant and 1/48 of the
shares subject to the option shall vest each month thereafter, subject to the
optionee's
73
<PAGE> 75
continuous service as a director of Semiconductor. The exercise price of all
options will be 100% of the fair market value per share of Semiconductor common
stock on the date of grant.
Options granted under the 2000 director option plan must be exercised
within three months of the end of the optionee's tenure as a director of
Semiconductor, or within six months after such director's termination by death
or disability, but in no event later than the expiration of the option's ten
year term.
Transferability of Options
No option granted under the 2000 director option plan is transferable by
the optionee other than by will or the laws of descent and distribution, and
each option is exercisable, during the lifetime of the optionee, only by the
optionee.
Transfer of Control
The 2000 director option plan provides that in the event of certain
transfers of control of Semiconductor within the first two years after the
effective date of the director option plan, including a merger of Semiconductor
with or into another corporation, or a sale of substantially all of
Semiconductor's assets, the board of directors may arrange to have the successor
entity to assume all outstanding options. Any options not so assumed will be
cancelled. If the transfer of control occurs more than two years after the
effective date of the director option plan, all outstanding options will
accelerate and become immediately exercisable and vested immediately prior to
such transfer of control, provided such transfer of control is actually
consummated.
Amendment and Termination of the 1999 Director Option Plan
The administrator will have the authority to amend, suspend or terminate
the 2000 director option plan, so long as no such action affects any shares of
common stock previously issued and sold or any option previously granted under
the 2000 director option plan. Unless terminated sooner, the 2000 director
option plan will terminate automatically ten years from the effective date of
this director option plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH C-CUBE MICROSYSTEMS
The Company has entered, or will enter into various arrangements with
C-Cube Microsystems which set forth both companies' duties and responsibilities
in the separation and distribution. Please see "Arrangements Between C-Cube
Microsystems and Semiconductor" beginning on page for further details.
INDEMNIFICATION AGREEMENTS
The Company has entered, or will enter, into indemnification agreements
with each of its directors and executive officers prior to the distribution.
Please see "Indemnification of Directors and Officers" beginning on page and
the form of Officers' and Directors' Indemnification Agreement attached hereto
as Exhibit 10.6, for further information.
74
<PAGE> 76
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain material federal income tax
considerations of the spin-off and the merger. Insofar as this discussion
relates to C-Cube Microsystems stockholders, it does not include all federal
income tax considerations that may be relevant to particular C-Cube Microsystems
stockholders in light of their particular circumstances, or to C-Cube
Microsystems stockholders who are subject to special tax rules, such as dealers
in securities, banks or other financial institutions, insurance companies,
individuals who are not citizens or residents of the United States, foreign
entities, or tax-exempt organizations. This discussion also assumes that C-Cube
Microsystems stockholders hold their shares as capital assets, and it does not
apply to C-Cube Microsystems stockholders who are subject to alternative minimum
tax or mark-to-market rules, stockholders who hold their shares as part of a
hedge, straddle or other risk reduction or conversion transaction, or
stockholders who acquired their C-Cube Microsystems common stock through stock
option or stock purchase programs or otherwise as compensation. In addition, it
does not address the tax consequences of the spin-off or the merger under
foreign, state or local tax laws. This discussion is based on the Internal
Revenue Code, applicable Treasury Regulations, judicial decisions and
administrative rulings and practice, all as of the date hereof, all of which are
subject to change. Any such changes could be applied retroactively and could
affect the accuracy of the statements and conclusions in this discussion and the
tax consequences of the spin-off and the merger to C-Cube Microsystems, Harmonic
and their stockholders. No ruling has been or will be requested from the
Internal Revenue Service with regard to any of the tax consequences of the
spin-off or the merger.
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX
CONSEQUENCES TO THEM OF THE SPIN-OFF AND THE MERGER BASED ON THEIR OWN
CIRCUMSTANCES, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM OF THE SPIN-OFF AND THE MERGER.
Material Federal Income Tax Considerations of the Spin-Off -- Stockholder Tax
Considerations
Tax-Free Treatment. Although the completion of the distribution is not
contingent on the receipt of a tax opinion with respect to the distribution, we
have been advised by Ernst & Young LLP that in their opinion, for federal income
tax purposes, the distribution will qualify as a spin-off that will be tax-free
to C-Cube Microsystems stockholders under Section 355(a) of the Internal Revenue
Code. Provided the distribution so qualifies:
- You will not recognize income, gain or loss as a result of your receipt
of Semiconductor stock.
- Your tax basis in your Semiconductor stock and your C-Cube Microsystems
stock (which will be converted into Harmonic stock in the merger) will be
determined by allocating your basis in the C-Cube Microsystems stock
immediately before the distribution and merger between the Harmonic stock
received in the merger and the Semiconductor stock received in proportion
to their relative fair market values on the date of the distribution.
- Your holding period in the Semiconductor stock received in the
distribution will include the holding period of the C-Cube Microsystems
stock with respect to which the Semiconductor stock is distributed,
provided the C-Cube Microsystems stock was held as a capital asset on the
date of the distribution.
- You will recognize gain or loss with respect to cash you receive instead
of fractional shares of Semiconductor stock. This gain or loss will be a
capital gain or loss provided your C-Cube Microsystems stock was held as
a capital asset on the date of the distribution, and it will be a long-
term capital gain or loss if you have held your C-Cube stock for more
than one year on the date of the distribution.
- Upon the future sale or other disposition of your Semiconductor stock,
you should have a taxable gain or loss equal to the difference between
the value of the consideration received and your basis in your
Semiconductor stock.
75
<PAGE> 77
The Ernst & Young LLP opinion referred to above will be based on and
subject to certain limitations, qualifications, assumptions and representations
provided by C-Cube Microsystems and Semiconductor. C-Cube Microsystems is not
aware of any present facts or circumstances which would make such assumptions or
representations untrue. However, certain future events not within the control of
C-Cube Microsystems or Semiconductor, including, for example, certain
dispositions of Semiconductor stock, could cause the distribution of
Semiconductor stock not to qualify for tax-free treatment to our stockholders.
In addition, even in the absence of an inaccurate assumption or representation,
the IRS is not precluded from successfully asserting that the distribution is
taxable to the C-Cube shareholders. The opinion of Ernst & Young LLP merely
represents its interpretation of existing authorities and is not binding on the
IRS.
Risk of Taxable Treatment. If the distribution of Semiconductor stock did
not qualify for tax-free treatment for the stockholders of C-Cube Microsystems,
each holder of C-Cube Microsystems stock who received Semiconductor stock would
be treated as receiving a taxable distribution, which might be treated as
taxable capital gains or taxable ordinary income up to the value of the stock
distributed.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS OF THE SPIN-OFF -- CORPORATE TAX
CONSIDERATIONS.
Notwithstanding the treatment of the transaction for our stockholders, the
spin-off will be taxable to C-Cube Microsystems. C-Cube Microsystems will
recognize a taxable gain approximately equal to the difference between the fair
market value of Semiconductor on the date of distribution, minus our basis in
the assets (net of liabilities) that we will transfer to Semiconductor, minus
certain expenses related to the spin-off transaction. C-Cube Microsystems has
estimated, based on certain assumptions, including an assumed fair market value
for the stock of the spin-off semiconductor business, that this tax liability
will be approximately [$200] million. The actual tax liability may differ
significantly from the estimate based on the facts and circumstances existing at
the time of the distribution. For example, the value of the stock of the
spun-off semiconductor business will likely fluctuate and if such value at the
time of the distribution exceeds the assumed value, the actual tax liability
will exceed the estimated tax liability.
Under Semiconductor's tax sharing agreement with Harmonic, Semiconductor
will be liable for the originally calculated corporate tax incurred as a result
of the spin-off, plus any increase in that corporate tax liability (plus certain
related costs) that results, for example, from an IRS audit. C-Cube Microsystems
will retain, and transfer to Harmonic, cash reserves in an amount sufficient to
pay this corporate tax liability. In addition, Semiconductor has agreed to
indemnify and hold Harmonic harmless from and against these tax liabilities to
the extent they relate to the semiconductor business, including the spin-off,
and exceed the retained cash reserve set aside for the payment of taxes.
THE FOREGOING SUMMARY OF MATERIAL INCOME TAX CONSIDERATIONS IS ONLY A
GENERAL DESCRIPTION. EACH C-CUBE MICROSYSTEMS STOCKHOLDER SHOULD CONSULT SUCH
HOLDER'S OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES OF THE
DISTRIBUTION IN LIGHT OF SUCH STOCKHOLDER'S PARTICULAR CIRCUMSTANCES, INCLUDING
APPLICATION OF FEDERAL, STATE, LOCAL AND FOREIGN LAWS, AND THE EFFECT OF
POSSIBLE CHANGES IN TAX LAWS THAT MAY AFFECT THE ABOVE DISCUSSION.
Material Federal Income Tax Considerations of the Merger.
For information regarding the material federal income tax considerations of
the merger of C-Cube Microsystems and Harmonic, please see the section entitled
"Material Federal Income Tax Consequences of the Merger" beginning on page
of the joint proxy statement/prospectus/information statement of Harmonic and
C-Cube Microsystems to which this information statement is attached.
76
<PAGE> 78
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
Following the distribution, Semiconductor authorized capital stock will
consist of 200,000,000 shares of common stock, $.001 par value, and 10,000,000
shares of preferred stock, $.001 par value. The description set forth below is
incomplete and is qualified by reference to certificate of incorporation or
certificate and bylaws, which are set forth in Exhibits 3.1 and 3.2.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Except as
otherwise provided by law, the holders of common stock vote together with the
holders of preferred stock as one class. Subject to the rights of holders of any
shares of preferred stock which may at the time be outstanding, holders of
common stock will be entitled to such dividends as the board of directors may
declare out of funds legally available therefor. Subject to the prior rights of
creditors and holders of any preferred stock which may be outstanding from time
to time, the holders of common stock are entitled, in the event of liquidation,
dissolution or winding up of Semiconductor, to share pro rata in the
distribution of all remaining assets. The common stock is not liable for any
calls or assessments and is not convertible into any other securities. In
addition, there are no redemption or sinking fund provisions applicable to the
common stock.
PREFERRED STOCK
The certificate provides that the board of directors is authorized to
provide for the issuance of shares of preferred stock, from time to time, in one
or more series. Prior to the issuance of shares in each series, the board of
directors is required by the certificate and the DGCL to adopt resolutions and
file a Certificate of Designations, Preferences and Relative, Participating,
Optional and Other Special Rights of Preferred Stock and Qualifications,
Limitations and Restrictions Thereof or the Certificate of Designation with the
Secretary of State of Delaware, fixing for each such series the designations,
preferences and relative, participating, optional or other special rights
applicable to the shares to be included in any such series and any
qualifications, limitations or restrictions thereon, including, but not limited
to, dividend rights, dividend rate or rates, conversion rights, voting rights,
rights and terms of redemption (including sinking fund provisions), the
redemption price or prices, and the liquidation preferences as are permitted by
Delaware law.
DISTRIBUTION AGENT; TRANSFER AGENT AND REGISTRAR
The Distribution Agent, Transfer Agent and Registrar for the common stock
and preferred stock is Boston Equiserve.
CERTAIN CHARTER AND BYLAW PROVISIONS AND DELAWARE LAW
After the distribution, certain provisions of the certificate and bylaws
could discourage potential acquisition proposals and could delay or prevent a
change in control. The certificate provides, among other things, for a
classified board of directors and eliminates the right of stockholders to take
action by written consent. The issuance of preferred stock authorized in the
certificate could have the effect of delaying or preventing a change in control.
Such preferred stock could be utilized to implement, without stockholder
approval, a stockholders' rights plan that could be triggered by certain change
in control transactions, which could delay or prevent a change in control or
could impede a merger, consolidation, takeover or other business combination
involving Semiconductor. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting power of the holders of common
stock, including the loss of voting control to others. We have no current plans
to issue shares of preferred stock.
In addition, the bylaws provide, among other things, that special meetings
of our stockholders may be called only by the board of directors or, the
chairman of the board of directors. The bylaws also establish procedures,
including advance notice procedures with regard to the nomination, other than by
or at the direction of the board of directors, of candidates for election as
directors.
77
<PAGE> 79
We are subject to the provisions of Section 203 of the DGCL, an
antitakeover law. In general, the statute prohibits a publicly held Delaware
corporation from entering into a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. For purposes of Section 203, a
"business combination" includes a merger, asset sale or transaction resulting in
a financial benefit to the interested stockholder, and an "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of our voting capital stock.
THE PROVISIONS OF THE CERTIFICATE, BYLAWS AND DELAWARE LAW ARE INTENDED TO
ENCOURAGE POTENTIAL ACQUIRORS TO NEGOTIATE WITH US AND ALLOW OUR BOARD OF
DIRECTORS THE OPPORTUNITY TO CONSIDER ALTERNATIVE PROPOSALS IN THE INTEREST OF
MAXIMIZING STOCKHOLDER VALUE. SUCH PROVISIONS, HOWEVER, MAY ALSO HAVE THE EFFECT
OF DISCOURAGING ACQUISITION PROPOSALS OR DELAYING OR PREVENTING A CHANGE IN
CONTROL, WHICH MAY HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF THE COMMON
STOCK.
RECENT SALES OF UNREGISTERED SECURITIES
In February 2000, Semiconductor entered into a Securities Purchase
Agreement with Thomson Multimedia S.A.. The Securities Purchase Agreement
provides that, for a purchase price of $19.78 per share of common stock, Thomson
will receive 474,747 shares of Semiconductor's common stock on a post-
investment basis and a warrant to purchase 949,494 shares of Semiconductor's
common stock post-investment basis at an exercise price of $19.78. The
percentages Thomson will receive will be based on the number of shares of common
stock of Semiconductor outstanding at the end of the first trading day after the
distribution. The warrant is fully-vested upon issuance and is exercisable
approximately seven (7) years from the date of the agreement. Notwithstanding
this provision, if Thomson attains certain milestones, the warrant will be
accelerated and exercisable in part pursuant to its terms. All of the securities
issued to Thomson pursuant to the agreement are restricted securities that have
not been registered under the Securities Act and that have been acquired for
investment purposes and not to resell.
If Thomson wishes to dispose of 33% or more of the securities that it
obtained pursuant to the agreement, Semiconductor will have the first right to
repurchase the shares in whole or in part for cash at the amount specified in
the transfer notice provided to Semiconductor by Thomson. If Semiconductor
chooses not to exercise this right, Thomson is free to transfer the shares on
terms not materially less favorable than those offered to Semiconductor to the
potential purchaser. Transfers to "qualified institutional buyers" are exempt
from this right of first refusal.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain all future earnings, if any, for use in the operation
and expansion of our business and do not anticipate declaring or paying cash
dividends.
78
<PAGE> 80
INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the DGCL, Semiconductor has included in its certificate a
provision to eliminate the personal liability of its directors for monetary
damages for breach or alleged breach of their fiduciary duties as directors,
subject to certain exceptions. In addition, the bylaws require the companies to
(i) indemnify their officers and directors under certain circumstances,
including those circumstances in which indemnification would otherwise be
discretionary, and (ii) advance expenses to their officers and directors as
incurred in connection with proceedings against them for which they may be
indemnified. We have entered into indemnification agreements with our officers
and directors containing provisions that are in some respects broader than the
specific indemnification provisions contained in the DGCL. The indemnification
agreements may require the companies, among other things, to indemnify such
officers and directors against certain liabilities that may arise by reason of
their status or service as directors or officers (other than liabilities arising
from willful misconduct of a culpable nature), to advance expenses incurred as a
result of any proceeding against them as to which they could be indemnified, and
to obtain directors' and officers' insurance if available on reasonable terms.
We believe that these charter provisions and indemnification agreements are
necessary to attract and retain qualified persons as directors and officers.
We understand that the staff of the Securities and Exchange Commission is
of the opinion that statutory, charter and contractual provisions as are
described above have no effect on claims arising under the federal securities
laws.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Semiconductor common stock is
Boston EquiServe, L.P., 150 Royall Street, Canton, MA 02021; telephone: (781)
575-3120.
79
<PAGE> 81
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements:
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets at December 31, 1998 and
1997................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996....................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996....................... F-6
Notes to Consolidated Financial Statements................ F-7
Condensed Consolidated Balance Sheets at September 30,
1999 and December 31, 1998............................. F-23
Condensed Consolidated Statements of Income for the
quarters ended and the nine-month periods ended
September 30, 1999 and 1998............................ F-24
Condensed Consolidated Statements of Cash Flows for the
nine-month periods ended September 30, 1999 and 1998... F-25
Notes to Condensed Consolidated Financial Statements...... F-26
</TABLE>
F-1
<PAGE> 82
[DELOITTE & TOUCHE LOGO]
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, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
January 21, 1999
F-2
<PAGE> 83
C-CUBE MICROSYSTEM INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
(IN THOUSANDS, EXCEPT
PAR VALUE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $108,224 $145,034
Short-term investments.................................... 99,603 21,316
Accounts receivable, net of allowances: 1998 -- $17,034,
1997 -- $10,175........................................ 36,980 40,606
Inventories............................................... 16,073 15,270
Deferred income taxes..................................... 11,170 11,496
Other current assets...................................... 19,977 14,666
-------- --------
Total current assets.............................. 292,027 248,388
Property and equipment -- net............................... 29,622 23,561
Production capacity rights.................................. 12,600 18,200
Distribution rights -- net.................................. 1,483 1,648
Purchased technology -- net................................. 5,921 9,408
Other assets................................................ 1,518 2,903
-------- --------
Total............................................. $343,171 $304,108
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 19,942 $ 9,221
Accrued compensation and benefits......................... 12,379 9,639
Other accrued liabilities................................. 16,628 14,167
Income taxes payable...................................... 15,551 2,467
Deferred contract revenue................................. 6,706 3,895
Current portion of long-term obligations.................. 355 608
-------- --------
Total current liabilities......................... 71,561 39,997
Long-term obligations....................................... 23,557 87,462
Deferred income taxes....................................... 4,650 869
-------- --------
Total liabilities................................. 99,768 128,328
-------- --------
Minority interest in subsidiary............................. 28 365
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000 shares
authorized............................................. -- --
Common stock, $0.001 par value, 150,000 shares authorized;
shares outstanding: 1998 -- 38,261, 1997 -- 36,787..... 225,265 203,728
Accumulated other comprehensive loss...................... (1,852) (1,986)
Retained earnings (deficit)............................... 19,962 (26,327)
-------- --------
Total stockholders' equity........................ 243,375 175,415
-------- --------
Total............................................. $343,171 $304,108
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 84
C-CUBE MICROSYSTEM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net revenues............................................... $351,797 $337,012 $319,758
-------- -------- --------
Costs and expenses:
Cost of product revenues................................. 160,839 151,333 144,985
Research and development................................. 74,031 64,204 44,177
Selling, general and administrative...................... 60,512 52,732 39,002
Purchased in-process technology.......................... -- -- 131,349
-------- -------- --------
Total............................................ 295,382 268,269 359,513
-------- -------- --------
Income (loss) from operations.............................. 56,415 68,743 (39,755)
Other income (expense):
Interest income and other................................ 8,511 4,291 5,934
Interest expense and other............................... (4,272) (6,048) (5,962)
-------- -------- --------
Total............................................ 4,239 (1,757) (28)
-------- -------- --------
Income (loss) before income taxes, minority interest and
extraordinary item....................................... 60,654 66,986 (39,783)
Income tax expense......................................... 18,196 22,895 32,944
-------- -------- --------
Income (loss) before minority interest and extraordinary
item..................................................... 42,458 44,091 (72,727)
Minority interest in net income (loss) of subsidiary....... (337) (248) 318
-------- -------- --------
Income (loss) before extraordinary item.................... 42,795 44,339 (73,045)
Extraordinary gain on repurchase of convertible notes (net
of tax).................................................. 3,494 -- --
-------- -------- --------
Net income (loss).......................................... $ 46,289 $ 44,339 $(73,045)
======== ======== ========
Basic earnings (loss) per share:
Income (loss) before extraordinary item.................. $ 1.14 $ 1.21 $ (2.15)
Extraordinary item (net of tax).......................... 0.09 -- --
-------- -------- --------
Net income (loss)........................................ $ 1.24 $ 1.21 $ (2.15)
======== ======== ========
Diluted earnings (loss) per share:
Income (loss) before extraordinary item.................. $ 1.11 $ 1.15 $ (2.15)
Extraordinary item (net of tax).......................... 0.09 -- --
-------- -------- --------
Net income (loss)........................................ $ 1.19 $ 1.15 $ (2.15)
======== ======== ========
Shares:
Basic.................................................... 37,382 36,497 33,928
======== ======== ========
Diluted.................................................. 40,754 41,683 33,928
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 85
C-CUBE MICROSYSTEM INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES ACCUMULATED
COMMON STOCK DEFERRED RECEIVABLE OTHER RETAINED
----------------- STOCK FROM COMPREHENSIVE EARNINGS
SHARES AMOUNT COMPENSATION STOCKHOLDERS LOSS (DEFICIT)
------ -------- ------------ ------------ ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1,
1996.................... 32,363 $ 87,124 $(635) $(459) $ (874) $ 2,379
Net loss.................. (73,045)
Accumulated translation
adjustments............. (378)
Unrealized gain on
investments............. 1
Comprehensive loss........
Common stock issued under
stock plans............. 1,359 7,302
Common stock issued and
stock options assumed in
connection with business
acquisition............. 2,291 76,580
Tax benefit from employee
stock transactions...... 20,038
Amortization of deferred
stock compensation...... 385
Collection of notes
receivable from
stockholders............ 154
------ -------- ----- ----- ------- --------
BALANCES, DECEMBER 31,
1996.................... 36,013 191,044 (250) (305) (1,251) (70,666)
Net income................ 44,339
Accumulated translation
adjustments............. (731)
Unrealized loss on
investments............. (4)
Comprehensive income......
Common stock issued under
stock plans............. 774 9,111
Tax benefit from employee
stock transactions...... 3,573
Amortization of deferred
stock compensation...... 250
Collection of notes
receivable from
stockholders............ 305
------ -------- ----- ----- ------- --------
BALANCES, DECEMBER 31,
1997.................... 36,787 203,728 -- -- (1,986) (26,327)
Net income................ 46,289
Accumulated translation
adjustments............. 41
Unrealized gain on
investments............. 93
Comprehensive income......
Common stock issued under
stock plans............. 1,474 20,111
Tax benefit from employee
stock transactions...... 1,426
------ -------- ----- ----- ------- --------
BALANCES, DECEMBER 31,
1998.................... 38,261 $225,265 $ -- $ -- $(1,852) $ 19,962
====== ======== ===== ===== ======= ========
<CAPTION>
TOTAL
TOTAL COMPREHENSIVE
STOCKHOLDERS' INCOME
EQUITY (LOSS)
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
BALANCES, JANUARY 1,
1996.................... $ 87,535
Net loss.................. (73,045) $(73,045)
Accumulated translation
adjustments............. (378) (378)
Unrealized gain on
investments............. 1 1
--------
Comprehensive loss........ $(73,422)
========
Common stock issued under
stock plans............. 7,302
Common stock issued and
stock options assumed in
connection with business
acquisition............. 76,580
Tax benefit from employee
stock transactions...... 20,038
Amortization of deferred
stock compensation...... 385
Collection of notes
receivable from
stockholders............ 154
-------- --------
BALANCES, DECEMBER 31,
1996.................... 118,572
Net income................ 44,339 $ 44,339
Accumulated translation
adjustments............. (731) (731)
Unrealized loss on
investments............. (4) (4)
--------
Comprehensive income...... $ 43,604
========
Common stock issued under
stock plans............. 9,111
Tax benefit from employee
stock transactions...... 3,573
Amortization of deferred
stock compensation...... 250
Collection of notes
receivable from
stockholders............ 305
-------- --------
BALANCES, DECEMBER 31,
1997.................... 175,415
Net income................ 46,289 $ 46,289
Accumulated translation
adjustments............. 41 41
Unrealized gain on
investments............. 93 93
--------
Comprehensive income...... $ 46,423
========
Common stock issued under
stock plans............. 20,111
Tax benefit from employee
stock transactions...... 1,426
--------
BALANCES, DECEMBER 31,
1998.................... $243,375
========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 86
C-CUBE MICROSYSTEM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 46,289 $ 44,339 $(73,045)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary gain on repurchase of convertible notes... (3,494) -- --
Minority interest in subsidiary......................... (337) (248) 318
Depreciation and amortization........................... 22,577 17,396 7,728
Deferred income taxes................................... 4,107 3,356 (9,007)
Purchased in-process technology......................... -- -- 131,349
Changes in assets and liabilities:
Receivables........................................... 4,138 (146) (890)
Inventories........................................... (490) 12,712 (6,751)
Production capacity rights............................ -- -- (24,500)
Prepaids and other assets............................. (4,457) 10,956 (455)
Accounts payable...................................... 10,153 (8,993) (6,685)
Income taxes payable.................................. 10,680 2,147 (9,789)
Deferred contract revenue............................. 2,811 (2,815) 6,710
Accrued liabilities................................... 6,352 9,926 238
--------- -------- --------
Net cash provided by operating activities................. 98,329 88,630 15,221
--------- -------- --------
Cash flows from investing activities:
Sales and maturities of short-term investments............ 69,736 14,850 54,701
Purchases of short-term investments....................... (147,322) (29,956) (49,297)
Capital expenditures...................................... (20,037) (13,572) (17,141)
Acquisition of business (net of $8.4 million cash acquired
in 1996)................................................ -- -- (58,568)
Other assets.............................................. 207 368 (126)
--------- -------- --------
Net cash used in investing activities..................... (97,416) (28,310) (70,431)
--------- -------- --------
Cash flows from financing activities:
Bank borrowings........................................... 39,541 -- --
Repayment of bank borrowings.............................. (39,541) -- --
Notes payable -- net...................................... -- -- (8,836)
Payment of purchase consideration......................... (1,125) -- --
Payments of capital lease obligations..................... (369) (467) (626)
Repurchase of convertible subordinated notes.............. (56,099) -- --
Sale of common stock, net of notes receivable............. 20,111 9,111 7,302
Collection of stockholder notes receivable................ -- 305 154
--------- -------- --------
Net cash provided by (used in) financing activities....... (37,482) 8,949 (2,006)
--------- -------- --------
Exchange rate impact on cash and equivalents................ (241) (476) 43
--------- -------- --------
Net increase (decrease) in cash and equivalents............. (36,810) 68,793 (57,173)
Cash and equivalents, beginning of period................... 145,034 76,241 133,414
--------- -------- --------
Cash and equivalents, end of period......................... $ 108,224 $145,034 $ 76,241
========= ======== ========
Supplemental schedule of noncash investing and financing
activities:
Unrealized gain (loss) on investments..................... $ 93 $ (4) $ 1
Purchase of production capacity rights for note payable... -- -- (24,500)
Forgiveness of note payable for production capacity
rights.................................................. -- 24,500 --
Equipment acquired under lease............................ 861 -- --
Supplemental disclosure of cash flow information --
Cash paid during the period for:
Interest.................................................. $ 4,410 $ 5,609 $ 5,852
Income taxes.............................................. 1,092 11,473 38,127
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 87
C-CUBE MICROSYSTEM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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 wafers in relation to the total amount of wafers purchased under the
agreement.
F-7
<PAGE> 88
C-CUBE MICROSYSTEM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
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 $38
million and $70 million at December 31, 1998 and 1997, respectively. The
estimated fair value of all other financial instruments at December 31, 1998 and
1997 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
F-8
<PAGE> 89
C-CUBE MICROSYSTEM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
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.
The Company is subject to credit risks related to sales made into Asia,
where an economic crisis, which resulted in several countries sharply devaluing
their currencies in 1998, is reducing the cash flows and the access to credit of
some of the Company's major customers. Approximately 49% of the Company's sales
in 1998 were into Asia. The Company is requiring letters of credit for
substantially all of its sales into Asia, except for those made into Japan and
Taiwan. Nevertheless, banks have failed in some of these countries in recent
months, and it is possible that there will be more such failures before the
crisis is settled. Bank failures could cause the letters of credit upon which
the Company is relying on not to be paid or to be paid much later than is called
for in the contract. To reduce this risk, the Company is requiring its customers
in Asia to obtain letters of credit from only the largest banks in the
customer's country, or in the case of China, the largest banks in Hong Kong and
China. However, there can be no assurance that the largest banks in these
countries will not fail, causing defaults against letters of credit.
Product and Geographic Risks
Sales of the Company's VideoCD and Chaoji VCD decoder products represent a
significant percentage of the Company's total net revenues. Declines in demand
for these products, whether as a result of competition, technological change or
otherwise, would have a material adverse effect on the Company's business and
results of operations.
The Asian consumer electronics markets accounted for approximately 49%, 55%
and 62% of total Company sales in 1998, 1997 and 1996, respectively. The
economic crisis in Asia has been 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. Most of the
Company's sales in Asia were of decoder chips, which are used in VideoCD
players. 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.
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 intercompany
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
F-9
<PAGE> 90
C-CUBE MICROSYSTEM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
contracts is determined by obtaining quoted market prices of comparable
contracts at the balance sheet date, adjusted by interpolation where necessary
for maturity differences.
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 of contracts at
December 31, 1998 was $1.0 million and estimated fair value of these contracts
was $1.0 million. These contracts mature through March 1999. 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 these contracts was $4.2
million. These contracts mature through February 1999. Unrealized losses on
forward exchange contracts at December 31, 1998 were not material. 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, 1997, the Company had $13.4 million of outstanding foreign
exchange contracts to buy Japanese yen and $1.3 million of outstanding foreign
exchange contracts to sell Japanese yen, maturing through April 1998. The net
carrying value of contracts at December 31, 1997 was $12.1 million and estimated
fair value of these contracts was $11.7 million. Unrealized losses on forward
exchange contracts at December 31, 1997 were $0.4 million. Prior to 1997, the
Company held no foreign exchange contracts.
Intangibles
The Company amortizes distribution rights over 15 years and other
intangible assets over five 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 assets exceeds
its fair market value, as determined by discounted cash flows using a discount
rate reflecting the Company's average cost of funds.
During 1995, the Company and Kubota Corporation contributed additional
equity to C-Cube Japan and the Company recorded a $768,000 adjustment to paid-in
capital to reflect subsidiary losses previously recognized.
Earnings (Loss) 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.
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."
Recently Issued Accounting Standards
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
F-10
<PAGE> 91
C-CUBE MICROSYSTEM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
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
2000, 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. ACQUISITIONS
On August 28, 1996, the Company acquired DiviCom Inc., a digital video
networking company. C-Cube paid $65.7 million in cash, issued 2.3 million shares
of its common stock valued at $69.6 million, assumed options exercisable for
264,000 shares of its common stock valued at $7.0 million and incurred $1.35
million in other costs in exchange for the outstanding shares of DiviCom stock
that C-Cube did not already own. The purchase price was allocated on the basis
of the estimated fair value of the assets acquired and liabilities assumed as
follows (in thousands):
<TABLE>
<S> <C>
Fair value of tangible assets acquired (including cash of
$8,448)................................................... $ 53,741
Purchased technology........................................ 14,159
In-process technology....................................... 131,349
Liabilities assumed (including deferred tax liabilities of
$5,239)................................................... (55,653)
--------
Purchase consideration...................................... $143,596
========
</TABLE>
The purchased technology is being amortized over 5 years. The Company
incurred acquisition-related charges of $133 million, which include the
in-process technology write-off and bonuses paid to DiviCom employees.
The acquisition of DiviCom was accounted for as a purchase and therefore
DiviCom financial results from the date of acquisition, August 28, 1996, are
included in C-Cube's consolidated financial results.
Excluding the one-time charge of $133 million, intercompany sales and cost
of sales, and including amortization of purchased technology, pro forma revenue,
net income and diluted earnings per share would be $354 million, $49 million and
$1.27, respectively for the year ended December 31, 1996, assuming DiviCom had
been acquired at the beginning of the period. The pro forma results are not
necessarily indicative of what actually would have occurred if the acquisition
had been in effect for the entire period presented or of future operations of
the combined companies.
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
additional wafer production capacity in the years 1996 to 2001. The agreement
with TSMC provided that TSMC would produce and ship wafers to C-Cube at
specified prices and required C-Cube to make two advance payments totaling $49
million. An advance payment of $24.5 million was made in June 1996. In May 1997,
the Company amended its agreement with TSMC which resulted in a reduction of the
Company's future wafer purchase commitments and the forgiveness of the second
advance payment of $24.5 million. TSMC will apply the June 1996 prepayment
against a portion of the wafer cost as product is delivered to C-Cube.
Accordingly, the prepaid amount, which has been allocated between current and
long-term assets. Advance payments
F-11
<PAGE> 92
C-CUBE MICROSYSTEM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
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, 1998, $5.6
million of the remaining $18.2 million production capacity rights is included in
other current assets. In January 1999, the Company signed a second amendment to
its agreement with TSMC which will result in a refund to the Company of $11.7
million from the remaining $18.2 million balance in prepaid capacity.
NOTE 4. SHORT-TERM INVESTMENTS
Short-term investments include the following available-for-sale securities
as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
AMORTIZED MARKET HOLDING HOLDING
COST VALUE GAINS LOSSES
--------- ------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998:
Commercial paper....................... $40,554 $40,550 $ 20 $(24)
Municipal bonds........................ 32,856 32,929 88 (15)
U.S. government agencies............... 26,117 26,124 7 --
------- ------- ---- ----
Total short-term investments... $99,527 $99,603 $115 $(39)
======= ======= ==== ====
1997:
Commercial paper....................... $21,333 $21,316 $ -- $(17)
======= ======= ==== ====
</TABLE>
The Company's holdings of commercial paper and U.S. government agencies
mature within one year. Holdings of municipal bonds maturing within one year
have a market value of $10.7 million, and maturing in one to five years have a
market value of $22.3 million.
The Company realized net gains of $80,000 on the sale of investments in
1998, and no gains or losses on the sale of investments in 1997 or 1996.
NOTE 5. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Finished goods........................................... $ 3,566 $ 9,158
Work-in-process.......................................... 6,281 3,852
Raw materials............................................ 6,226 2,260
------- -------
Total.......................................... $16,073 $15,270
======= =======
</TABLE>
F-12
<PAGE> 93
C-CUBE MICROSYSTEM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Equipment under capital lease.......................... $ 2,108 $ 2,834
Machinery and equipment -- principally computers....... 52,355 44,307
Furniture and fixtures................................. 4,542 3,559
Leasehold improvements................................. 5,529 4,727
-------- --------
Total........................................ 64,534 55,427
Accumulated depreciation and amortization.............. (34,912) (31,866)
-------- --------
Property and equipment -- net.......................... $ 29,622 $ 23,561
======== ========
</TABLE>
NOTE 7. LINE OF CREDIT AND NOTES PAYABLE TO BANKS
At December 31, 1998, the Company had an available bank line of credit of
$30,000,000 which expires May 1, 1999. Borrowings bear interest at LIBOR plus
1.25% or the bank's prime rate (7.75% at December 31, 1998). 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, 1998, 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,
------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Convertible notes (see below)............................ $22,790 $86,250
Purchase consideration (see below)....................... -- 1,125
Capital lease obligations (see Note 9)................... 717 225
Other long-term obligations.............................. 405 470
------- -------
23,912 88,070
Current portion.......................................... (355) (608)
------- -------
Long-term portion........................................ $23,557 $87,462
======= =======
</TABLE>
In November 1995, the Company completed a public debt offering of $86.3
million of convertible subordinated notes. The notes mature in 2005. Interest is
payable semi-annually at 5.875% per annum. The notes are convertible at the
option of the note holders into the Company's common stock at an initial
conversion price of $30.70 per share, subject to adjustment. Beginning in
November 1997, the notes are redeemable at the option of the Company at an
initial redemption price of 104.7% of the principal amount.
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. Upon repurchase of the notes, the Company recognized extraordinary
gains of $3.5 million, or $0.09 per diluted share, net of related income taxes
of $2.4
F-13
<PAGE> 94
C-CUBE MICROSYSTEM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
million. The Company has reserved 742,345 shares of common stock for conversion
of the notes outstanding at December 31, 1998. Total offering costs of $793,000
are included in other assets and are amortized on a straight-line basis as an
adjustment to interest expense over the remaining term of the notes.
On November 1995, the Company acquired all of the outstanding capital stock
of Media Computer Technologies, Inc. (MCT), and withheld $1.1 million of the
purchase price for indemnification against unknown claims, which was included in
long-term obligations at December 31, 1997. In 1998, the Company released the
purchase consideration to MCT shareholders and option holders, as specified
under the merger agreement.
NOTE 9. LEASE COMMITMENTS
Equipment with a cost and accumulated depreciation of $2,108,000 and
$1,391,000, respectively, at December 31, 1998 (cost of $2,834,000 fully
depreciated at December 31, 1997) has been leased under capital leases. In
addition, the Company rents office and research facilities under operating lease
agreements which expire through April 2005.
Future minimum annual operating and capital lease commitments at December
31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- -------
(IN THOUSANDS)
<S> <C> <C>
1999........................................................ $ 4,425 $ 304
2000........................................................ 3,297 304
2001........................................................ 1,436 152
2002........................................................ 1,329 --
2003........................................................ 1,338 --
Thereafter.................................................. 1,037 --
------- -----
Total minimum lease payments................................ $12,862 760
=======
Amount representing interest................................ (43)
-----
Present value of minimum lease payments..................... 717
Current portion............................................. (278)
-----
Long-term portion........................................... $ 439
=====
</TABLE>
Rent expense for operating leases was approximately $3,586,000, $3,385,000
and $2,048,000 for the years ended December 31, 1998, 1997 and 1996,
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, 1998, no shares of preferred stock had been
issued.
F-14
<PAGE> 95
C-CUBE MICROSYSTEM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
Common Stock
The Company has authorized 38,626,670 shares of its common stock for
issuance to founders, employees and others as designated by the Board of
Directors through the Company's stock option plans or through stock purchase
agreements. Notes receivable from stockholders were collected in 1997.
Employee Stock Option Plans
The Company's stock option plans (the "Plans") authorize the issuance of
35,777,670 shares of common stock (included in the 38,626,670 authorized shares
discussed above) for the grant of incentive or nonstatutory stock options and
the direct award or sale of shares to employees, directors, contractors and
consultants. Under the Plans, options are generally granted at fair value at the
date of grant. Such options become exercisable over periods of one to five years
and expire up to 10 years from the grant date.
Upon the acquisition of DiviCom in August 1996, 268,285 outstanding options
under DiviCom's Stock Option Plan at an average exercise price of $7.75 were
assumed by C-Cube. These options retained their original terms.
The Company repriced 6,429,078 options to $19.94, the market price on July
14, 1997, and 3,532,716 options to $38.13, the market price on September 11,
1996. The repriced shares are treated as canceled and regranted; however, the
vesting terms on the 1997 regrants were extended six months. The 1996 regrants
retained their original vesting terms.
Option activity under the Plans was as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Outstanding, January 1, 1996 (1,316,523 exercisable at a
weighted average price of $4.16)......................... 6,013,818 $ 12.20
Granted (weighted average fair value of $17.87)............ 8,076,424 40.57
Exercised.................................................. (1,189,523) (4.56)
Canceled................................................... (3,899,002) (44.38)
----------
Outstanding, December 31, 1996 (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............................. 14,218,293 $ 18.23
==========
</TABLE>
F-15
<PAGE> 96
C-CUBE MICROSYSTEM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
Additional information regarding options outstanding as of December 31,
1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------
WEIGHTED
AVERAGE OPTIONS EXERCISABLE
REMAINING ----------------------------
CONTRACTUAL WEIGHTED WEIGHTED
RANGE OF NUMBER LIFE AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.14 - $ 1.50.. 314,225 3.98 $ 0.54 314,225 $ 0.54
2.87 - 14.75.. 2,221,839 6.90 9.69 1,612,265 8.17
14.81 - 19.50.. 4,819,212 9.12 17.93 701,221 17.70
19.56 - 19.94.. 5,012,486 7.73 19.93 1,935,004 19.94
20.06 - 63.00.. 1,850,531 8.76 27.68 419,932 32.33
---------- ---- ------ --------- ------
$ 0.14 - $63.00.. 14,218,293 8.12 $18.23 4,982,647 $15.64
========== ==== ====== ========= ======
</TABLE>
At December 31, 1998, 871,511 shares were available for future grants.
Employee Stock Purchase Plan
The Company has an employee stock purchase plan, under which eligible
employees may authorize payroll deductions of up to 10% of their compensation
(as defined 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 or the end of the offering
period. There are 1,580,000 shares authorized under this plan. Stock issued
under the plan was 223,000, 211,000 and 171,000 shares in 1998, 1997 and 1996 at
weighted average prices of $15.52, $20.52 and $11.07, respectively. The weighted
average fair value of the 1998, 1997 and 1996 awards was $7.06, $9.46 and
$10.39, respectively. At December 31, 1998, 800,300 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, 5.60 in 1998, 5.50 years
in 1997 and 6.25 years in 1996; stock volatility, 68% in 1998, 63% in 1997 and
66% in 1996; risk free interest rates, 5.2% in 1998, 6.1% in 1997 and 6.1% in
1996; 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 1998, 1997 and 1996 awards had
been amortized to expense over the vesting period of the awards, pro forma net
income would have been $15.2 million ($0.52 per
F-16
<PAGE> 97
C-CUBE MICROSYSTEM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
share) in 1998, $18.0 million ($0.54 per share) in 1997 and net loss would have
been $85.6 million ($2.52 per share) in 1996. However, the impact of outstanding
non-vested stock options granted prior to 1995 has been excluded from the pro
forma calculation; accordingly, the 1998, 1997 and 1996 pro forma adjustments
are not indicative of future period pro forma adjustments, when the calculation
will apply to all applicable stock options. Per share amounts above represent
diluted earnings per share under SFAS 128 (see Note 1).
Deferred Stock Compensation
In connection with the grants of certain stock options to employees in 1994
and 1993, the Company recorded deferred stock compensation for the difference
between the deemed fair value for accounting purposes and the option price as
determined by the Board at the grant dates. Deferred stock compensation was
amortized over the vesting period of the related stock options and was fully
amortized by December 31, 1997.
NOTE 11. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED
------------------- ------------------------------
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1998 1997 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss) before extraordinary
item................................... $12,424 $11,597 $42,795 $44,339 $(73,045)
Extraordinary item........................ -- -- 3,494 -- --
------- ------- ------- ------- --------
Numerator for basic earnings (loss) per
share.................................. 12,424 11,597 46,289 44,339 (73,045)
Addback interest expense after tax related
to convertible shares.................. 211 883 2,242 3,532 --
------- ------- ------- ------- --------
Numerator for diluted earnings (loss) per
share.................................. $12,635 $12,480 $48,531 $47,871 $(73,045)
Denominator:
Weighted-average shares -- denominator for
basic earnings (loss) per share........ 37,884 36,738 37,382 36,497 33,928
Convertible shares........................ 743 2,809 1,871 2,809 --
Dilutive common stock equivalents, using
treasury stock method.................. 2,081 2,476 1,501 2,377 --
------- ------- ------- ------- --------
Denominator for diluted earnings (loss)
per share.............................. 40,708 42,023 40,754 41,683 33,928
======= ======= ======= ======= ========
Basic earnings (loss) per share............. $ 0.33 $ 0.32 $ 1.24 $ 1.21 $ (2.15)
======= ======= ======= ======= ========
Diluted earnings (loss) per share........... $ 0.31 $ 0.30 $ 1.19 $ 1.15 $ (2.15)
======= ======= ======= ======= ========
</TABLE>
NOTE 12. COMPREHENSIVE INCOME
In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income," which
requires an enterprise to report, by major components and as a single total, the
change in net assets during the period from nonowner sources. SFAS 130 requires
unrealized gains or losses on investments and foreign currency translation
adjustments,
F-17
<PAGE> 98
C-CUBE MICROSYSTEM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
which prior to adoption were reported separately in stockholders' equity, to be
included in other comprehensive income; however, the adoption of this Statement
had no impact on net income or stockholders' equity. The Company has presented
its comprehensive income or loss in the Statement of Changes in Stockholders'
Equity. Prior year amounts have been reclassified to conform to the requirements
of SFAS 130.
The following are the components of accumulated other comprehensive loss:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Unrealized gain (loss) on investments:
Unrealized holding gains (losses) arising during period... $ 93 $ (4)
Less: reclassification adjustment for losses included in
net income............................................. (17) (13)
------- -------
Net unrealized gain (loss) on investments................... 76 (17)
Accumulated translation adjustments......................... (1,928) (1,969)
------- -------
Total............................................. $(1,852) $(1,986)
======= =======
</TABLE>
NOTE 13. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................. $10,348 $14,336 $37,087
State............................................... 1,598 2,938 4,686
Foreign............................................. 2,143 2,265 170
------- ------- -------
Total....................................... 14,089 19,539 41,943
Deferred:
Federal............................................. 4,430 3,105 (6,660)
State............................................... (323) (899) (1,189)
Foreign............................................. -- 1,150 (1,150)
------- ------- -------
Total....................................... 4,107 3,356 (8,999)
------- ------- -------
Total................................................. $18,196 $22,895 $32,944
======= ======= =======
</TABLE>
The tax benefit associated with dispositions from employee stock plans
reduced taxes currently payable by $1,426,000, $3,573,000 and $20,038,000 for
1998, 1997 and 1996, respectively.
F-18
<PAGE> 99
C-CUBE MICROSYSTEM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
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,
------------------------------
1998 1997 1996
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax expense (benefit) computed at federal statutory
rate............................................... $21,228 $23,445 $(14,035)
State income taxes, net of federal effect............ 1,329 1,248 (1,865)
Tax credits.......................................... (2,609) (2,646) (4,710)
Change in valuation allowance........................ -- -- (1,324)
Purchased in-process technology...................... -- -- 52,080
Foreign operations taxed at different rates.......... (2,533) 1,068 1,239
Other................................................ 781 (220) 1,559
------- ------- --------
Income tax expense................................. $18,196 $22,895 $ 32,944
======= ======= ========
</TABLE>
The components of the net deferred tax asset as of December 31 were as
follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accruals and reserves recognized in different periods..... $11,719 $11,603
Net operating loss carryforwards.......................... 444 289
Tax credit carryforwards.................................. -- 1,607
Deferred revenue.......................................... 1,700 --
Tax basis depreciation.................................... -- 990
Other..................................................... -- 972
------- -------
Total............................................. 13,863 15,461
Valuation allowance......................................... (444) (218)
------- -------
Net............................................... 13,419 15,243
Deferred tax liabilities:
Purchased technology...................................... (2,925) (4,616)
Unrepatriated foreign earnings............................ (3,974) --
------- -------
Net deferred tax assets................................... $ 6,520 $10,627
======= =======
</TABLE>
At December 31, 1998, the Company has foreign net operating loss
carryforwards of approximately $966,000 expiring through 2003.
U.S. income taxes were not provided on a cumulative total of approximately
$17 million and $13 million of undistributed earnings from foreign subsidiaries
for the years ending December 31, 1998 and 1997, 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. The valuation allowance relates to foreign net
operating losses which the Company believes may not be realized.
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 in 2005 at 88.4% of the
principal amount, with accrued interest to the
F-19
<PAGE> 100
C-CUBE MICROSYSTEM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
date of repurchase. Upon repurchase of the notes, the Company recognized
extraordinary gains of $3.5 million, or $0.09 per diluted share, net of related
income taxes of $2.4 million.
NOTE 15. 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 16. DEVELOPMENT AGREEMENTS
The Company enters into development agreements with other companies for
which it receives development fees with certain payments contingent upon
attaining contract milestones. The Company generally retains ownership of the
products developed under the agreements; however, some agreements limit the
product markets in which the Company may sell the developed product. In
addition, under certain of the agreements, the Company is required to pay
royalties based on a percentage of the net sales of the products developed under
the agreements. Royalty expense was $587,000 in 1998, $1,960,000 in 1997 and
$1,860,000 in 1996.
NOTE 17. SEGMENT INFORMATION
On December 31, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which established standards for reporting information about
operating segments in annual financial statements, along with related
disclosures about products and services, geographic areas, and major customers.
The information for 1997 and 1996 has been restated from the prior year's
presentation to conform to the 1998 presentation.
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
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.
F-20
<PAGE> 101
C-CUBE MICROSYSTEM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
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.
Segment Profit and Assets
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996(2)
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:(1)
Semiconductor............................................ $209,082 $218,252 $270,631
DiviCom.................................................. 142,715 118,760 49,127
-------- -------- --------
Consolidated net revenues.................................. $351,797 $337,012 $319,758
======== ======== ========
Income (loss) from operations:
Semiconductor............................................ $ 33,113 $ 38,648 $(54,794)
DiviCom.................................................. 23,302 30,095 15,039
-------- -------- --------
Consolidated income (loss) from operations................. $ 56,415 $ 68,743 $(39,755)
======== ======== ========
Interest expense:
Semiconductor............................................ $ 3,766 $ 5,574 $ 5,446
DiviCom.................................................. -- -- 59
-------- -------- --------
$ 3,766 $ 5,574 $ 5,505
======== ======== ========
Interest income:
Semiconductor............................................ $ 5,789 $ 3,941 $ 5,544
DiviCom.................................................. 1,852 718 120
-------- -------- --------
$ 7,641 $ 4,659 $ 5,664
======== ======== ========
Depreciation and amortization expense:
Semiconductor............................................ $ 15,896 $ 10,866 $ 6,557
DiviCom.................................................. 6,681 6,530 1,171
-------- -------- --------
$ 22,577 $ 17,396 $ 7,728
======== ======== ========
Segment assets:
Semiconductor............................................ $259,297 $233,959 $232,497
DiviCom.................................................. 83,874 70,149 47,018
-------- -------- --------
Consolidated net assets.................................... $343,171 $304,108 $279,515
======== ======== ========
Capital expenditures:
Semiconductor............................................ $ 12,867 $ 7,918 $ 15,783
DiviCom.................................................. 7,170 5,654 1,358
-------- -------- --------
Consolidated capital expenditures.......................... $ 20,037 $ 13,572 $ 17,141
======== ======== ========
</TABLE>
- ---------------
(1) Revenues are shown net of eliminations of intersegment revenues. This
presentation is consistent with the Company's internal presentation of
financial information to management.
(2) DiviCom revenues, income from operations and capital expenditures for 1996
are presented subsequent to the August 28, 1996 date of acquisition. In
1996, acquisition-related charges of $131.3
F-21
<PAGE> 102
C-CUBE MICROSYSTEM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
million and $2.6 million are included in income (loss) from operations for
Semiconductor and DiviCom, respectively.
Geographic Information
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
NET NET NET
REVENUES(1) PROPERTY REVENUES(1) PROPERTY REVENUES(1) PROPERTY
----------- -------- ----------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
North America........... $132,513 $27,462 $119,575 $22,392 $105,301 $21,538
China................... 120,348 155 123,100 122 91,731 19
Europe.................. 42,441 629 31,464 174 16,738 93
Japan................... 20,143 483 23,443 480 39,089 621
Other Asia.............. 30,345 893 38,854 393 66,624 382
Rest of World........... 6,007 -- 576 -- 275 --
-------- ------- -------- ------- -------- -------
Total......... $351,797 $29,622 $337,012 $23,561 $319,758 $22,653
======== ======= ======== ======= ======== =======
</TABLE>
- ---------------
(1) Revenues are broken out geographically by the ship-to location of the
customer.
Major Customers
During 1998, no individual customer accounted for 10% or more of the
Company's consolidated revenues. Revenues from one customer of the Company's
semiconductor segment accounted for $67.7 million and $39.1 million of the
Company's consolidated revenues in 1997 and 1996, respectively.
NOTE 18. EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITOR'S
REPORT
On October 27, 1999, C-Cube entered into an Agreement and Plan of Merger
and Reorganization with Harmonic Inc., a Delaware corporation ("Harmonic"),
pursuant to which, subsequent to the sale or spin-off of C-Cube's semiconductor
business, C-Cube has agreed to merge with and into Harmonic (the "Merger"). This
Agreement was amended and restated on December 9, 1999. The Merger will be
effected through the issuance of 0.5427 shares of Harmonic stock for each share
of common stock of C-Cube outstanding immediately prior to the consummation of
the Merger. The Merger is subject to the approval of the stockholders of each
company, customary closing conditions, including applicable regulatory
clearances, and the spin-off or sale of the semiconductor business.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
F-22
<PAGE> 103
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PAR VALUE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $117,098 $108,224
Short-term investments.................................... 160,275 99,603
Accounts receivable -- net................................ 61,046 36,980
Inventories............................................... 12,373 16,073
Deferred income taxes..................................... 11,723 11,170
Other current assets...................................... 14,914 19,977
-------- --------
Total current assets.............................. 377,429 292,027
Property and equipment -- net............................... 33,881 29,622
Production capacity rights.................................. 5,164 12,600
Distribution rights -- net.................................. 1,359 1,483
Purchased technology -- net................................. 5,139 5,921
Other assets................................................ 1,995 1,518
-------- --------
Total............................................. $424,967 $343,171
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 24,356 $ 19,942
Accrued liabilities....................................... 31,195 29,007
Income taxes payable...................................... 12,162 15,551
Deferred contract revenue................................. 5,537 6,706
Current portion of long-term obligations.................. 368 355
-------- --------
Total current liabilities......................... 73,618 71,561
Long-term obligations....................................... 20,150 23,557
Deferred income taxes....................................... 3,230 4,650
-------- --------
Total liabilities................................. 96,998 99,768
-------- --------
Minority interest in subsidiary............................. 409 28
Stockholders' equity:
Common stock, $0.001 par value, 150,000 shares authorized;
shares outstanding: 1999 -- 40,477; 1998 -- 38,261..... 270,932 225,265
Accumulated other comprehensive loss...................... (1,992) (1,852)
Retained earnings......................................... 58,620 19,962
-------- --------
Total stockholders' equity........................ 327,560 243,375
-------- --------
Total............................................. $424,967 $343,171
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-23
<PAGE> 104
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1999 1998 1999 1998
-------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues..................................... $101,368 $86,162 $291,922 $255,997
-------- ------- -------- --------
Costs and expenses:
Cost of revenues............................... 45,210 38,757 130,947 116,768
Research and development....................... 21,094 18,867 61,659 55,134
Selling, general and administrative............ 17,462 15,207 50,677 43,756
-------- ------- -------- --------
Total.................................. 83,766 72,831 243,283 215,658
-------- ------- -------- --------
Income from operations........................... 17,602 13,331 48,639 40,339
Other income, net................................ 2,657 1,636 7,084 2,547
-------- ------- -------- --------
Income before income taxes, minority interest and
extraordinary item............................. 20,259 14,967 55,723 42,886
Income tax expense............................... 6,078 4,490 16,717 12,869
-------- ------- -------- --------
Income before minority interest and extraordinary
item........................................... 14,181 10,477 39,006 30,017
Minority interest in net income (loss) of
subsidiary..................................... 148 (185) 381 (354)
-------- ------- -------- --------
Income before extraordinary item................. 14,033 10,662 38,625 30,371
Extraordinary gain on repurchase of convertible
notes (net of tax)............................. -- 2,356 33 3,494
-------- ------- -------- --------
Net income....................................... $ 14,033 $13,018 $ 38,658 $ 33,865
======== ======= ======== ========
Basic earnings per share:
Income before extraordinary item............... $ 0.35 $ 0.29 $ 0.98 $ 0.82
Extraordinary item (net of tax)................ -- 0.06 -- 0.09
-------- ------- -------- --------
Net income..................................... $ 0.35 $ 0.35 $ 0.98 $ 0.91
======== ======= ======== ========
Diluted earnings per share:
Income before extraordinary item............... $ 0.32 $ 0.28 $ 0.91 $ 0.79
Extraordinary item (net of tax)................ -- 0.06 -- 0.09
-------- ------- -------- --------
Net income..................................... $ 0.32 $ 0.34 $ 0.91 $ 0.88
======== ======= ======== ========
Shares:
Basic.......................................... 40,097 37,424 39,368 37,215
======== ======= ======== ========
Diluted........................................ 45,021 39,686 43,224 40,769
======== ======= ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-24
<PAGE> 105
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 1998
--------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 38,658 $ 33,865
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary gain on repurchase of convertible notes,
net of taxes.......................................... (33) (3,494)
Minority interest in subsidiary........................ 381 (354)
Depreciation and amortization.......................... 14,397 13,327
Deferred income taxes.................................. (1,973) 207
Changes in assets and liabilities:
Receivables.......................................... (23,758) 7,519
Inventories.......................................... 3,749 (1,314)
Other current assets................................. 858 2,926
Accounts payable..................................... 3,926 7,731
Accrued liabilities.................................. 7,089 1,946
Income taxes payable................................. (3,412) 11,195
Production capacity rights........................... 11,800 --
Deferred revenue..................................... (1,169) 1,195
--------- --------
Net cash provided by operating activities................. 50,513 74,749
--------- --------
Cash flows from investing activities:
Sales and maturities of short-term investments............ 188,565 26,956
Purchases of short-term investments....................... (247,989) (36,073)
Capital expenditures...................................... (17,051) (14,778)
Other assets.............................................. (2,780) 592
--------- --------
Net cash used in investing activities..................... (79,255) (23,303)
--------- --------
Cash flows from financing activities:
Bank borrowings........................................... -- 39,541
Repayment of bank borrowings.............................. -- (39,541)
Repayments of capital lease obligations................... 4 (411)
Sale of common stock...................................... 40,562 7,704
Repurchase of convertible subordinated notes.............. (3,271) (56,077)
--------- --------
Net cash provided by (used in) financing activities....... 37,295 (48,784)
--------- --------
Exchange rate impact on cash and equivalents................ 321 99
--------- --------
Net increase in cash and equivalents........................ 8,874 2,761
Cash and equivalents, beginning of period................... 108,224 145,034
--------- --------
Cash and equivalents, end of period......................... $ 117,098 $147,795
========= ========
Supplemental schedule of noncash investing and financing
activities:
Unrealized gain (loss) on investments..................... $ (295) $ 87
Equipment acquired under lease............................ -- 1,382
Conversion of notes at option of holder................... 48 --
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest............................................... $ 818 $ 3,659
Income taxes........................................... 11,985 1,011
</TABLE>
See notes to condensed consolidated financial statements.
F-25
<PAGE> 106
C-CUBE MICROSYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements contained in this
report have been prepared by C-Cube Microsystems Inc. ("C-Cube" or the
"Company"). In the opinion of management, such financial statements include all
normal recurring adjustments and accruals necessary for a fair presentation of
the Company's financial position as of September 30, 1999, and the results of
operations for the quarters and nine months ended September 30, 1999 and 1998
and cash flows for the nine months ended September 30, 1999 and 1998. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted in accordance with the rules and regulations of the
Securities and Exchange Commission. This unaudited quarterly information should
be read in conjunction with the audited consolidated financial statements of
C-Cube and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. Cost is computed using standard costs which approximate actual cost on a
first-in, first-out basis. Inventories consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods..................................... $ 8,097 $ 3,566
Work-in-process.................................... 2,547 6,281
Raw materials...................................... 1,729 6,226
------- -------
Total.................................... $12,373 $16,073
======= =======
</TABLE>
3. PRODUCTION CAPACITY RIGHTS
In the second quarter of 1996, the Company expanded and formalized its
relationship with Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC") to
provide additional wafer production capacity in the years 1996 to 2001. The
agreement with TSMC provided that TSMC would produce and ship wafers to C-Cube
at specified prices and required C-Cube to make two advance payments totaling
$49 million. An advance payment of $24.5 million was made in June 1996. In May
1997, the Company amended its agreement with TSMC which resulted in a reduction
of the Company's future wafer purchase commitments and the forgiveness of the
second advance payment of $24.5 million. In January 1999, TSMC refunded $11.8
million of the advance payment to the Company. TSMC will apply the remaining
prepayment against a portion of the wafer cost as product is delivered to
C-Cube. Accordingly, the prepaid amount, which has been allocated between
current and long-term assets, will be amortized to inventory as wafers are
received.
F-26
<PAGE> 107
C-CUBE MICROSYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Income before extraordinary item.................... $14,033 $10,662 $38,625 $30,371
Extraordinary item.................................. -- 2,356 33 3,494
------- ------- ------- -------
Numerator for basic earnings per share.............. 14,033 13,018 38,658 33,865
Addback interest income after tax related to
convertible shares................................ 186 333 577 2,031
------- ------- ------- -------
Numerator for diluted earnings per share............ $14,219 $13,351 $39,235 $35,896
======= ======= ======= =======
Denominator:
Weighted-average shares -- denominator for basic
earnings per share................................ 40,097 37,424 39,368 37,215
Convertible shares.................................. 633 1,216 660 2,247
Dilutive common stock equivalents, using treasury
stock method...................................... 4,291 1,046 3,196 1,307
------- ------- ------- -------
Denominator for diluted earnings per share.......... 45,021 39,686 43,224 40,769
======= ======= ======= =======
Basic earnings per share............................ $ 0.35 $ 0.35 $ 0.98 $ 0.91
======= ======= ======= =======
Diluted earnings per share.......................... $ 0.32 $ 0.34 $ 0.91 $ 0.88
======= ======= ======= =======
</TABLE>
5. COMPREHENSIVE INCOME
For the quarters ended September 30, 1999 and 1998, comprehensive income,
which was comprised of the Company's net income for the periods, changes in
accumulated translation adjustments and unrealized gains (losses) on
investments, was $14.3 million and $13.1 million, respectively. For the nine
months ended September 30, 1999 and 1998, comprehensive income was $38.5 million
and $34.0 million, respectively.
6. EXTRAORDINARY ITEM
During the nine months ended September 30, 1999, the Company repurchased
$3.4 million of the face value of the Company's 5 7/8% Convertible Subordinated
Notes (the "Notes") due 2005 at 95.5% of the principal amount, with related
accrued interest to the date of repurchase, and recognized an extraordinary gain
of approximately $33,000 (zero effect per diluted share), net of related income
taxes of approximately $23,000. During the quarter and nine months ended
September 30, 1998, the Company repurchased $42.8 million and $63.5 million of
the face value of the Notes at 88.4% of the principal amount, with related
accrued interest to the date of repurchase, and recognized extraordinary gains
of $2.4 million and $3.5 million, or $0.06 and $0.09 per diluted share, net of
related income taxes of $1.6 million and $2.4 million, respectively.
7. SEGMENT INFORMATION
On December 31, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures About Segments of an Enterprise and
Related Information." Readers are referenced to
F-27
<PAGE> 108
C-CUBE MICROSYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"Item 8, Note 17. Segment Information" in the Company's most recent Annual
Report on Form 10-K, filed with the Securities and Exchange Commission ("SEC")
on March 23, 1999, for further discussion.
Segment information based on internal company reports used by the chief
operating decision maker is as follows (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1999 1998 1999 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Semiconductor.................................. $ 52,308 $47,867 $158,101 $153,700
DiviCom........................................ 49,060 38,295 133,821 102,297
-------- ------- -------- --------
Consolidated net revenues........................ $101,368 $86,162 $291,922 $255,997
======== ======= ======== ========
Income from operations:
Semiconductor.................................. $ 8,807 $ 6,373 $ 27,427 $ 24,721
DiviCom........................................ 8,795 6,958 21,212 15,618
-------- ------- -------- --------
Consolidated income from operations.............. $ 17,602 $13,331 $ 48,639 $ 40,339
======== ======= ======== ========
</TABLE>
8. RECENTLY ISSUED ACCOUNTING STANDARDS
Recently Issued Accounting Standard
In March 1998, the American Institute of Certified Public Accountants
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 September 30, 1999, the Company had capitalized
approximately $661,000 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 June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Adoption of this statement is not expected to
materially impact the Company's consolidated financial position, results of
operations or cash flows. The Company is required to adopt this statement in the
first quarter of fiscal year 2001, with early adoption permitted.
9. SUBSEQUENT EVENT
On October 27, 1999, C-Cube entered into an Agreement and Plan of Merger
and Reorganization with Harmonic Inc., a Delaware corporation ("Harmonic"),
pursuant to which, subsequent to the sale or spin-off of C-Cube's semiconductor
business, C-Cube has agreed to merge with and into Harmonic (the "Merger"). This
Agreement was amended and restated on December 9, 1999. The Merger will be
effected through the issuance of 0.5427 shares of Harmonic stock for each share
of common stock of C-Cube outstanding immediately prior to the consummation of
the Merger. The merger is subject to the approval of the stockholders of each
company, customary closing conditions, including applicable regulatory
clearances, and the spin-off or sale of the semiconductor business. The closing
is anticipated to take place during Q1 2000. Readers are referenced to the
Company's Form 8-K filed with the SEC on October 29, 1999 for more information.
F-28
<PAGE> 109
ITEM 15(b). EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
3.1* Certificate of Incorporation of C-Cube Semiconductor Inc.
3.2* Bylaws of C-Cube Semiconductor Inc.
10.1* Form of Separation and Distribution Agreement between C-Cube
Microsystems Inc. and C-Cube Semiconductor Inc.
10.2+ Form of Tax Sharing Agreement between C-Cube Microsystems
Inc. and C-Cube Semiconductor Inc.
10.3* Form of Assignment and Assumption Agreement between C-Cube
Microsystems Inc. and C-Cube Semiconductor Inc.
10.4+ Form of Indemnification and Insurance Matters Agreement
between C-Cube Microsystems Inc. and C-Cube Semiconductor
Inc.
10.5+ Form of Transitional Services Agreement between C-Cube
Microsystems Inc. and C-Cube Semiconductor Inc.
10.6* Form of Officers' and Directors' Indemnification Agreement
10.7 Securities Purchase Agreement by and between C-Cube
Semiconductor Inc. and Thomson Multimedia S.A. dated as of
February 11, 2000.
10.8 Form of Warrant for Thomson Multimedia S.A.
</TABLE>
- ------------------------
* Previously filed.
+ To be filed with an amendment.
<PAGE> 110
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, Semiconductor Inc. has duly caused this Registration Statement on Form
10 to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Milpitas, State of California on February 17, 2000.
C-CUBE SEMICONDUCTOR INC.
By: /s/ UMESH PADVAL
------------------------------------
Umesh Padval
President and Chief Executive
Officer
<PAGE> 111
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
3.1* Certificate of Incorporation of C-Cube Semiconductor Inc.
3.2* Bylaws of C-Cube Semiconductor Inc.
10.1* Form of Separation and Distribution Agreement between C-Cube
Microsystems Inc. and C-Cube Semiconductor Inc.
10.2+ Form of Tax Sharing Agreement between C-Cube Microsystems
Inc. and C-Cube Semiconductor Inc.
10.3* Form of Assignment and Assumption Agreement between C-Cube
Microsystems Inc. and C-Cube Semiconductor Inc.
10.4+ Form of Indemnification and Insurance Matters Agreement
between C-Cube Microsystems Inc. and C-Cube Semiconductor
Inc.
10.5+ Form of Transitional Services Agreement between C-Cube
Microsystems Inc. and C-Cube Semiconductor Inc.
10.6* Form of Officers' and Directors' Indemnification Agreement
10.7 Securities Purchase Agreement by and between C-Cube
Semiconductor Inc. and Thomson Multimedia S.A. dated as of
February 11, 2000.
10.8 Form of Warrant for Thomson Multimedia S.A.
</TABLE>
- ------------------------
* Previously filed.
+ To be filed with an amendment.
<PAGE> 1
EXHIBIT 10.7
EXECUTION COPY
SECURITIES PURCHASE AGREEMENT
BY AND BETWEEN
C-CUBE SEMICONDUCTOR INC.
A DELAWARE CORPORATION
AND
THOMSON MULTIMEDIA S.A.
A FRENCH SOCIETE ANONYME
FEBRUARY 10, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. Issuance and Sale of the Securities......................................................1
1.1 Issuance and Sale of Common Stock and Warrant.....................................1
1.2 Closing...........................................................................2
1.3 Closing Deliveries................................................................2
2. Representations and Warranties of the Company............................................3
2.1 Organization, Standing and Power..................................................3
2.2 Authority; No Conflicts...........................................................3
2.3 Capitalization....................................................................3
2.4 Subsidiaries......................................................................4
2.5 Valid Issuance of Securities......................................................4
2.6 Governmental Consents.............................................................4
2.7 Litigation........................................................................4
2.8 Intellectual Property.............................................................5
2.9 Compliance with Other Instruments.................................................5
2.10 Material Contracts and Commitments................................................5
2.11 Title to Property.................................................................6
2.12 Financial Statements..............................................................6
2.13 Changes...........................................................................6
2.14 Outstanding Indebtedness; Material Liabilities....................................7
2.15 Permits...........................................................................8
2.16 Environmental and Safety Laws.....................................................8
2.17 SEC Filings.......................................................................8
2.18 Brokers' and Finder's Fees........................................................8
3. Representations and Warranties of the Purchaser..........................................8
3.1 Organization and Standing.........................................................8
3.2 Authority.........................................................................8
3.3 No Conflicts......................................................................9
3.4 Brokers' and Finder's Fees........................................................9
3.5 Purchase Entirely for Own Account.................................................9
3.6 Accredited Investor; Investment Experience........................................9
3.7 Restricted Securities.............................................................9
3.8 Legends..........................................................................10
4. Standstill Restrictions.................................................................10
4.1 Scope of Restrictions............................................................10
5. The Company's Right of First Refusal....................................................11
5.1 Exercise of Right................................................................11
</TABLE>
-i-
9
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
5.2 Assignment of Right..............................................................12
6. Conditions to the Issuance and Sale of the Securities...................................12
6.1 Conditions to Obligations of the Parties.........................................12
6.2 Additional Conditions of Purchaser's Obligations at Closing......................12
6.3 Additional Conditions of the Company's Obligations at the Closing................13
7. Additional Agreements...................................................................13
7.1 Expenses.........................................................................13
7.2 Public Disclosure................................................................13
7.3 Additional Documents and Further Assurances......................................13
8. Termination.............................................................................13
9. Miscellaneous...........................................................................14
9.1 Survival of Warranties...........................................................14
9.2 Transfer, Successors and Assigns.................................................14
9.3 Governing Law....................................................................14
9.4 Counterparts.....................................................................14
9.5 Titles and Subtitles; Headings...................................................14
9.6 Notices..........................................................................14
9.7 Attorneys' Fees..................................................................15
9.8 Amendments and Waivers...........................................................15
9.9 Severability.....................................................................15
9.10 Entire Agreement.................................................................15
9.11 Remedies.........................................................................15
9.12 Extension; Waiver................................................................16
9.13 Mutual Drafting..................................................................16
9.14 Venue............................................................................16
</TABLE>
EXHIBITS
EXHIBIT A Form of Warrant
EXHIBIT B Memorandum of Understanding
-ii-
<PAGE> 4
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (the "AGREEMENT") is made as of
February 10, 2000 by and between C-Cube Semiconductor Inc., a Delaware
corporation (the "COMPANY") and wholly owned subsidiary of C-Cube Microsystems
Inc., a Delaware corporation (the "PARENT"), and Thomson Multimedia S.A., a
French societe anonyme (the "PURCHASER").
WITNESSETH
WHEREAS, Parent and Harmonic Inc., a Delaware corporation ("HARMONIC"),
have entered into an Amended and Restated Agreement and Plan of Merger and
Reorganization, dated as of December 9, 1999 (the "MERGER AGREEMENT"), which
provides that: (i) all shares of capital stock of the Company will be
distributed to Parent's stockholders, on a pro rata, as converted basis in
accordance with the shares of Parent common stock held (the "DISTRIBUTION"), and
(ii) shortly after the Distribution, Parent will merge with and into Harmonic
(the "MERGER");
WHEREAS, subject to the terms and conditions set forth herein, the
Company wishes to issue and sell to the Purchaser, and the Purchaser wishes to
purchase from the Company, conditioned upon and promptly after the Distribution,
certain shares of common stock of the Company ("COMMON STOCK") and a warrant to
purchase shares of Common Stock in the quantities and at the price more fully
set forth herein;
WHEREAS, the Company and the Purchaser desire to make certain
representations and warranties in connection with the transactions contemplated
hereby.
NOW, THEREFORE, in consideration of the foregoing premises, the
representations and warranties, covenants and other agreements hereinafter set
forth, the mutual benefits to be gained by the performance thereof, and other
good and valuable consideration, the receipt and legal sufficiency of which are
hereby acknowledged and accepted, the parties hereto hereby agree as follows:
1. Issuance and Sale of the Securities.
1.1 Issuance and Sale of Common Stock and Warrant. On the
Closing Date and effective as of the Closing (each as defined in Section 1.2
hereof), upon the terms and subject to the conditions of this Agreement, the
Company shall issue and sell to the Purchaser, and the Purchaser shall purchase
from the Company, 474,747 shares of Common Stock (the "SHARES") and a warrant
substantially in the form attached as Exhibit A hereof, with the terms and
conditions set forth therein, with an exercise price per share equal to the Per
Share Price (as defined below), and exercisable for up to 949,494 shares of
Common Stock (the "WARRANT"). The Shares and the Warrant (together, the
"SECURITIES") will be issued and sold by the Company in exchange from the
Purchaser of cash equal to the Purchase Price (as defined in Section 1.1(a)
hereof).
<PAGE> 5
(a) Purchase Price; Per Share Price. The "PURCHASE PRICE"
shall equal the product of (i) 474,747, multiplied by (ii) the Per Share Price.
The "PER SHARE PRICE" shall equal $19.78.
1.2 Closing. Subject to the satisfaction or waiver of the
conditions set forth in Section 6 hereof, the consummation of the transactions
contemplated hereby pursuant to the terms and provisions hereof (the "CLOSING")
shall take place at the offices of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, located at Spear Street Tower, One Market, San
Francisco, California 94105, unless another place or time is agreed to in
writing by the Company and the Purchaser. The date upon which the Closing occurs
shall be referred to herein as the "CLOSING DATE."
1.3 Closing Deliveries.
(a) Purchaser. At the Closing, on the terms and subject to
the conditions set forth herein and in reliance on the representations and
warranties, covenants and other agreements set forth herein, the Purchaser shall
deliver, or cause to be delivered, to the Company each of the following:
(i) An executed copy of the certificate signed
by an authorized officer of the Company, as described in Section 6.2 (b);
(ii) the Purchase Price, payable by wire
transfer of immediately available funds, to an account or accounts designated in
writing at least five business days prior to the Closing by the Company;
(iii) the executed Memorandum of Understanding,
substantially in the form attached hereto as Exhibit B (the "MOU"); and
(iv) such other agreements, instruments,
certificates and other documents as may be necessary or reasonably appropriate
to effectuate completely the transactions contemplated hereby.
(b) Company. At the Closing, on the terms and subject to
the conditions set forth herein and in reliance on the representations and
warranties, covenants and other agreements set forth herein, the Company shall
deliver, or cause to be delivered, to the Purchaser each of the following:
(i) certificate(s) representing the Shares,
validly executed by the appropriate duly authorized officers of the Purchaser
registered in the name of the Purchaser;
(ii) the executed Warrants;
(iii) the executed MOU; and
-2-
<PAGE> 6
(iv) such other agreements, instruments,
certificates and other documents as may be necessary or reasonably appropriate
to effectuate completely the transactions contemplated hereby.
2. Representations and Warranties of the Company. Except as specifically
set forth in the Disclosure Schedule delivered by the Company herewith (the
"DISCLOSURE SCHEDULE"), the Company hereby represents and warrants to the
Purchaser as follows:
2.1 Organization, Standing and Power. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Company has the corporate power to own its
properties and to carry on its business as now being conducted and is duly
qualified to do business and is in good standing in each jurisdiction in which
the failure to be so qualified would have a material adverse effect on the
ability of the Company to consummate the transactions contemplated hereby. The
Company has made available a true and correct copy of the Certificate of
Incorporation and Bylaws of the Company, as amended to date, to counsel for the
Purchaser.
2.2 Authority; No Conflicts. The Company has all requisite
corporate power and authority to enter into this Agreement, the MOU and, upon
the Closing, to issue the Shares and the Warrant and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement and the MOU and, upon the Closing, the Shares, and the Warrant and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all necessary corporate action on the part of the Company, and no
further action is required on the part of Parent to authorize the Agreement and
the MOU, to issue the Shares, and the Warrant and to consummate the transactions
contemplated hereby and thereby. This Agreement and the MOU have been duly
executed and delivered by the Company and constitute or, in the case of the
Warrant, when executed will constitute, a valid and binding obligation of the
Company, enforceable in accordance with their respective terms, except as such
enforceability may be limited by principles of public policy and subject to the
laws of general application relating to bankruptcy, insolvency and the relief of
debtors and to rules of law governing specific performance, injunctive relief or
other equitable remedies. The execution and delivery by the Company of this
Agreement and the MOU and, upon the Closing, the Shares and the Warrant do not,
and the performance and consummation of the transactions contemplated hereby and
thereby will not result in any conflict with (i) any provisions of its
Certificate of Incorporation or Bylaws, (ii) any mortgage, indenture, lease,
contract or other agreement or instrument, permit, concession, franchise or
license to which the Company is subject or (iii) any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to the Company or its
properties or assets.
2.3 Capitalization
(a) C-Cube Semiconductor. As of January 31, 2000, the
authorized capital of the Company consisted of the following: (i) 10,000,000
shares of preferred stock, $0.001 par value, of which no shares are issued and
outstanding; and (ii) 200,000,000 shares of common stock, $0.001 par value, of
which no shares are issued and outstanding. There are no outstanding
-3-
<PAGE> 7
options, warrants, rights (including conversion or preemptive rights) or
agreements for the purchase or acquisition from the Company of any shares of its
capital stock.
(b) C-Cube Microsystems. As of January 31, 2000, the
authorized capital stock of the C-Cube Microsystems Inc. ("C-CUBE MICROSYSTEMS")
consisted of the following: (i) 5,000,000 shares of preferred stock, $ 0.001 par
value, of which no shares are issued and outstanding; and (ii) 150,000,000
shares of common stock, $0.001 par value, of which 40,052,172 shares are issued
and outstanding. All shares of capital stock of C-Cube Microsystems have been
duly authorized and validly issued and are fully paid and nonassessable and were
not issued in violation of any preemptive rights. As of January 31, 2000, there
were outstanding options to purchase 14,105,200 shares of common stock of C-Cube
Microsystems. Except for the Merger transactions, for items set forth in this
Section 2.3 (b), for certain convertible notes from C-Cube Microsystems, and for
changes since January 31, 2000 resulting from the exercise of options
outstanding on such date, there are no other outstanding options, warrants,
rights (including conversion or preemptive rights) or agreements for the
purchase or acquisition from C-Cube Microsystems of any shares of its capital
stock.
2.4 Subsidiaries. The Company does not currently own or control,
directly or indirectly, any interest in any other corporation, association, or
other business entity which is material to the Company's business.
2.5 Valid Issuance of Securities. The Shares being issued
hereunder and the shares of Common Stock to be issued pursuant to the Warrant
(collectively, the "TRANSACTION SHARES"), when issued, sold and delivered in
accordance with the terms hereof or thereof, as applicable, for the
consideration expressed herein, will be duly and validly issued, fully paid and
nonassessable. Based in part upon the representations of the Purchaser in this
Agreement and subject to the provisions of Section 2.6 below, the Transaction
Shares will be issued in compliance with all applicable federal and state
securities laws. The Transaction Shares shall be free of any liens or
encumbrances, other than any liens or encumbrances created by the Purchasers;
provided, however, that the Transaction Shares may be subject to restrictions on
transfer under state and/or federal securities laws. The Transaction Shares are
not and will not be subject to any preemptive rights, rights of first refusal,
rights of first offer or other similar rights that have not been properly waived
or complied with.
2.6 Governmental Consents. No consent, approval or authorization
of or designation, declaration or filing with any governmental authority on the
part of the Company is required in connection with the valid execution and
delivery of this Agreement, the Transaction Shares, or the Warrant or the
consummation of the transactions contemplated hereby or thereby except those
which may be required under applicable federal and state securities laws.
2.7 Litigation. There is no action, suit, arbitration, proceeding
or investigation pending or to the Company's knowledge, currently threatened
against the Company or its properties before any court, arbitrator or
governmental agency. The Company is not a party or subject to the provisions of
any order, writ, injunction, judgment or decree of any court of government
agency or instrumentality.
-4-
<PAGE> 8
2.8 Intellectual Property. As of the date of this Agreement, to
the Company's knowledge, the Company has legally enforceable rights to use all
patents, trademarks, service marks, trade names, copyrights, trade secrets,
information, proprietary rights, know-how and processes necessary for its
business as now conducted without any infringement on the rights of others.
Except pursuant to Contracts (as defined in Section 2.10 below) listed in the
Disclosure Schedule, there are no outstanding material options, licenses, or
agreements of any kind relating to the foregoing, nor is the Company bound by or
a party to any options, licenses or agreements of any kind with respect to the
patents, trademarks, service marks, trade names, copyrights, trade secrets,
licenses, information, proprietary rights, know-how and processes of any other
person or entity. To the Company's knowledge, the Company has not violated any
of the patents, trademarks, service marks, trade names, copyrights or trade
secrets or other proprietary rights of any other person or entity. The Company
is not aware that any of its employees is obligated under any contract
(including licenses, covenants or commitments of any nature) or other agreement,
or subject to any judgment, decree or order of any court or administrative
agency, that would interfere with the use of his or her best efforts to promote
the interests of the Company or that would conflict with the Company's business
as currently conducted. Neither the execution nor delivery of this Agreement or
the MOU, nor the carrying on of the Company's business as conducted will, to the
Company's knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any of such employees is now obligated.
2.9 Compliance with Other Instruments. The Company is not in
violation or default of any provisions of its charter documents or of any
instrument, judgment, order, writ, decree or contract to which it is a party or
by which it is bound or, of any provision of federal, state or foreign statute,
rule, regulation, order or restriction applicable to the Company. The execution,
delivery and performance of this Agreement and the MOU will not result in any
such violation or be in conflict with or constitute, with or without the passage
of time and giving of notice, either a default under any such provision,
instrument, judgment, order, writ, decree or contract or an event which results
in the creation of any lien, charge or encumbrance upon any of the properties or
assets of the Company or the suspension, revocation, impairment, forfeiture, or
nonrenewal of any material permit, license, authorization, or approval
applicable to the Company, its business or operations or any of its assets or
properties. No consent, approval, qualification, order or authorization of, or
filing with, any governmental authority, or any consent or approval of any third
party person or entity is required in connection with the Company's valid
execution, delivery or performance of this Agreement, the MOU or the offer, sale
or issuance of the Transaction Shares, or the Warrant, or the consummation of
any other transaction contemplated on the part of the Company hereby, except
those filings which may be required under federal and state securities laws.
2.10 Material Contracts and Commitments. Except for agreements
explicitly contemplated hereby (the "CONTRACTS"), there are no agreements,
instruments, leases, licenses, commitments or contracts to which the Company is
a party or by which it is bound, which (i) involve provisions restricting the
development, manufacture or distribution of the Company's products or services,
or (ii) involve indemnification by the Company with respect to infringements of
proprietary rights (other than indemnification obligations arising from purchase
and sale
-5-
<PAGE> 9
agreements entered into in the ordinary course of business and ordinary course
licensing agreements entered into with customers of the Company). All of the
Contracts are valid, binding and in full force and effect in all material
respects and enforceable by the Company in accordance with their respective
terms in all material respects, subject to the effect of applicable bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium, usury or other
laws of general application relating to or affecting enforcement of creditors'
rights and rules or laws concerning equitable remedies. The Company is not in
material default under any of such Contracts, nor has the Company received
notice that any third party does not intend to renew any material contract it
currently has with the Company, or that any third party intends to terminate any
material contract currently in place with the Company. To the knowledge of the
Company, no other party to any of the Contracts is in material default
thereunder.
2.11 Title to Property. The Company has good and marketable title
to its property and assets, free and clear of all mortgages, liens, loans and
encumbrances, except such encumbrances and liens which arise in the ordinary
course of business and do not materially impair the Company's ownership or use
of such property or assets. With respect to the property and assets it leases,
the Company is in compliance with such leases and, to its knowledge, holds a
valid leasehold interest free of any liens, claims or encumbrances.
2.12 Financial Statements. The Purchaser has received the
Company's audited consolidated balance sheet, statements of income, cash flow
and shareholders' equity for the fiscal year ended December 31, 1998, together
with the related opinion of its independent public accountants, and the
Company's unaudited consolidated balance sheet, statement of income cash flow
and shareholders' equity for the nine-month period ended September 30, 1999 (the
"FINANCIAL STATEMENTS"), which are complete and correct in all material respects
and have been prepared in accordance with generally accepted accounting
principles applied on a basis consistent throughout the periods indicated and
consistent with each other, subject to normal end-of-period adjustments. The
Financial Statements fairly present the consolidated financial condition,
operating results and cash flows of the Company as of the respective dates and
for the respective periods indicated.
2.13 Changes. Except as otherwise disclosed in the Financial
Statements, since September 30, 1999, there has not been:
(a) any change in the assets, liabilities, financial
condition or operating results of the Company from that reflected in the
Financial Statements, except changes in the ordinary course of business that
have not been, in the aggregate, materially adverse;
(b) any incurrence of any indebtedness for money borrowed;
(c) any damage, destruction or loss, whether or not
covered by insurance, materially and adversely affecting the assets, properties,
financial condition, operating results, prospects or business of the Company (as
such business is presently conducted and as it is proposed to be conducted);
-6-
<PAGE> 10
(d) any waiver by the Company of a valuable right or of a
material debt owed to it;
(e) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business and that is not material to the assets, properties, financial
condition, operating results or business of the Company (as such business is
presently conducted and as it is proposed to be conducted);
(f) any material change or amendment to a Contract by
which the Company or any of its assets or properties is bound or subject;
(g) any material change in any compensation arrangement or
agreement with any employee, contractor or director;
(h) any material change in the Company's accounting
methods, principles, or practices;
(i) any sale, assignment or transfer of any patents,
trademarks, copyrights, trade secrets or other intangible assets, except
licenses entered into in the ordinary course of business and consistent with
past practices;
(j) any mortgage, pledge, transfer of a security interest
in, or lien, created by the Company with respect to any of its material
properties or assets, except liens for taxes not yet payable;
(k) any loans or guarantees made by the Company to or for
the benefit of its employees, officers or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business;
(l) any declaration, setting aside or payment of dividends
or other distribution with respect to any of the Company's capital stock or any
direct or indirect redemption, purchase or other acquisition of any of such
stock by the Company; or
(m) any agreement or commitment by the Company to perform
any of the acts described in this Section 2.13.
2.14 Outstanding Indebtedness; Material Liabilities. Except
pursuant to the Contracts or as disclosed in the Financial Statements, the
Company has no material liabilities or obligations exceeding $1,000,000 in the
aggregate, absolute or contingent (individually or in the aggregate), except (i)
liabilities and obligations under a lease for its principal offices and leases
for equipment which do not exceed $5,000,000 in the aggregate, (ii) liabilities
and obligations under sales, procurement and other contracts and arrangements
entered into in the normal course of business, which do not exceed $50,000
individually, or $100,000 in the aggregate, (iii) liabilities incurred in the
ordinary course of business subsequent to September 30, 1999, and (iv)
obligations under contracts and commitments incurred in the ordinary course of
business and not required under
-7-
<PAGE> 11
generally accepted accounting principles to be reflected in the Financial
Statements, which, in all cases, individually or in the aggregate, are not
material to the financial condition or operating results of the Company.
2.15 Permits. The Company has all franchises, permits, licenses,
and any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could reasonably be expected to have a
material adverse effect on the Company. The Company is not in default in any
material respect under any of such franchises, permits, licenses, or other
similar authority.
2.16 Environmental and Safety Laws. To the Company's knowledge,
the Company is not in violation of any applicable federal, state or local
statute, law or regulation relating to the environment or occupational health
and safety.
2.17 SEC Filings. The Company has timely and properly filed all
forms, reports, prospectuses and documents required to be filed with the
Securities and Exchange Commission (the "SEC") pursuant to the Securities
Exchange Act of 1934, as amended, including the Report on Form 10, filed with
the SEC on October 29, 1999 (File No. 000-23596), as amended on January 24, 2000
(the "FORM 10") (collectively, the "COMPANY SEC DOCUMENT"). As of its filing
date, each Company SEC Document complied as to form in all material respects
with the applicable requirements of the 1933 Securities Act, as amended (the
"SECURITIES ACT"), and the 1934 Securities Exchange Act, as amended (the
"EXCHANGE ACT"), as the case may be. As of its filing date, each Company SEC
Document filed pursuant to the Exchange Act did not contain any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements made therein, in light of the circumstances under which they were
made, not misleading.
2.18 Brokers' and Finder's Fees. The Company has not incurred,
nor will it incur, directly or indirectly, any liability for brokerage or
finders' fees or agents' commissions or any similar charges in connection with
this Agreement or the MOU, or the consummation of the transactions contemplated
hereby.
3. Representations and Warranties of the Purchaser. The Purchaser hereby
represents and warrants to the Company that:
3.1 Organization and Standing. The Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of France.
3.2 Authority. The Purchaser has all requisite power and
authority to enter into this Agreement and the MOU, to perform its obligations
hereunder, and to consummate the transactions contemplated hereby. The execution
and delivery by the Purchaser of this Agreement and the MOU, the performance by
the Purchaser of its obligations hereunder, and the consummation by the
Purchaser of the transactions contemplated hereby, have been duly authorized by
all necessary corporate action on the part of the Purchaser. This Agreement and
the MOU have been duly executed and delivered by the Purchaser, and constitute a
valid and binding obligation of the Purchaser enforceable against it in
accordance with the terms hereof, except as such enforceability
-8-
<PAGE> 12
may be limited by principles of general application relating to bankruptcy,
insolvency, creditor's rights, and the relief of debtors, and rules of law
governing specific performance, injunctive relief or other equitable remedies.
3.3 No Conflicts. The execution and delivery by the Purchaser of
this Agreement and the MOU, the performance by the Purchaser of its obligations
hereunder, and the consummation by the Purchaser of the transactions
contemplated hereby, will not (i) give rise to any conflict, violation, default,
termination, cancellation, modification, acceleration or loss under any
provision of the Certificate of Incorporation or Bylaws of the Purchaser, or
(ii) violate any order, injunction, judgment, ruling, law or regulation of any
governmental authority applicable to the Purchaser or any of its properties or
assets. No consent, approval, order or authorization of, or registration,
declaration or filing with, any governmental authority is required by or with
respect to the Purchaser in connection with the execution and delivery by the
Purchaser of this Agreement and the MOU, the performance by the Purchaser of its
obligations hereunder, and the consummation by the Purchaser of the transactions
contemplated hereby, except for such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required under
applicable state and federal securities and antitrust laws.
3.4 Brokers' and Finder's Fees. The Purchaser has not incurred,
nor will it incur, directly or indirectly, any liability for brokerage or
finders' fees or agents' commissions or any similar charges in connection with
this Agreement or the MOU, or the consummation of the transactions contemplated
hereby.
3.5 Purchase Entirely for Own Account. Securities to be acquired
by the Purchaser will be acquired for investment for the Purchaser's own
account, not as a nominee or agent, and not with a view to the resale,
distribution or offering of any part thereof, and the Purchaser has no present
intention of selling, granting any participation in, or otherwise distributing
the same. The Purchaser does not presently have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Securities.
3.6 Accredited Investor; Investment Experience. The Purchaser has
such knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risks of the prospective investment in the
Securities, it is able to bear the economic consequences thereof, and it
qualifies as an "accredited investor" as such term is defined in Rule 501 of
Regulation D promulgated under the Securities Act. Purchaser is experienced in
evaluating and investing in securities of emerging publicly traded high
technology companies and acknowledges that it can bear the economic risk of its
investment. Purchaser has not been formed for the specific purpose of acquiring
the Securities.
3.7 Restricted Securities. Purchaser understands that the
Securities have not been, and will not be, registered under the Securities Act
or any state securities ("BLUE SKY") law, by reason of a specific exemption from
the registration provisions of the Securities Act and the applicable Blue Sky
laws, which depend upon, among other things, the bona fide nature of the
investment intent and the accuracy of such Purchaser's representations as
expressed herein. Such
-9-
<PAGE> 13
Purchaser understands that as such the Securities are characterized as
"restricted securities" under the Securities Act and that under the Securities
Act and applicable regulations such Securities may be resold without
registration under the Securities Act only in certain limited circumstances. In
this connection, such Purchaser represents that it is familiar with Rule 144
promulgated under the Securities Act, as presently in effect, and understands
the resale limitations imposed thereby and by the Securities Act.
3.8 Legends. It is understood that the Securities, and any
securities issued in respect thereof or conversion thereof, may bear one or all
of the following legends:
(a) "THIS SECURITY AND ANY SHARES OF COMMON STOCK ISSUED
UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION
MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR
AN OPINION OF COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED."
(b) Any legend required by the laws of the State of
Delaware or the State of California, including any legend required by the
California Department of Corporations.
(c) Any legend required by the Blue Sky laws of any other
state to the extent such laws are applicable to the shares represented by the
certificate so legended.
4. Standstill Restrictions
4.1 Scope of Restrictions. At and after the Closing Date, neither
Purchaser nor its directors, officers, employees, agents and advisors
(including, without limitation, financial advisors, attorneys and accountants)
of the Purchaser shall, on behalf of Purchaser or Purchaser's affiliates,
without the prior written consent of the Company:
(a) Acquire, offer to acquire, or agree to acquire,
directly or indirectly, by purchase or otherwise, any voting securities or
direct or indirect rights to acquire any voting securities of the Company any
subsidiary thereof, or of any successor to or person in control of the Company,
or any assets of the Company or any subsidiary or division thereof or of any
such successor or controlling person;
(b) Make, or in any way participate, directly or
indirectly, in any "solicitation" of "proxies" to vote (as such terms are used
in the rules of the SEC), or seek to advise or influence any person or entity
with respect to the voting of any voting securities of the Company;
-10-
<PAGE> 14
(c) Make any public announcement with respect to, or
submit a proposal for, or offer of (with or without conditions) any
extraordinary transaction involving the Company or any of its securities or
assets;
(d) Form, join or in any way participate in a "group" as
defined in Section 13(d)(3) of the Exchange Act, in connection with any of the
foregoing;
(e) Otherwise act or seek to control or influence the
management, board of directors or policies of the Company;
(f) Take any action that could reasonably be expected to
require the Company to make a public announcement regarding the possibility of
any of the events described in clauses (a) through (e) above; or
(g) Request the Company directly or indirectly, to amend
or waive any provision of this paragraph.
5. The Company's Right of First Refusal.
5.1 Exercise of Right. Prior to Purchaser effecting any direct
or indirect, sale, transfer, pledge, contract to sell, sale of any option or
contract to purchase, purchase of any option or contract to sell, grant of any
option, right or warrant to purchase, transfer the economic risk of ownership
of, or otherwise dispose of, Shares representing 33% or more of the total shares
of Common Stock of the Company originally held by Purchaser immediately after
the Closing, on an as-converted to Common Stock basis (a "TRANSFER"), the
Company shall have a first refusal right to purchase such Shares on the
following terms and conditions:
(a) Purchaser shall give prior notice (the "TRANSFER
NOTICE") to the Company in writing of such intention, specifying the name of the
proposed purchaser or transferee, the number of Shares proposed to be the
subject of such Transfer, the proposed price therefor and the other material
terms upon which such disposition is proposed to be made.
(b) The Company shall have the right, exercisable by
written notice given by the Company to Purchaser within ten (10) business days
after receipt of such Transfer Notice (the "RESPONSE NOTICE"), to purchase all
or any portion of the Shares specified in such Transfer Notice for cash at the
price per share specified in the Transfer Notice or, if consideration other than
cash is specified in the Transfer Notice, in an amount equal to the fair market
value of such non-cash consideration. Such right shall not be conditional upon
the Company having sufficient financing, at the time the right arises, to
purchase the Shares; provided, however, in any event, the Company is required to
obtain such financing within the time period set forth in Section 5.1(c).
(c) If the Company exercises its right of first refusal
hereunder, the closing of the purchase of the Shares with respect to which such
right has been exercised shall take place within thirty (30) calendar days after
the Company gives the Response Notice to Purchaser. Upon exercise of its right
of first refusal, the Company and Purchaser shall be legally obligated to
-11-
<PAGE> 15
consummate the purchase and sale contemplated thereby and shall use their best
efforts to secure any approvals required in connection therewith.
(d) If the Company does not exercise its right of first
refusal hereunder within the time specified for such exercise in subparagraph
(b) above or close within the time period specified in Section 5.1(c) with
respect to all of the Shares specified in such Transfer Notice, such Purchaser
shall be free, during the period of ninety (90) calendar days following the
expiration of such time for exercise, to Transfer or tender for Transfer those
Shares specified in such Transfer Notice with respect to which the Company has
not exercised its first refusal rights to the proposed purchaser or transferee
specified in such Transfer Notice and on terms not materially less favorable to
Purchaser than the terms specified in such Transfer Notice.
(e) Notwithstanding the above, a transfer of Common Stock
by Purchaser either to a "qualified institutional buyer," as such term is
defined in Rule 144A of the Securities Act of 1933, as amended, or to a wholly
owned subsidiary, or direct or indirect corporate parent, of Purchaser shall not
be deemed a "Transfer" for purposes of this Section 5.
5.2 Assignment of Right. The Company may assign its right of
first refusal under this Section 5 to any direct affiliate of Company or a
successor entity in a merger acquisition that succeeds to all of the Company's
rights and obligations under this Agreement; provided, however, in the event of
a sale of the substantially all of the assets, share purchase or other business
combination that the Company shall be liable for the timely performance of any
obligations in this Section 5 by such assignee.
6. Conditions to the Issuance and Sale of the Securities.
6.1 Conditions to Obligations of the Parties. The respective
obligations of each party to this Agreement shall be subject to the satisfaction
at or prior to the Closing Date of the following conditions:
(a) Government Approvals. The Company and Purchaser shall
have obtained all authorizations, consents, orders and approvals required from
or of, or declarations or filings with, or expirations of waiting periods
imposed by, any governmental body required for the consummation of the
transactions contemplated by this Agreement.
(b) Consummation of the Distribution. The Distribution,
pursuant to the terms described in the Form 10, shall have been consummated.
6.2 Additional Conditions of Purchaser's Obligations at Closing.
The obligations of the Purchaser to the Company under this Agreement are
additionally subject to the fulfillment or waiver on or before the Closing, of
each of the following conditions:
(a) Representations and Warranties. The representations
and warranties of the Company contained in Section 2 shall be true in all
material respects on and as of
-12-
<PAGE> 16
the Closing Date with the same effect as though such representations and
warranties had been made on and as of the Closing Date (other than such
representations and warranties as are made as of another date, which
representations and warranties shall continue to be true and correct as of such
particular date), except for failures to be true and correct that do not in the
aggregate constitute a Material Adverse Effect. "MATERIAL ADVERSE EFFECT" shall
mean any change in, or effect on, the business of the Company (as conducted as
of the date of this Agreement) (the "BUSINESS") that is materially adverse to
the results of operations or the financial condition of the Business, taken as a
whole.
(b) Officer's Certificate. The Company shall have provided
a certificate signed by a duly authorized officer of the Company to the effect
that the condition contained in Section 6.2(a) has been met.
6.3 Additional Conditions of the Company's Obligations at the
Closing. The obligations of the Company to the Purchaser under this Agreement
are subject to the fulfillment or waiver, on or before the Closing, of the
following condition:
(a) Representations and Warranties. The representations
and warranties of the Purchaser contained in Section 3 shall be true in all
material respects on and as of the Closing Date with the same effect as though
such representations and warranties had been made on and as of the Closing Date
(other than such representations and warranties as are made as of another date,
which representations and warranties shall continue to be true and correct as of
such particular date).
7. Additional Agreements.
7.1 Expenses. Whether or not this Agreement and the transactions
contemplated hereby are consummated, all expenses incurred by a party in
connection with the transactions contemplated by this Agreement, including
without limitation, all legal, accounting, financial advisory, consulting and
all other fees and expenses of third parties ("THIRD PARTY EXPENSES") incurred
in connection with the negotiation and effectuation of the terms and conditions
of this Agreement and the transactions contemplated hereby, shall be the
obligation of the respective party incurring such fees and expenses.
7.2 Public Disclosure. The Company and the Purchaser shall
consult with each other before issuing any press release or otherwise making any
public statements with respect to this Agreement or any of the transactions
contemplated by the foregoing and shall not issue any such press release or make
any such public statement without the other party's prior written consent,
except as may be required by law, the Nasdaq Stock Market, or any listing
agreement with a national securities exchange.
7.3 Additional Documents and Further Assurances. Each party
hereto, at the request of the other party hereto, shall execute and deliver such
other instruments and do and perform such other acts and things as may be
necessary or desirable for effecting completely the consummation of this
Agreement and the transactions contemplated hereby.
8. Termination. This Agreement shall terminate and the transactions
contemplated hereby abandoned at any time prior to the Closing if the Merger
Agreement is terminated pursuant to
-13-
<PAGE> 17
its terms or by the mutual consent of the parties, in such case the termination
of this Agreement shall be as of the time of such termination.
9. Miscellaneous.
9.1 Survival of Warranties. The warranties, representations and
covenants of the Company and the Purchaser contained in or made pursuant to this
Agreement shall not survive the execution and delivery of this Agreement and the
Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Purchaser or the Company.
9.2 Transfer, Successors and Assigns. The terms and conditions
of this Agreement shall inure to the benefit of and be binding upon the
respective successors and assigns of the parties. Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
9.3 Governing Law. This Agreement shall be governed by and
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.
9.4 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
9.5 Titles and Subtitles; Headings. The titles and subtitles
used in this Agreement are used for convenience only and are not to be
considered in construing or interpreting this Agreement. The table of contents
and headings contained in this Agreement are for convenience of reference only
and shall not affect in any way the meaning or interpretation of this Agreement,
or any of the terms and provisions hereof.
9.6 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally or by a
recognized commercial overnight delivery service, or mailed by registered or
certified mail (return receipt requested) or sent via facsimile (with
acknowledgment of complete transmission) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to the Purchaser, to: Thomson Multimedia S.A.
46 Quai A LeGallo
92100 Boulogne
France
Attention: Chief Executive Officer
Facsimile No.: 331-4126-6400
-14-
<PAGE> 18
with a copy to: Morrison & Foerster LLP
425 Market Street
San Francisco, CA 94105
Attention: Robert Townsend, Esq.
Facsimile No.: (415) 268-7522
(b) if to the Company, to: C-Cube Semiconductor Inc.
1778 McCarthy Boulevard
Milpitas, CA 95035
Attention: Chief Executive Officer
Facsimile No.: (408) 490-8402
with a copy to: Wilson Sonsini Goodrich & Rosati
Professional Corporation
Spear Street Tower, One Market
San Francisco, CA 94105
Attention: Steve L. Camahort, Esq.
Facsimile No.: (415) 947-2099
9.7 Attorneys' Fees. If any action at law or in equity is
necessary to enforce the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
9.8 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Purchaser.
Any amendment or waiver effected in accordance with this Section shall be
binding upon each transferee of any Securities, each future holder of all such
Securities, and the Company.
9.9 Severability. In the event that any provision of this
Agreement or the application thereof, becomes or is declared by a court of
competent jurisdiction to be illegal, void or unenforceable, the remainder of
this Agreement will continue in full force and effect and the application of
such provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further agree
to replace such void or unenforceable provision of this Agreement with a valid
and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
9.10 Entire Agreement. This Agreement and the exhibits hereto,
together with the MOU and the Warrant, constitute the entire agreement between
the parties hereto pertaining to the purchase of the Securities.
9.11 Remedies. The Purchaser and the Company agree that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of the provisions of this Agreement and each hereby
agrees to waive the defense in any action for specific
-15-
<PAGE> 19
performance that a remedy at law would be adequate. Accordingly, it is agreed
that the Company or the Purchaser, as the case may be, shall be entitled to an
injunction, restraining order or other equitable relief to prevent breaches of
this Agreement and to enforce specifically the terms and provisions hereof in
any court of competent jurisdiction in the United States or any state thereof.
Such remedies shall be cumulative and non-exclusive and shall be in addition to
any other rights and remedies the parties may have under the Agreement.
9.12 Extension; Waiver. At any time, the Purchaser and the
Company may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations of the other party hereto, (ii) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto, and (iii) waive compliance
with any of the agreements or conditions for the benefit of such party contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.
9.13 Mutual Drafting. Both parties waive the application of any
law, resolution, holding or rule of construction providing that ambiguities in
an agreement or other document will be construed against the party drafting such
agreement or document.
9.14 Venue. Any legal action or other legal proceeding relating
to this Agreement, the MOU (as to the confidentiality and publicity provisions
only), or the Warrant, or the transactions contemplated hereby or thereby, may
be brought or otherwise commenced in any state or federal court located in the
County of San Francisco, California. Each of the parties hereto (i) expressly
and irrevocably consents and submits to the jurisdiction of each state and
federal court located in the County of San Francisco, California in connection
with any such legal proceeding, including to enforce any settlement, order or
award, (ii) agrees that each state and federal court located in the County of
San Francisco, California shall be deemed to be a convenient forum, and (iii)
waives and agrees not to assert (by way of motion, as a defense or otherwise),
in any such legal proceeding commenced in any state or federal court located in
the County of San Francisco, California, any claim that such party is not
subject personally to the jurisdiction of such court, that such legal proceeding
has been brought in an inconvenient forum, that the venue of such proceeding is
improper or that the subject matter hereof or thereof may not be enforced by
such court. Each party hereto agrees to the entry of any order to enforce any
resolution, settlement, order or award made pursuant to this Section 9.14 by the
state and federal courts located in the County of San Francisco, California and
in connection therewith hereby waives, and agrees not to assert by way of
motion, as a defense, or otherwise, any claim that such resolution, settlement,
order or award is inconsistent with or violative of the laws or public policy of
the laws of the State of California or any other jurisdiction.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-16-
<PAGE> 20
IN WITNESS WHEREOF, the parties have executed this Securities Purchase
Agreement as of the date first above written.
COMPANY:
C-CUBE SEMICONDUCTOR INC.
a Delaware corporation
By: ________________________________
Name:
Title:
PURCHASER:
THOMSON MULTIMEDIA S.A.
a French societe anonyme
By: ________________________________
Name:
Title:
[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]
<PAGE> 1
EXHIBIT 10.8
CONFIDENTIAL
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
FORM OF WARRANT
THIS WARRANT AND ANY SHARES OF COMMON STOCK ISSUED UPON EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE
OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL
SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
________________ __, 2000
WARRANT
TO PURCHASE SHARES OF COMMON STOCK OF
C-CUBE SEMICONDUCTOR INC.
This certifies that, for the consideration received pursuant to that
certain Securities Purchase Agreement, dated as of ________ __, 2000 (the
"Purchase Agreement"), by and between C-Cube Semiconductor Inc., a Delaware
corporation (the "Company"), and Thomson Multimedia S.A., a French societe
anonyme ("Holder"), and for other value received, Holder is entitled, upon the
terms and subject to the conditions hereinafter set forth, and at or prior to
11:59 p.m., Pacific Standard Time, on _________ ___, 2007 (the "Expiration
Time"), but not thereafter, to acquire from the Company, in whole or in part,
the number of shares of common stock of the Company (the "Stock") set forth in
Section 1 hereto, at a purchase price per share as set forth in Section 1 hereto
(the "Exercise Price"). Such number of shares, type of security and Exercise
Price are subject to adjustment as provided herein, and all references to
"Stock" and "Exercise Price" herein shall be deemed to include any such
adjustment or series of adjustments, unless otherwise indicated.
1. NUMBER OF SHARES; EXERCISE PRICE; EXERCISE OF WARRANT AND PAYMENT OF
EXERCISE PRICE
(a) Number of Shares. The aggregate number of shares of Stock
under the Warrant (the "Warrant Number"), subject to adjustment as provided in
Section 8 herein, shall be equal to 949,494.
1
<PAGE> 2
(b) Exercise Price. The exercise price per share of Stock under
this Warrant, subject to adjustment as provided in Section 8 herein (the
"Exercise Price"), shall be equal to $19.78.
(c) Exercise of Warrant. This Warrant shall be fully vested upon
issuance, and shall become exercisable with respect to the shares on the date
which is one (1) week prior to the Expiration Time. Notwithstanding the
foregoing, this Warrant shall be exercisable in part, prior to _________ __,
2007, to the extent, and upon the satisfaction of, the conditions (each, a
"Milestone"), described below:
(i) Definitions.
A. "Design Win" shall mean Holder's completion of
one board design which incorporates the
Company's silicon, and issuance of a purchase
order by Holder for a minimum of 100 units
under the Company's "C-Cube" product name
(collectively, the "Products").
B. "Revenue" shall mean the cumulative revenue
generated since the date of this Warrant, to
the Company from the Company's sales of
Products to the Holder, net of returns and
sales taxes. (ii) Milestones in 2000. The
Warrant shall become exercisable at a rate of
[*] of the Warrant Number, up to an aggregate
of [*] of the Warrant Number, for each Design
Win on or before February 10, 2001. The date of
completion of each Design Win shall trigger the
exercisability of the related portion of the
Warrant. (iii) Milestones in Subsequent Years.
In addition to the portion of the Warrant
exercisable pursuant to subsection (ii) above,
the Warrant shall become exercisable at the
following rates (with such rate being reduced
by any portion of the Warrant already
exercisable pursuant to either subsection (ii)
or (iii) during prior year(s)), upon the
Company's cumulative generation of Revenue, as
follows:
<TABLE>
<CAPTION>
Portion of Warrant Calendar Year
Number That Becomes -------------
Exercisable 2001 2002 2003 2004 2005 2006
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
[*] [*] [*] [*] [*] [*] [*]
[*] [*] [*] [*] [*] [*] [*]
[*] [*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
</TABLE>
1 Revenue figures shown in millions in chart.
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
2
<PAGE> 3
In connection with this Section 1(c)(iii), the Company shall deliver to Holder
within 45 days subsequent to each calendar quarter, a report containing the
Revenue generated in such quarter. In the event that Revenue reported by the
Company is above 90% of a given applicable Milestone set forth above, then
Company shall deliver to Holder within 45 days subsequent to each calendar
month, a report containing the Revenue generated in such month, until such
Revenue target has been met or has passed. In the event that Holder disputes the
Revenue reported by the Company, then such dispute shall be settled by binding
arbitration in San Francisco County, California, under the rules of the American
Arbitration Association ("AAA") then in effect by a single arbitrator mutually
agreeable to Company and Holder. In the event that within 30 days after the
submission of any dispute to arbitration, Holder and Company cannot mutually
agree on a single arbitrator, then AAA shall select the arbitrator.
Subject to the above restrictions, the purchase rights represented by
this Warrant are exercisable by Holder at or prior to the Expiration Time by the
surrender of this Warrant and the notice of exercise form attached hereto as
Exhibit A (the "Notice of Exercise") duly executed, completed and delivered to
the principal offices of the Company, 1778 McCarthy Boulevard, Milpitas, CA
95035, Attn: Chief Financial Officer, with a copy to Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Spear Street Tower, One Market, San Francisco,
California 94105, Attn: Steve L. Camahort, Esq. (or such other office or agency
of the Company as it may designate by notice in writing to the registered holder
hereof at the address of such holder appearing on the books of the Company). The
date appearing on the Notice of Exercise shall be the "Exercise Date." Promptly
upon receipt of the Notice of Exercise by the Company and the payment of the
purchase price in accordance with the terms set forth below, and, if exercised
prior to ______ __, 2007, subject to the satisfaction of the Milestones set
forth herein, but in no event later than fifteen (15) business days thereafter,
the Company shall issue to Holder a certificate for the number of shares of
stock purchased, shall execute the acknowledgment of exercise in the form
attached hereto as Exhibit B (the "Acknowledgment of Exercise") and issue to the
Holder a new Warrant in substantially identical form and dated as of the
Exercise Date for the purchase of that number of shares of Stock equal to the
difference, if any, between the number of shares of Stock subject hereto and the
number of shares of Stock as to which this Warrant is so exercised.
(d) Payment of Exercise Price. The Exercise Price may be paid at
Holder's election either by wire transfer of immediately available funds or
cashier's check.
2. ISSUANCE OF SHARES; NO FRACTIONAL SHARES OR SCRIP
The Company hereby represents and warrants that all shares of Stock
which may be issued upon the exercise of this Warrant will, upon such exercise,
be duly and validly authorized and issued, fully paid and nonassessable and free
from all taxes, liens and charges in respect of the issuance thereof (other than
liens or charges created by or imposed upon the holder of the Warrant). The
Company agrees that the shares so issued shall be and shall for all purposes be
deemed to have been issued to such holder as the record owner of such shares as
of the close of business on the date on which this Warrant shall have been
exercised or converted in accordance with the terms hereof. No fractional shares
or scrip representing fractional shares shall be issued upon the exercise of
this Warrant. With respect to any fraction of a share called for upon the
exercise of this Warrant, an amount equal to such fraction multiplied by the
Fair Market Value of one share of Stock shall be paid in cash or check to the
holder of this Warrant. "Fair Market Value" shall mean with
3
<PAGE> 4
respect to each share of Stock, the average of the closing bid and ask prices,
as quoted on the NASDAQ or similar applicable system, of the Stock on the
Exercise Date.
3. CHARGES, TAXES AND EXPENSES
Holder shall be responsible for payment of any charges related to
issuance of certificates for shares of Stock upon the exercise of this Warrant
for any issue or transfer tax and such certificates shall be issued in the name
of the holder of this Warrant.
4. NO RIGHTS AS SHAREHOLDERS
This Warrant does not entitle the holder hereof to any voting rights or
other rights as a shareholder of the Company prior to the exercise hereof.
5. TRANSFERABILITY
This Warrant and all rights hereunder are not transferable by the Holder
hereof, except to a wholly owned subsidiary or direct or indirect corporate
parent of Holder, without the prior written consent of the Company.
6. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
On receipt by the Company of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and in
case of any such loss, theft or destruction of this Warrant, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of any such mutilation, on surrender and cancellation of such
Warrant, the Company will execute and deliver to the holder, in lieu thereof, a
new warrant in substantially identical form, dated as of such cancellation and
reissuance.
7. SATURDAYS, SUNDAYS AND HOLIDAYS
If the last or appointed day for the taking of any action or the
expiration of any right required or granted herein shall be a Saturday or a
Sunday or shall be a legal holiday, then such action may be taken or such right
may be exercised on the next succeeding business day.
8. ADJUSTMENT TO NUMBER AND TYPE OF SECURITIES, EXERCISE PRICE
The type and number of securities of the Company issuable upon exercise
of this Warrant and the Exercise Price are subject to adjustment as set forth
below:
(a) Adjustment for Stock Splits, Stock Dividends, Recapitalizations,
Automatic Conversion, etc. The number and type of securities and/or other
property issuable upon exercise of this Warrant shall be appropriately and
proportionately adjusted to reflect any stock dividend, stock split, combination
of shares, reclassification, recapitalization, automatic conversion, redemption
or other similar event affecting the number or character of outstanding shares
of Stock, so that the number and type of securities and/or other property
issuable upon exercise of this Warrant shall be equal to that which would have
been issuable with respect to the number of shares of Stock subject hereto at
the time of such event, had such shares of Stock then been outstanding.
4
<PAGE> 5
(b) Adjustment for Reorganization, Consolidation, Merger, etc. In case
of any consolidation or merger of the Company with or into any other
corporation, entity or person, or any other corporate reorganization, in which
the Company shall not be the continuing or surviving entity of such
consolidation, merger or reorganization, or any transaction in which in excess
of 50% of the Company's voting power is transferred, or any sale of all or
substantially all of the assets of the Company (any such transaction being
hereinafter referred to as a "Reorganization"), then, in each case, the holder
of this Warrant, on exercise hereof at any time after the consummation or
effective date of such Reorganization, shall receive, in lieu of the Stock
issuable on such exercise prior to the date of such Reorganization, the stock
and other securities and property (including cash) to which such holder would
have been entitled upon the date of such Reorganization if such holder had
exercised this Warrant immediately prior thereto. The provisions of this Section
8(b) shall apply to successive Reorganizations.
(c) Certificate as to Adjustments. In case of any adjustment in the
Exercise Price or number and type of securities issuable on the exercise of this
Warrant, the Company will promptly give written notice thereof to the holder of
this Warrant in the form of a certificate, certified and confirmed by an officer
of the Company, setting forth such adjustment and showing in reasonable detail
the facts upon which adjustment is based.
9. NOTICES OF RECORD DATE, ETC.
In the event of:
(a) any taking by the Company of a record of the holders of Common Stock
for the purpose of determining the holders thereof who are entitled to receive
any dividend or other distribution, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right,
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, or any transfer of all or
substantially all the assets of the Company to, or consolidation or merger of,
the Company with or into any person,
(c) any voluntary or involuntary dissolution, liquidation or winding-up
of the Company, or
(d) any proposed issue or grant by the Company to all holders of Common
Stock of any right or warrant to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities,
then and in each such event the Company will mail to the Holder hereof a notice
specifying (i) the date on which any such record is to be taken for the purpose
of such dividend, distribution or right, and stating the amount and character of
such dividend, distribution or right, (ii) the date on which any such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up is to take place, and the time,
if any is to be fixed, as to which the holders of record of Common Stock shall
be entitled to exchange their shares for securities or other property
deliverable on such reorganization, reclassification, recapitalization,
transfer, consolidation, merger, dissolution, liquidation or winding-up, (iii)
the amount and character of any stock or other securities, or rights or warrants
with respect thereto, proposed to be issued or granted, the date of such
proposed issue or grant and the persons or class of persons to whom such
proposed issue or grant is to be offered or made, and (iv) in reasonable detail,
the facts, including the
5
<PAGE> 6
proposed date, concerning any other such event. Such notice shall be delivered
to the holder hereof at least ten (10) days prior to the date therein specified.
10. NOTICES
All notices and other communications hereunder shall be in writing and
shall be deemed given if delivered personally or by a recognized commercial
overnight delivery service, or mailed by registered or certified mail (return
receipt requested) or sent via facsimile (with acknowledgment of complete
transmission) to Holder or Company at the following addresses (or at such other
address for a party as shall be specified by like notice):
(i) if to Holder, to: Thomson Multimedia S.A.
46 Quai A. Le Gallo
92100 Boulogne
France
Attention: Chief Executive Officer
Facsimile No.: 331-4126-6400
with a copy to: Morrison & Foerster LLP
425 Market Street
San Francisco, CA 94105-2482
Attention: Robert Townsend, Esq.
Facsimile No.: (415) 268-7522
(ii) if to Company, to: C-Cube Semiconductor Inc.
1778 McCarthy Boulevard
Milpitas, CA 95035
Attention: Chief Executive Officer
Facsimile No.: (408) 490-8402
with a copy to: Wilson Sonsini Goodrich & Rosati
Professional Corporation
Spear Street Tower
One Market
San Francisco, CA 94105
Attention: Steve L. Camahort, Esq.
Facsimile No.: (415) 947-2099
11. COOPERATION
The Company will not, by amendment of its bylaws or certificate of
incorporation or through any reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other action, avoid or seek to avoid the observance or performance of any of the
terms to be observed or performed hereunder by the Company, but will at all
times in good faith assist in the carrying out
6
<PAGE> 7
of all the provisions of this Warrant and in the taking of all such action as
may be necessary or appropriate in order to protect the rights of the holder of
the Warrant against impairment.
12. WAIVER AND AMENDMENT
Any provision of this Warrant may be amended, waived or modified only
upon the written consent of the Company and the Holder.
7
<PAGE> 8
13. GOVERNING LAW
This Warrant shall be governed by and construed in accordance with the
laws of California applicable to contracts made and to be performed wholly
within California.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its duly authorized officer.
Dated: __________ ___, 2000 C-CUBE SEMICONDUCTOR INC.
a Delaware corporation
By: ___________________________________
Name:
Title:
<PAGE> 9
EXHIBIT A
NOTICE OF EXERCISE
To: C-Cube Semiconductor Inc.
(1) The undersigned hereby elects to purchase __________ shares of the
common stock of C-Cube Semiconductor Inc. issuable pursuant to the terms of the
attached Warrant, and tenders herewith payment of the Exercise Price in full for
such shares.
(2) Please issue a certificate or certificates representing the shares
issuable pursuant to the attached Warrant in the name of the undersigned.
(3) The undersigned represents that the aforesaid shares are being
acquired for the account of the undersigned for investment and not with a view
to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares,
except in compliance with applicable federal and state securities laws.
Thomson Multimedia S.A.
a French societe anonyme
Date: _______________________ By: ___________________________________
Name:
Title:
<PAGE> 10
EXHIBIT B
ACKNOWLEDGMENT OF EXERCISE
The undersigned, C-Cube Semiconductor Inc., hereby acknowledges receipt
of the "Notice of Exercise" from Thomson Multimedia S.A., to purchase
___________ shares of the Common Stock of C-Cube Semiconductor Inc., pursuant to
the terms of the Warrant and the method of payment indicated on the Notice of
Exercise received from ________________________________ on __________ ___, 20__.
C-CUBE SEMICONDUCTOR INC.
a Delaware corporation
Date: _______________________ By: ___________________________________
Name:
Title:
