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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 22, 2000
REGISTRATION NO. 333-31896
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT
NO. 2
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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C-CUBE SEMICONDUCTOR INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3577 77-0192108
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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1778 MCCARTHY BLVD.
MILPITAS, CALIFORNIA 95035
(408) 490-8000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ALEXANDRE BALKANSKI
PRESIDENT AND CHIEF EXECUTIVE OFFICER
C-CUBE MICROSYSTEMS INC.
1778 MCCARTHY BLVD.
MILPITAS, CALIFORNIA 95035
(408) 490-8000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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COPIES TO:
LARRY W. SONSINI, ESQ.
STEVE L. CAMAHORT, ESQ.
KELLY S. BOYD, ESQ.
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(650) 493-9300
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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47,000,000 Shares of C-Cube Semiconductor
Common Stock are being distributed
to the Stockholders of C-Cube Microsystems
C-CUBE LOGO
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Prior to this offering, there has been no public market for C-Cube
Semiconductor's common stock. C-Cube Semiconductor has applied to have the
C-Cube Semiconductor common stock included for quotation on The Nasdaq Stock
Market's National Market under the symbol "CUBE."
Neither C-Cube Microsystems nor C-Cube Semiconductor will receive any
proceeds from this offering.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Delivery of the shares of common stock will be made on or about May 2,
2000.
The date of this prospectus is March 22, 2000.
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TABLE OF CONTENTS
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Summary..................................................... 3
Risk Factors................................................ 5
Forward-Looking Statements.................................. 11
The Distribution............................................ 12
Pro Forma Capitalization.................................... 13
Reasons for the Distribution................................ 14
Business.................................................... 16
Where You Can Find More Information......................... 30
Selected Financial Data..................................... 31
Management's Discussion and Analysis........................ 32
Unaudited Pro Forma Financial Statements.................... 42
Unaudited Pro Forma Condensed Consolidated Balance Sheet.... 43
Management.................................................. 49
Executive Compensation and Other Matters.................... 52
Stock Ownership of Certain Beneficial Owners and
Management................................................ 55
Arrangements Between C-Cube Microsystems and
Semiconductor............................................. 57
Descriptions of Employee Benefits Plans..................... 63
Certain Relationships and Related Transactions.............. 66
Material Federal Income Tax Considerations.................. 68
Description of Semiconductor's Capital Stock................ 71
Dividend Policy............................................. 72
Indemnification of Directors and Officers................... 73
Transfer Agent and Registrar................................ 73
Legal Matters............................................... 73
Experts..................................................... 73
Index to Financial Statements............................... F-1
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You should rely only on the information contained in this 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
prospectus is accurate as of the date on the front cover of this prospectus
only. Semiconductor's business, financial condition, results of operations and
prospects may have changed since that date.
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SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. To better understand the distribution and Semiconductor, you should
read the entire prospectus carefully, including the risk factors and financial
statements.
WHY THIS PROSPECTUS WAS SENT TO YOU
This prospectus is being delivered by C-Cube Microsystems Inc. to you
because you were an owner of C-Cube Microsystems common stock on April 25, 2000.
This entitles you to receive a distribution of one share of the common stock of
a new company, C-Cube Semiconductor Inc. or Semiconductor, a Delaware
corporation, for each share of C-Cube Microsystems common stock owned by you on
April 25, 2000. 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. 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 was formed in conjunction with C-Cube Microsystems' merger
with Harmonic Inc. This prospectus 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.
BUSINESS OF SEMICONDUCTOR
Semiconductor designs, develops, has manufactured and sells semiconductors,
software and systems for digital video applications. As a major supplier of such
products, Semiconductor has played a 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 and digital video disc as well as digital VHS
players. The communications market targets interactive set-top boxes, broadcast
encoders, which compress data into a more compact form making the data easier to
store and transmit, and other emerging appliances. Users of these products will
be able to record hours of digital video disc-quality video obtained from any
video source, whether television, video cassette recorder, digital video
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 digital video disc, web pages, e-mail, recordable compact
disc or personal computer hard-disk drives.
RELATIONSHIP BETWEEN C-CUBE MICROSYSTEMS AND SEMICONDUCTOR
All Semiconductor common stock is being distributed to the C-Cube
Microsystems stockholders as described in this prospectus. 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.
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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.
THE DISTRIBUTION
Each C-Cube Microsystems stockholder will receive one share of
Semiconductor common stock for every share of C-Cube Microsystems common stock
held.
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 April 25, 2000.
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."
TAX TREATMENT OF THE DISTRIBUTION
We have been advised by Ernst & Young LLP that in their opinion, the
distribution will qualify as a tax-free distribution to C-Cube Microsystems
stockholders, although C-Cube Microsystems itself will recognize substantial
gain in connection with the distribution as a result of Section 355(e) of the
Internal Revenue Code because it is undertaken as part of the same plan as the
Harmonic merger, which will result in a change of control of C-Cube
Microsystems, and also as a result of certain internal restructuring
transactions undertaken prior to the distribution of the Semiconductor stock.
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.
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.
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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. Factors that have negatively
affected Semiconductor's operating results in the past include:
- Availability, cost and manufacturing yield of raw materials, chip
manufacturing capacity, assembly capacity, packages and test capacity
from our vendors;
- Competitive products and pressures on average selling prices on products
supplied by Semiconductor;
- 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; and
- The level of orders which are received and can be shipped in any given
quarter.
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In the future, Semiconductor's operating results could again be affected by
one or more of these factors or a wide variety of other factors that have not
had an adverse effect on Semiconductor in the past.
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.
If Semiconductor is unable to generate increased revenue from new opportunities
for digital video compression in the consumer electronics, computer and
communications markets or if systems manufacturers do no accept Semiconductor's
products, its results of operation would be harmed. Some of the potential new
markets for the compression of digital video into a more compact form, which
provides significant storage and transmission efficiencies, 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.
IF CHIP 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. If these chip suppliers
on which Semiconductor depends are unable to provide Semiconductor with the
chips it needs to fill orders for its products, Semiconductor's results of
operations could suffer. 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 many of
its products. This dependence on single foundries subjects Semiconductor to
risks associated with an interruption in supply from any such foundry.
Furthermore, Semiconductor obtains semiconductor chip manufacturing
capacity through forecasts that are generated many months in advance of expected
delivery dates and are binding. 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.
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. Though C-Cube Microsystems has always faced competition, Semiconductor
may be less able to react quickly to competitive threats without the added
benefits of joint research and development and more financial stability that it
enjoyed through its
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combination with DiviCom. Semiconductor will continue to compete with its
principal competitors including:
- Philips,
- ST-Microelectronics,
- ESS Technology,
- Sony,
- NEC,
- Matsushita Electric Industrial Company,
- Zoran, and
- IBM Microelectronics.
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 video compact disc products in China. 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 which might
have a negative effect on Semiconductor's results of operations. Semiconductor
expects that revenue from video compact disc products will decrease as a
percentage of total revenue, but continue to account for a significant portion
of its product revenue in 2000.
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.
The spin-off will be taxable to C-Cube Microsystems as a result of Section
355(e) of the Internal Revenue Code because it is undertaken as part of the same
plan as the Harmonic merger, which will result in a change of control of C-Cube
Microsystems, and also as a result of certain internal restructuring
transactions undertaken prior to the distribution of the Semiconductor stock.
Accordingly, C-Cube Microsystems will incur a substantial corporate-level tax in
connection with the distribution, which Semiconductor has agreed to pay. 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. 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 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 of $975 million for the
stock of the spun-off semiconductor business, that this tax liability will be
approximately $203 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 likely will
exceed the estimated tax liability.
Semiconductor will retain, and transfer to Harmonic, cash reserves in an
amount estimated to be 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 related transactions, 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 and related
transactions (plus certain related
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costs) that results, for example, from an IRS audit. An increase in this tax
liability could force Semiconductor to incur debt which, in turn, could
negatively impact Semiconductor's financial position and future results of
operations and or to issue equity, which 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 and C-Cube Microsystems. 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. The combination of Semiconductor
with the DiviCom business has resulted in faster growth and greater scale for
C-Cube Microsystems. After the distribution, without these benefits of a
combined business, Semiconductor may not experience the same success attracting
quality employees. Competition for qualified 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. Lack of success in attracting
qualified 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 ITS 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 products are primarily based on technology that was
developed internally which it protects through a combination of patents,
copyrights and trade secret law, confidentiality procedures and licensing
arrangements. Semiconductor's operating results depend, in part, on its ability
to protect its technology. Unauthorized parties may attempt to obtain and use
Semiconductor's proprietary information which might negatively affect the value
of its stock. Policing unauthorized use of its 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".
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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. 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 chip manufacturing facilities used by Semiconductor, but chip production
capacity in the near future is anticipated to be tight. Factors such as these or
any number of other factors specific to international transactions could have a
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. In addition, Semiconductor has made no formal
presentations to potential investors in anticipation of the distribution.
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.
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. Furthermore, broad market and industry fluctuations may
adversely affect the trading price of the common stock, regardless of
Semiconductor's actual operating performance. Any of these factors could
adversely affect the liquidity and trading price of the Semiconductor common
stock.
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 beginning on page 48 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
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and computer networking. Any failure or significant downtime in C-Cube
Microsystems' or Semiconductor's own information systems could prevent
Semiconductor from taking customer orders, shipping products or billing
customers and could harm its business. 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.
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. 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 MATERIAL 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. 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 successful integration of the
acquired business, decreases in reported earnings as a
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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.
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<PAGE> 13
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 April 25, 2000, 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 April 25, 2000, C-Cube Microsystems will complete preliminary
internal restructuring transactions related to the Semiconductor business. On
May 2, 2000, C-Cube Microsystems will effect the distribution by delivering all
of the Semiconductor common stock to the custodian for the benefit of the C-Cube
Microsystems stockholders of record as of the record date. On or about May 2,
2000, 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.
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PRO FORMA CAPITALIZATION
The following table sets forth the capitalization and certain other balance
sheet data of Semiconductor as of December 31, 1999. This information should be
read in conjunction with the pro forma financial information included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 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............................ $319,653 $(179,852) $ 139,801
======== ========= =========
Stockholders' Equity:
Preferred Stock........................ $ -- $ -- $ --
Common Stock........................... 323,756 222,148 545,904
Accumulated Other Comprehensive Loss... (2,204) 190 (2,014)
Retained Earnings (Deficit)............ 77,240 (493,220) (415,980)
-------- --------- ---------
Total Stockholders' Equity..... 398,792 (270,882) 127,910
-------- --------- ---------
Total Capitalization.............. $398,792 $(270,882) $ 127,910
======== ========= =========
</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 $54,801,000 and stockholders' equity would be $42,910,000. See
Unaudited Pro Forma Financial Statements for a description of the pro forma
adjustments reflected in the adjusted balances.
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<PAGE> 15
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 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 Credit Suisse First Boston 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 Credit Suisse First Boston reviewed with C-Cube Microsystems'
board of directors various potential transactions, including the transaction
described in this prospectus.
Credit Suisse First Boston, 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 Credit Suisse First Boston as
its financial advisor because it is an internationally recognized investment
banking firm that has substantial experience in transactions similar to the
distribution.
Although Credit Suisse First Boston 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
Securities and Exchange Commission. For tax and legal purposes, C-Cube
Microsystems will report
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<PAGE> 16
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 equal to the difference between the net tax basis of the semiconductor
business and the fair market of the shares of Semiconductor stock distributed.
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.
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<PAGE> 17
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 Semiconductor.
Semiconductor designs, develops, has manufactured and sells semiconductors,
software and systems for digital video applications. As a major supplier of such
products, Semiconductor has played a 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 and digital video disc as
well as digital VHS recorders and digital video recorders. The communications
market targets interactive set-top boxes, broadcast encoders, which compress
data into a more compact form making the data easier to store and transmit, and
other emerging appliances. Users of these products will be able to record hours
of digital video disc-quality video obtained from any video source, whether
television, video cassette recorder, digital video 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
digital video 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 compact discs, resulting in
tremendous growth in the market for compact disc 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.
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.
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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 standards for digital video and audio compression.
The moving picture experts group-1 standard enabled the first digital video
consumer products such as video compact disc, while the more recent moving
picture experts group-2 standard has become the accepted compression format in
diverse applications such as digital satellite, cable and terrestrial television
as well as professional video editing, digital VHS and digital video disc. The
adoption and acceptance of these standards has contributed greatly to the growth
of digital video markets during the 1990s.
MATHEMATICAL RULES GOVERN COMPRESSION WHICH DETERMINES 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. A moving picture
experts group-compliant encoder (which is the compression device) will create
data that a moving picture experts group-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 these mathematical rules. 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 products that are not only fully compliant with the moving
picture experts group-1 or -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
The ability to compress digital video into a more compact form, which
provides significant storage and transmission efficiencies, is currently
enabling a number of applications and capabilities in the communications market
in diverse segments such as satellite, cable, telephone and wireless networks.
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SATELLITE
The first full-scale digital video transmission systems to achieve full
deployment were a series of direct broadcast satellite networks. By combining
the ability to compress digital video into a more compact form with high-power
Ku-band satellites, direct broadcast satellite systems typically provide 100 or
more channels to a large geographical area (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
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 moving picture experts group 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) compact discs 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 video compact disc
players, digital video disc players, digital VHS and recordable digital video
discs 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 video cassette recorder 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 video cassette recorder 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
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- the ability to integrate the video cassette recorder recording function
with other desirable consumer features such as easy program recording,
timeshifting of programs and digital video disc playback.
Key advantages of digital-VHS include:
- the ability to record up to 24 hours of video on a single tape;
- capability to record high-definition television; and
- compatibility with VHS and Super-VHS, thus preserving existing consumer
video libraries stored in VHS format.
DIGITAL VIDEO DISC PLAYER
Unlike the video compact disc standard, which is an adaptation of the audio
compact disc, the digital video disc standard was defined specifically for the
very high-quality playback of feature-length movies. The digital video disc
format now commercially available provides up to 135 minutes of playing time
(270 for double-sided) on a disc the same physical size as an audio compact disc
with four times the image resolution of a standard video compact disc. Digital
video disc uses moving picture experts group-2 compression technology.
VIDEO COMPACT DISC PLAYER
A video compact disc player is essentially an audio compact disc player
with a moving picture expert group-1 decoder and a video output. While adding
this functionality marginally increases the cost to manufacture a typical
compact disc player, these machines now have the ability to play movies, music
videos and other titles from moving picture experts group-1 encoded compact
discs. The physical video compact disc format is identical to a standard audio
compact disc and is limited to 72 minutes playing time with video quality that
is generally perceived as comparable to an analog VHS tape. Several thousand
Video compact disc titles are now available, including movies, music videos and
karaoke titles. The video compact disc format has thus far received mass-market
adoption in China. In 1998, leading Chinese manufacturers and the Chinese
government introduced an enhanced version of video compact disc known as Chaoji
video compact disc. This enhanced version features moving picture experts
group-2 video quality that is comparable to digital video disc video and is
backward compatible with video compact disc 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,
which was 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 compact disc 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 digital video disc 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
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applications. Semiconductor has long recognized, however, 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 moving picture experts group-2 codec architecture
and introduced DVxpert(TM), the first product based on the new architecture, in
August 1997. 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 high-definition
television 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, digital video disc 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 begin high-definition
television transmissions, but many infrastructure issues remain uncertain. In
1999, Semiconductor introduced its high-definition digital video product to
address these issues. This product is a moving picture experts group-2 encoder
for high-definition television 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.
Interactive Set-top Box Decoders
The primary communications application for moving picture experts group-2
decoders is in the set-top box market. To reconstruct the compressed broadcast
program, several steps are required. First, the moving picture experts group-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 moving picture experts group-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 CL9100 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 television, 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 pages displayed over video,
an important feature for interactive applications.
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
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set-tops are incorporated in an interactive service developed by NTL, the United
Kingdom'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 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
moving picture experts group 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 television.
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 television in the living room,
including web-based e-commerce, video e-mail and voice over the Internet.
CONSUMER ELECTRONICS
Recordable Digital Video
While digital video disc 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 digital video disc-quality video. Thus,
Semiconductor extended its DVxpert technology to the consumer world with the
DVxplore(TM) line of consumer codecs. DVxplore codecs are the world's first
single-chip consumer products to support both moving picture experts group
formats and the digital video format used primarily in digital camcorders called
DV. The initial focus is on the personal computer market, where original
equipment manufacturers use DVxplore codecs to offer personal content creation,
personal computer/television and time-shifting applications. Users of these
products are able to record hours of digital video disc-quality video obtained
from any video source, whether television, video cassette recorder, digital
video 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.
Video cassette recorder 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 digital video disc; and hard disk digital video recorder.
Semiconductor is developing products for all three emerging consumer digital
recordable platforms.
Encoders for Editing Applications
Professional editing had been primarily the province of motion-joint
photographic experts group products due to the need for accurate cuts and
special effects. Because moving picture experts group-compliant encoders
essentially collapse some frames to achieve high levels of compression, industry
analysts doubted whether moving picture experts group could ever achieve the
accuracy needed to supplant motion-joint photographic experts group products for
professional needs. However, Semiconductor showed that moving picture experts
group is a viable format for editing with the introduction of the DVxpress
codecs. Based on the same architecture as the DVxpert product, the DVxpress(TM)
codecs feature Semiconductor's proprietary Frame-Accurate Moving picture experts
group Editing (FAME(TM)) algorithm and dual-stream decoding, two capabilities
for professional editing.
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Semiconductor's DVxpress-MX codec products can support both moving picture
experts group and DV formats, to allow mixed-format editing where, for example,
a moving picture experts group 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 moving picture experts group
is the prevailing standard for transmission and storage. Panasonic, the
developer of the DV format, and Avid, a leading editing original equipment
manufacturers, both endorsed the DVxpress-MX codec as a significant step toward
unifying the moving pictures experts group and DV worlds. During 1999, many
leading providers of editing solutions introduced products based on DVxpress-MX,
including Matrox Electronic Systems, Pinnacle Systems, Accom and Fast
Multimedia.
DVD Decoders
Semiconductor's ZiVA(TM) family of digital video disc products includes
decoders and system-level design solutions for consumer original equipment
manufacturers. The ZiVA digital video disc decoder family incorporates several
critical digital video disc 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 digital video disc consortium's copy
protection scheme.
Semiconductor collaborated with partner Toshiba to develop the ZiVA-PC
decoder targeted specifically at the notebook market, the first digital video
disc hardware chip with full PC98 compliance. The ZiVA-personal computer decoder
offers one of the industry's lowest overall system cost for hardware digital
video disc playback, as well as one of the lowest power consumption, while
delivering true interactivity and flawless image quality. In 1999, Semiconductor
developed its third-generation digital video disc 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
digital video disc-enabled notebook computers.
Video Compact Disc Decoders
Video compact disc is a consumer entertainment format based on moving
picture experts group-1 technology. Video compact disc 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 moving pictures
experts group-1 decoders used in video compact disc players throughout the
mid-and late-1990s. Semiconductor pioneered the moving picture experts group-1
market with the introduction in 1992 of the CL450 moving picture experts group-1
video decoder, the first commercially available moving picture experts group-1
video decoder. The CL450 found uses in commercial and professional digital
karaoke players. It followed with the CL480 family of video compact disc
decoders, products that boosted Semiconductor to market leadership in the
rapidly growing market for video compact disc players in China in the mid-1990s.
Semiconductor's current video compact disc product is the CL680 Advanced
video compact disc 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 Video Compact Disc Decoders
As the video compact disc 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 video compact disc
and digital compact disc, Semiconductor was well qualified to help define the
new standard. The result of this effort was the introduction of the Chaoji video
compact disc
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standard, an extension to video compact disc that was endorsed by the Chinese
government and leading original equipment manufacturers.
Soon after the adoption of the Chaoji video compact disc standard,
Semiconductor introduced the CL8800 family of Chaoji video compact disc 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 Video compact disc and audio compact disc formats.
In 1999, Semiconductor introduced the most integrated Chaoji video compact disc
decoder chip, the CL8830A. Leading Chinese original equipment manufacturers have
adopted the CL8800 decoders for their Chaoji video compact disc product
offerings. In 2000, we believe that the Chaoji video compact disc market will
continue to encroach on the video compact disc market as prices for Chaoji video
compact disc 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 video compact disc
decoder family of products have represented a significant percentage of
Semiconductor's total net revenues. Semiconductor expects that revenues from its
video compact disc decoder products including the CL680 and Chaoji video compact
disc 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 video compact disc
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 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% of
Semiconductor's net revenues during 1997.
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RESEARCH AND DEVELOPMENT
Semiconductor believes that the continued introduction of new products in
its target markets is essential to its growth. As of December 31, 1999,
Semiconductor had 289 full-time employees engaged in research and development.
Expenditures for research and development in 1999, 1998 and 1997 were
approximately $54.3 million, $52.6 million and $46.5 million, respectively.
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 moving picture experts group-2 encoders and decoders. The success of
new product introductions is dependent on several factors, including:
- proper new product definition;
- product cost;
- timely completion and introduction of new product designs;
- quality of new products;
- differentiation of new products from those of 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 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 the
compression of digital video into a more compact form, providing significant
storage and transmission efficiencies, 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 December 31, 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.
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INTERNATIONAL BUSINESS ACTIVITIES
During 1999, 1998 and 1997, international revenues accounted for
approximately 82%, 82% and 88% of Semiconductor's net revenues, respectively.
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 typical risks of doing business internationally. For example, China is
the primary market for video compact disc and Chaoji video compact disc 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 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. 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, Semiconductor 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. As a
result, currency fluctuations could, in the long term, have an 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 an adverse effect on
Semiconductor's business and results of operations. Similarly, protectionist
trade legislation in either the United States or foreign countries could have an
adverse effect on Semiconductor's ability to manufacture or sell its products in
foreign markets.
The Asian consumer electronics markets accounted for approximately 67%, 74%
and 80% of total sales in 1999, 1998 and 1997, respectively. 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 video compact disc and Chaoji video compact disc
players. Semiconductor believes purchases of video compact disc and Chaoji video
compact disc 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 1999, Semiconductor's devices were fabricated using advanced process
technology with 0.5 micron, 0.35 micron, 0.30 micron, 0.25 micron, and 0.22
micron process feature sizes, using either three, four or five layers of metal
interconnect. In 1999, Semiconductor began using 0.18 micron process technology.
Fabricated chips are tested by the fabrication facility to Semiconductor
specifications. Once
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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 1999, C-Cube Microsystems has
invested in new information technology tools that improve the speed and quality
of subcontract management.
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 December 31, 1999, remaining production capacity rights were $6.4
million dollars of which $1.4 million was included in other current assets and
$5.0 million was classified as a non-current asset.
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
chip manufacturing facilities. 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 chip manufacturing facilities 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 chip manufacturing facilities.
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 chip manufacturing facilities subjects Semiconductor to risks
associated with an interruption in supply from these chip manufacturing
facilities. In connection with the manufacture of its newer products,
Semiconductor needs to continue to evaluate and qualify additional chip
manufacturing facilities that employ advanced manufacturing and process
technologies, which are currently available from a limited number of chip
manufacturing facilities. 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 chip manufacturing facilities.
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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.
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
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;
- Zoran;
- Sony; and
- MEC.
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
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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.
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 the capacity to
compress digital video into a more compact form. Semiconductor does not know
whether system manufacturers will use such processors for video compression
applications. While moving picture experts group 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
As of December 31, 1999, Semiconductor had 63 issued United States patents
and 31 U.S. patent applications pending and has filed certain corresponding
applications in certain foreign jurisdictions. These patents expire at various
times from 2010 to 2018. 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. 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 and Semiconductor does
not hold patents or other intellectual property rights for such standards.
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
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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.
EMPLOYEES
As of December 31, 1999, Semiconductor had approximately 622 employees, 289
of whom are engaged in, or directly support, Semiconductor's research and
development, 197 of whom are in sales and marketing, 39 of whom are in
operations and 97 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.
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.
MERGERS
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 under three leases 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.
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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 Securities
Act, for the securities issued under this prospectus. This prospectus contains
general information about the contents of contracts and other documents filed as
exhibits to the registration statement. However, this prospectus 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.
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).
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SELECTED FINANCIAL DATA
The following selected consolidated financial data for each of the five
years in the period ended December 31, 1999 have been derived from the audited
consolidated financial statements of the Company. The selected consolidated
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes thereto included elsewhere in
this report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Product.................................................. $407,648 $351,797 $337,012 $319,758 $123,190
Development contracts.................................... -- -- -- -- 1,412
-------- -------- -------- -------- --------
Total.............................................. 407,648 351,797 337,012 319,758 124,602
-------- -------- -------- -------- --------
Costs and expenses:
Cost of product revenues................................. 181,891 160,839 151,333 144,985 59,253
Research and development................................. 84,366 74,031 64,204 44,177 14,342
Selling, general and administrative...................... 69,437 60,512 52,732 39,002 19,227
Purchased in-process technology.......................... -- -- -- 131,349 3,800
-------- -------- -------- -------- --------
Total.............................................. 335,694 295,382 268,269 359,513 96,622
-------- -------- -------- -------- --------
Income (loss) from operations.............................. 71,954 56,415 68,743 (39,755) 27,980
Other income (expense), net................................ 10,456 4,239 (1,757) (28) 2,059
-------- -------- -------- -------- --------
Income (loss) before income taxes, minority interest and
extraordinary item....................................... 82,410 60,654 66,986 (39,783) 30,039
Income tax expense......................................... 24,723 18,196 22,895 32,944 4,933
-------- -------- -------- -------- --------
Income (loss) before minority interest and extraordinary
item..................................................... 57,687 42,458 44,091 (72,727) 25,106
Minority interest in net income (loss) of subsidiary....... 442 (337) (248) 318 211
-------- -------- -------- -------- --------
Income (loss) before extraordinary item.................... 57,245 42,795 44,339 (73,045) 24,895
Extraordinary gain on repurchase of convertible notes (net
of tax).................................................. 33 3,494 -- -- --
-------- -------- -------- -------- --------
Net income (loss).......................................... $ 57,278 $ 46,289 $ 44,339 $(73,045) $ 24,895
======== ======== ======== ======== ========
Basic earnings (loss) per share:(1)
Income (loss) before extraordinary item.................. $ 1.44 $ 1.14 $ 1.21 $ (2.15) $ 0.78
Extraordinary item (net of tax).......................... -- 0.09 -- -- --
-------- -------- -------- -------- --------
Net income (loss) per share.............................. $ 1.44 $ 1.24 $ 1.21 $ (2.15) $ 0.78
======== ======== ======== ======== ========
Diluted earnings (loss) per share:(1)
Income (loss) before extraordinary item.................. $ 1.30 $ 1.11 $ 1.15 $ (2.15) $ 0.74
Extraordinary item (net of tax).......................... -- 0.09 -- -- --
-------- -------- -------- -------- --------
Net income (loss) per share.............................. $ 1.30 $ 1.19 $ 1.15 $ (2.15) $ 0.74
======== ======== ======== ======== ========
Shares used in computation:(1)
Basic.................................................... 39,891 37,382 36,497 33,928 31,819
======== ======== ======== ======== ========
Diluted.................................................. 44,571 40,754 41,683 33,928 35,000
======== ======== ======== ======== ========
PRODUCT GROSS MARGIN DATA:
Net product revenues....................................... $407,648 $351,797 $337,012 $319,758 $123,190
Cost of product revenues................................... 181,891 160,839 151,333 144,985 59,253
-------- -------- -------- -------- --------
Product gross margin....................................... $225,757 $190,958 $185,679 $174,773 $ 63,937
======== ======== ======== ======== ========
Product gross margin percentage............................ 55.4% 54.3% 55.1% 54.7% 51.9%
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash and short-term investments............................ $319,653 $207,827 $166,350 $ 82,246 $144,089
Working capital............................................ 367,450 220,466 208,391 124,487 158,577
Total assets............................................... 496,309 343,171 304,108 279,515 203,526
Short-term debt and current portion of long-term
obligations.............................................. 742 355 608 25,337 3,093
Long-term obligations, net of current portion.............. 18,869 23,557 87,462 87,700 88,010
Stockholders' equity....................................... 398,792 243,375 175,415 118,572 87,535
</TABLE>
- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the computation of net income (loss) per share.
31
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW AND BASIS OF PRESENTATION
While the legal structure of the transaction described in this prospectus
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:
- the historical assets, revenue, profits and employees of C-Cube
Semiconductor, Inc. have been greater than those of DiviCom;
- the corporate management of C-Cube Microsystems will remain employees of
Semiconductor; and
- the C-Cube Microsystems stockholders will receive common stock
representing approximately 44% ownership interest in Harmonic in the
merger.
This report contains forward-looking statements. 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.
YEAR ENDED DECEMBER 31, 1999
The following table sets forth certain operating data as a percentage of
net revenues for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0%
----- ----- -----
Costs and expenses:
Cost of product revenues.................................. 44.6 45.7 44.9
Research and development.................................. 20.7 21.0 19.1
Selling, general and administrative....................... 17.0 17.2 15.6
----- ----- -----
Total............................................. 82.3 84.0 79.6
----- ----- -----
Income from operations...................................... 17.7 16.0 20.4
Other income (expense), net................................. 2.6 1.2 (0.5)
----- ----- -----
Income before income taxes, minority interest and
extraordinary item........................................ 20.2 17.2 19.9
Income tax expense.......................................... 6.1 5.2 6.8
----- ----- -----
Income before minority interest and extraordinary item...... 14.2 12.1 13.1
Minority interest in net income (loss) of subsidiary........ 0.1 (0.1) (0.1)
----- ----- -----
Income before extraordinary item............................ 14.1 12.2 13.2
Extraordinary gain on repurchase of convertible notes (net
of tax)................................................... -- 1.0 --
----- ----- -----
Net income.................................................. 14.1% 13.2% 13.2%
===== ===== =====
</TABLE>
Merger
On October 27, 1999, C-Cube Microsystems entered into an agreement and plan
of merger and reorganization with Harmonic Inc., a Delaware corporation,
following which, subsequent to the spin-off of C-Cube's semiconductor business,
C-Cube Microsystems has agreed to merge with and into Harmonic. The merger will
be effected through the issuance of 0.5427 shares of Harmonic stock for each
share of common stock of C-Cube outstanding immediately prior to the
consummation of the merger. The merger is subject to the approval of the
stockholders of each company, customary closing conditions and the spin-off of
the semiconductor business. The closing is anticipated to take place during the
second quarter of
32
<PAGE> 34
2000.* For further information regarding the financial effects of the merger,
see "Liquidity and Capital Resources". For more information about the merger,
readers are referenced to C-Cube Microsystems' Form 8-K filed on October 29,
1999.
Production Capacity
In the second quarter of 1996, C-Cube Microsystems 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 C-Cube Microsystems at
specified prices and required C-Cube Microsystems to make two advance payments
totaling $49.0 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, C-Cube Microsystems signed a
second amendment to its agreement with Taiwan Semiconductor Manufacturing Co.,
Ltd. which resulted in a refund to C-Cube Microsystems of $11.7 million and an
extension of the term of the agreement to 2003. Advance payments associated with
chip production capacity rights are amortized over the shorter of the contract
period or the actual delivery of chips in relation to the total amount of chips
purchased under the agreement. At December 31, 1999, remaining production
capacity rights were $6.4 million, of which $1.4 million was included in other
current assets and $5.0 million was classified as a non-current asset.
In the fourth quarter of 1999, C-Cube Microsystems signed a production
capacity agreement with United Microelectronics Corporation to provide chip
production capacity in the years 2000 to 2002, for which it paid a $20 million
refundable payment in January 2000. This deposit allows for certain discounts on
purchased capacity based upon the quantities purchased. The agreement does not
commit C-Cube Microsystems to purchase chips, but does guarantee the
availability of a set capacity of chips at not to exceed prices.
Net Revenues
Net revenues increased 15.9% to $407.6 million in 1999 compared to $351.8
million in 1998. This increase was led by growth in sales of DiviCom's encoder
products, primarily attributable to:
- existing customer upgrades to next generation products;
- contract wins in the cable and satellite markets; and
- higher selling prices on next generation products, based on design
improvements and feature and quality enhancements.
Semiconductor division revenues increased slightly over 1998; however, the
product mix changed significantly. Revenues from digital video disc decoder
chips used in consumer applications increased significantly due to higher volume
shipments, despite price reductions resulting from increased competition.
Revenues from encoder and codec chipsets for set-top, broadcast and editing
applications increased due to higher volume shipments. The increases discussed
above were largely offset by reductions in video compact disc and Chaoji video
compact disc decoder chip revenues due to reduced shipments and increased price
competition.
In 1998, net revenues increased 4.4% to $351.8 million compared to $337.0
million in 1997. Revenue from 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 the Company's DVxpress and DVxpert families of
codecs. Revenue from moving picture experts group-2 decoder chips used primarily
in digital set-top boxes and in digital video disc-read only memory on personal
computers increased from 1997 due to customers' adoption of C-Cube Microsystems'
AViA and ZiVA families of decoder chips and the wider acceptance of the digital
video disc format. The Company also had sales from the introduction of its
Chaoji video compact disc decoder. These increases were partially offset by a
decrease in revenues
33
<PAGE> 35
from moving picture experts group-1 decoder chips used in video compact disc
players sold primarily in China, due to price reductions made in response to
competitive pricing pressures, partially offset by an increase in unit volumes.
The sales returns allowance at December 31, 1999 was $6.8 million,
decreasing from $13.1 million at December 31, 1998. During 1999, additions to
the sales returns allowance were $2.4 million and deductions were $8.8 million.
The deductions to the allowance were primarily due to price protection credits
given to distributors and other pricing adjustments. The additions to the
allowance were to cover price protection, pricing adjustments and stock rotation
credits to distributors.
The sales returns allowance at December 31, 1998 was $13.1 million,
increasing from $6.7 million at December 31, 1997. During 1998, additions to the
sales returns allowance were $12.6 million and deductions were $6.2 million. The
deductions to the allowance were primarily due to price protection credits given
to distributors and other pricing adjustments. The additions to the allowance
were to cover price protection, pricing adjustments and inventory rotation
credits to distributors.
During 1999 and 1998, no customer accounted for 10% or more of net
revenues. During 1997, sales to Sinorex, a distributor, accounted for 20% of
C-Cube Microsystems' net revenues.
International revenues accounted for 60%, 62% and 65% of net revenues in
1999, 1998 and 1997, respectively. International revenues were a significant
portion of total revenues primarily due to volume shipments of digital video
disc, video compact disc and Chaoji video compact disc players into Asia and an
increase in set-top and encoder sales into Europe. 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 increased to 55.4% in 1999
from 54.3% in 1998. This increase was primarily the result of changes in product
mix, as the volume of sales of products with higher gross margins, including
DiviCom encoders, digital video disc decoders and digital set-top boxes,
increased in 1999 over 1998. While the selling prices for semiconductor products
have generally declined from 1998, C-Cube Microsystems was able to offset the
related impact on gross margin by realizing greater operating efficiencies,
including reduced material costs, refinement of its semiconductor fabrication
process and the reduction of outside manufacturing costs. C-Cube Microsystems'
gross margin percentage decreased to 54.3% in 1998 from 55.1% in 1997. This
decrease was due primarily to higher product transition costs and lower average
selling prices partially offset by reduced product material costs and a shift in
product mix to higher margin encoder products.
DiviCom's business involves transactions which can vary substantially in
the portions of DiviCom manufactured products, third party products and services
included in their contract agreements. These variations can cause substantial
differences in gross margin from one contract to another. DiviCom has a number
of competitors which are divisions of larger corporations. Such corporations may
decide from time-to-time to aggressively lower prices of products that compete
with DiviCom in order to sell related products or achieve strategic goals. Such
strategic pricing by competitors can place strong pricing pressure on DiviCom
products in certain transactions, resulting in lower selling prices and gross
margins for those transactions.
The markets into which C-Cube 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
34
<PAGE> 36
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, 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 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 somewhat constrained during the first half of
2000 due to higher projected industry demand for semiconductor products causing
a reduction of available capacity.* As a result, product costs may increase at a
rate faster than C-Cube 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 1999, research and development expenses were $84.4 million or 20.7% of
net revenues, compared to $74.0 million or 21.0% of net revenues in 1998. The
increase in research and development expenses from 1998 is primarily related to
an increase in employee-related costs associated with increases in product
engineering staff, in addition to increases in costs for development tools and
non-recurring engineering. The increase in headcount reflects C-Cube
Microsystems' continuing efforts to provide industry leading digital video
solutions at the chip and systems levels. In 1998, research and development
expenses were $74.0 million or 21.0% of net revenues, compared to $64.2 million
or 19.1% of net revenues in 1997. The increase in research and development
expenses from 1997 was primarily related to an increase in employee-related
costs associated with increases in product engineering staff, partially offset
by decreases in start-up and non-recurring engineering costs. 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 $69.4 million or
17.0% of net revenues in 1999 compared to $60.5 million or 17.2% of net revenues
in 1998. The increase from 1998 is primarily related to an increase in
employee-related costs associated with increases in sales and marketing staff,
and to a lesser extent from higher sales commissions, as a result of the
increase in revenues over 1998. The increase in sales and marketing headcount
reflects C-Cube Microsystems' efforts to increase its international presence.
Selling, general and administrative expenses increased to $60.5 million or 17.2%
of net revenues in 1998 compared to $52.7 million or 15.6% of net revenues for
1997. The increase in absolute dollars from 1997 was primarily due to increased
travel, staffing and related expenses partially offset by decreased commissions
to distributors. C-Cube Microsystems expects that absolute levels of selling,
general and administrative expenses will continue to increase in future
periods.*
35
<PAGE> 37
Other Income (Expense)
Interest income and other increased to $12.1 million in 1999 compared to
$8.5 million in 1998 primarily due to higher average balances of cash and
investments in 1999 compared to 1998. Interest income and other increased to
$8.5 million in 1998 compared to $4.3 million in 1997 primarily due to higher
average balances of cash and investments in 1998 compared to 1997. Interest
expense and other decreased to $1.6 million in 1999 compared to $4.3 million in
1998 primarily due to lower average outstanding debt balances due to the
repurchase of a significant portion of C-Cube Microsystems' convertible
subordinated notes during 1998 and 1999. Interest expense and other decreased to
$4.3 million in 1998 compared to $6.0 million in 1997 primarily due to lower
average outstanding debt balances due to the repurchase of a significant portion
of C-Cube Microsystems' convertible subordinated notes.
Income Tax Expense
C-Cube Microsystems provided $24.7 million for income taxes in 1999 on
income before taxes, minority interest and extraordinary items of $82.4 million,
for an effective tax rate of 30%. In 1998, C-Cube Microsystems provided $18.2
million for income taxes on income before taxes, minority interest and
extraordinary items of $60.7 million, for an effective tax rate of 30%. In 1997,
C-Cube Microsystems provided $22.9 million for income taxes on income before
taxes and minority interest of $67.0 million, for an effective tax rate of 34%.
The effective tax rates for 1999, 1998 and 1997 are less than the combined
federal and state statutory rate primarily due to tax credits and lower foreign
taxes.
Extraordinary Item
During 1999, C-Cube Microsystems repurchased $3.4 million of the face value
of C-Cube Microsystems' 5.875% subordinated convertible notes due 2005 at 95.5%
of the principal amount, with accrued interest to the date of repurchase, and
recognized an extraordinary gain of $33,000 (zero effect per diluted share), net
of related income taxes of $23,000. During 1998, C-Cube Microsystems repurchased
$63.5 million of the face value of the notes at 88.4% of the principal amount,
with accrued interest to the date of repurchase, and recognized an extraordinary
gain of $3.5 million, or $0.09 per diluted share, net of related income taxes of
$2.4 million.
FACTORS THAT MAY AFFECT FUTURE RESULTS
On October 27, 1999, C-Cube Microsystems entered into an agreement and plan
of merger and reorganization with Harmonic Inc., a Delaware corporation,
following 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 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
36
<PAGE> 38
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 digital video disc 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
37
<PAGE> 39
expenses to levels appropriate to actual revenues, which could have a material
adverse effect on C-Cube Microsystems' business and results of operations.
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, 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
C-Cube Microsystems completed its Year 2000 project as scheduled, including
addressing leap year calendar date calculation concerns. As a result of these
efforts, to date C-Cube Microsystems has experienced no significant problems
with either its own technology or that of its infrastructure providers. C-Cube
Microsystems 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, C-Cube Microsystems
continues to monitor the impact of the Year 2000 on those suppliers and other
third parties on whom C-Cube Microsystems 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, C-Cube Microsystems 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
38
<PAGE> 40
C-Cube Microsystems in connection with its Year 2000 project have not and are
not expected to exceed $500,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments increased to $319.7
million at December 31, 1999 from the $207.8 million at December 31, 1998.
Working capital increased to $367.5 million at December 31, 1999 from $220.5
million at December 31, 1998.
C-Cube Microsystems' operating activities generated cash of $71.9 million
in 1999, compared to $98.3 million in 1998, primarily from net income, a
reduction of $11.8 million prepaid production capacity rights and increases in
accrued liabilities and accounts payable, partially offset by increases in
accounts receivable and deferred taxes and a decrease in income taxes payable.
C-Cube Microsystems' investing activities, exclusive of the sales and
maturities and purchases of short-term investments of $222.8 million and $296.1
million, respectively, used cash of $27.0 million, primarily for capital
expenditures.
Cash provided by financing activities was $64.2 million, primarily from
proceeds of $67.8 million from the sale of stock of employee stock plans,
partially offset by $3.3 million used to repurchase a portion of C-Cube
Microsystems' convertible subordinated notes.
On October 27, 1999, C-Cube Microsystems entered into an agreement and plan
of merger and reorganization with Harmonic Inc., a Delaware corporation,
following which, subsequent to the spin-off of C-Cube Microsystems'
semiconductor business, C-Cube Microsystems has agreed to merge with and into
Harmonic. The merger is subject to the approval of the stockholders of each
company, customary closing conditions and the spin-off of the semiconductor
business. The closing is anticipated to take place during the second quarter of
2000.* The merger agreement specifies that employees must exercise all vested
stock options prior to the merger/spin-off date. C-Cube Microsystems expects to
receive cash inflows from the remaining option exercises after December 31, 1999
of approximately $83 million.* Cash outflows related to the merger include
approximately $22 million of expenses C-Cube Microsystems expects to incur
during the second quarter of 2000 for legal, accounting and other direct costs
related to the merger.* Cash outflows will also include $60 million to be
retained by C-Cube Microsystems upon consummation of the merger, as specified by
the merger agreement. In addition, the semiconductor business will incur
significant income tax expense for the spin-off transaction. The valuation of
the semiconductor business cannot be estimated with any certainty at this time,
as it will depend on market factors around the date of the spin-off. If the
valuation of the semiconductor business is $975 million, related income tax
expense is estimated to be approximately $203 million.* If the valuation of the
semiconductor business is $1.1 billion, related income tax expense is estimated
to be approximately $288 million.* C-Cube Microsystems estimates that each
additional $100 million in valuation will increase the tax liability and reduce
cash and retained earnings by approximately $40 million.* C-Cube Microsystems
has debt financing available should the valuation of the semiconductor business
exceed $1.2 billion.* Readers are referenced to the "Unaudited Pro Forma
Financial Statements" presented herein for two pro forma balance sheet
presentations based on the possible valuations discussed above. Readers are also
referenced to C-Cube Microsystems' Form 8-K filed on October 29, 1999 for more
information about the merger.
At December 31, 1999, C-Cube Microsystems had an available bank line of
credit of $30.0 million which expires May 1, 2001. Borrowings bear interest at
LIBOR plus 1.25% or the bank's prime rate (8.5% at December 31, 1999). The line
of credit agreement requires C-Cube Microsystems, among other things, to
maintain a minimum tangible net worth, annual net income (no quarterly loss
exceeding $3.0 million) and certain financial ratios. In addition, the bank
agreement prohibits the payment of cash dividends. At December 31, 1999, C-Cube
Microsystems was in compliance with these covenants, and there were no
borrowings under this line.
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
39
<PAGE> 41
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 $49.0 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, C-Cube Microsystems signed a second amendment to its agreement with Taiwan
Semiconductor Manufacturing Co., Ltd. which resulted in a refund to C-Cube
Microsystems of $11.7 million. Advance payments associated with chip production
capacity rights are amortized over the shorter of the contract period or the
actual delivery of chips in relation to the total amount of chips purchased
under the agreement. Accordingly, the prepaid amount, which has been allocated
between current and long-term assets, will be amortized to inventory as chips
are received. At December 31, 1999, $1.4 million of the remaining $6.4 million
production capacity rights is included in other current assets.
In the fourth quarter of 1999, C-Cube Microsystems expanded its
relationship with United Microelectronics Corporation to provide additional chip
production capacity in the years 2000 to 2002. The agreement provides that
United Microelectronics Corporation will produce and ship chips to C-Cube at
specified prices, for which C-Cube Microsystems paid a refundable deposit of $20
million in January 2000.
Based on current plans, business conditions and estimations of the
valuation of C-Cube Microsystems' semiconductor division, 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. In addition,
C-Cube Microsystems has considered and will continue to consider various
possible transactions to secure additional chip manufacturing capacity, which
could include, without limitation, equity investments in, prepayments to,
non-refundable deposits with or loans to chip manufacturing facilities 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 with chip manufacturing
facilities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
C-Cube Microsystems is exposed to market risk related to changes in
interest rates and foreign currency exchange rates. C-Cube Microsystems does not
use derivative financial instruments for speculative or trading purposes.
Interest Rate Sensitivity. C-Cube Microsystems maintains a short-term
investment portfolio consisting mainly of income securities with an average
maturity of less than two years. The market value of this portfolio was $175.4
million at December 31, 1999. These available-for-sale securities are subject to
interest rate risk and will fall in value if market interest rates increase. If
market interest rates were to increase immediately and uniformly by 10% from
current levels at December 31, 1999, the fair value of the portfolio would
decline by $1.0 million. C-Cube Microsystems has the ability to hold its fixed
income investments until maturity, and therefore C-Cube Microsystems would not
expect its operating results or cash flows to be affected to any significant
degree by the effect of a sudden change in market interest rates on its
securities portfolio.* C-Cube Microsystems does not hedge any interest rate
exposures.
C-Cube Microsystems has fixed rate long-term debt of approximately $17.6
million, and a hypothetical 10% increase or decrease in current interest rates
from levels at December 31, 1999 would not have a material impact on the fair
market value of this debt.
Foreign Currency Exchange Risk. C-Cube Microsystems enters into foreign
exchange forward contracts and foreign currency options to hedge certain
economic exposures, balance sheet exposures and inter-company balances against
future movements in the dollar/yen, dollar/pound and dollar/franc
40
<PAGE> 42
exchange rates. Gains and losses on the forward contracts are largely offset by
gains and losses on the underlying exposure. A hypothetical 10% appreciation of
the U.S. dollar from December 31, 1999 market rates would increase the
unrealized value of C-Cube Microsystems' forward contracts by $0.3 million.
Conversely, a hypothetical 10% depreciation of the U.S. dollar from December 31,
1999 market rates would decrease the unrealized value of C-Cube Microsystems'
forward contracts by $0.3 million. In either scenario, the gains or losses on
the forward contracts are largely offset by the gains or losses on the
underlying transactions and consequently a sudden or significant change in
foreign exchange rates would not be expected to have a material impact on future
net income or cash flows.
All of the potential changes noted above are based on sensitivity analyses
performed on C-Cube Microsystems' financial positions at December 31, 1999.
Actual results may differ materially.
41
<PAGE> 43
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The historical financial statements have not been restated to give
retroactive effect to the sale of the DiviCom 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 DiviCom business
as if the transaction had taken place on January 1, 1997.
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. C-Cube Microsystems estimates that each additional $100 million in
valuation will reduce cash and retained earnings by approximately $40 million.
C-Cube Microsystems 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
December 31, 1999. The pro forma statement of operations assumes the spin-off
took place as of January 1, 1997.
42
<PAGE> 44
PRESENTATION (A)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 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........................... $319,653 $(179,852)(1)(2)(3) $ 139,801
Accounts receivable, net of allowances... 74,850 (62,334)(1) 12,516
Inventories.............................. 19,335 (10,369)(1) 8,966
Deferred income taxes.................... 14,064 (6,969)(1)(5) 7,095
Other current assets..................... 17,725 (4,593)(1) 13,132
-------- --------- ---------
Total current assets............. 445,627 (264,117) 181,510
Property and equipment -- net.............. 36,293 (15,938)(1) 20,355
Production capacity rights................. 4,985 -- 4,985
Distribution rights -- net................. 1,318 -- 1,318
Purchased technology -- net................ 4,194 (1,887)(1) 2,307
Other assets............................... 3,892 (1,499)(1) 2,393
-------- --------- ---------
Total............................ $496,309 $(283,441) $ 212,868
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 38,882 $ (14,744)(1) $ 24,138
Accrued liabilities...................... 31,129 9,003(1)(4) 40,132
Income taxes payable..................... 5,503 (2,855)(1) 2,648
Deferred revenue......................... 1,921 (1,921)(1) --
Current portion of long-term
obligations........................... 742 (15)(1) 727
-------- --------- ---------
Total current liabilities........ 78,177 (10,532) 67,645
Long-term obligations...................... 18,869 (23)(1) 18,846
Deferred income taxes...................... -- (2,004)(1) (2,004)
-------- --------- ---------
Total liabilities................ 97,046 (12,559) 84,487
-------- --------- ---------
Minority interest in subsidiary............ 471 -- 471
Stockholders' equity:
Preferred stock.......................... -- -- --
Common stock............................. 323,756 222,148(2) 545,904
Accumulated other comprehensive loss..... (2,204) 190(1) (2,014)
Retained earnings (deficit).............. 77,240 (493,220)(1)(2)(3)(4)(5) (415,980)
-------- --------- ---------
Total stockholders' equity....... 398,792 (270,882) 127,910
-------- --------- ---------
Total............................ $496,309 $(283,441) $ 212,868
======== ========= =========
</TABLE>
- ---------------
(A) Based on a $975 million valuation of the semiconductor business.
43
<PAGE> 45
PRESENTATION (B)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
C-CUBE SEMICONDUCTOR
MICROSYSTEMS INC. PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
----------------- ----------- -------------
<S> <C> <C> <C>
Current assets:
Cash, cash equivalents and short-term
investments........................... $319,653 $(264,852)(1)(2)(3) $ 54,801
Accounts receivable, net of allowances... 74,850 (62,334)(1) 12,516
Inventories.............................. 19,335 (10,369)(1) 8,966
Deferred income taxes.................... 14,064 (6,969)(1)(5) 7,095
Other current assets..................... 17,725 (4,593)(1) 13,132
-------- --------- ---------
Total current assets............. 445,627 (349,117) 96,510
Property and equipment -- net.............. 36,293 (15,938)(1) 20,355
Production capacity rights................. 4,985 -- 4,985
Distribution rights -- net................. 1,318 -- 1,318
Purchased technology -- net................ 4,194 (1,887)(1) 2,307
Other assets............................... 3,892 (1,499)(1) 2,393
-------- --------- ---------
Total............................ $496,309 $(368,441) $ 127,868
======== ========= =========
Current liabilities:
Accounts payable......................... $ 38,882 $ (14,744)(1) $ 24,138
Accrued liabilities...................... 31,129 9,003(1)(4) 40,132
Income taxes payable..................... 5,503 (2,855)(1) 2,648
Deferred revenue......................... 1,921 (1,921)(1) --
Current portion of long-term
obligations........................... 742 (15)(1) 727
-------- --------- ---------
Total current liabilities........ 78,177 (10,532) 67,645
Long-term obligations...................... 18,869 (23)(1) 18,846
Deferred income taxes...................... -- (2,004)(1) (2,004)
-------- --------- ---------
Total liabilities................ 97,046 (12,559) 84,487
-------- --------- ---------
Minority interest in subsidiary............ 471 -- 471
Stockholders' equity:
Preferred stock.......................... -- -- --
Common stock............................. 323,756 222,148(2) 545,904
Accumulated other comprehensive loss..... (2,204) 190(1) (2,014)
Retained earnings (deficit).............. 77,240 (578,220)(1)(2)(3)(4)(5) (500,980)
-------- --------- ---------
Total stockholders' equity....... 398,792 (355,882) 42,910
-------- --------- ---------
Total............................ $496,309 $(368,441) $ 127,868
======== ========= =========
</TABLE>
- ---------------
(B) Based on a $1.1 billion valuation of the semiconductor business.
44
<PAGE> 46
UNAUDITED PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED INCOME
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
C-CUBE SEMICONDUCTOR
MICROSYSTEMS INC. PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
----------------- ----------- -------------
<S> <C> <C> <C>
Net revenues:.................................. $407,648 $(185,500)(1) $222,148
-------- --------- --------
Costs and expenses:
Cost of product revenues..................... 181,891 (93,656)(1) 88,235
Research and development..................... 84,366 (30,106)(1) 54,260
Selling, general and administrative.......... 69,437 (28,049)(1) 41,388
-------- --------- --------
Total................................ 335,694 (151,811) 183,883
-------- --------- --------
Income from operations......................... 71,954 (33,689) 38,265
Other income:
Interest income and other.................... 12,067 (1,260)(1) 10,807
Interest expense and other................... (1,611) -- (1,611)
-------- --------- --------
Total................................ 10,456 (1,260) 9,196
Income before income taxes, minority interest
and extraordinary item....................... 82,410 (34,949) 47,461
Income tax expense............................. 24,723 (12,020)(1) 12,703
-------- --------- --------
Income before minority interest and
extraordinary item........................... 57,687 (22,929) 34,758
Minority interest in net income of
subsidiary................................... 442 -- 442
-------- --------- --------
Income before extraordinary item............... 57,245 (22,929) 34,316
======== ========= ========
Basic earnings per share:
Income before extraordinary item............. $ 1.44 $ 0.86
======== ========
Diluted earnings per share:
Income before extraordinary item............. $ 1.30 $ 0.82
======== ========
Shares:
Basic........................................ 39,891 39,891
======== ========
Diluted...................................... 44,571 41,835
======== ========
</TABLE>
45
<PAGE> 47
UNAUDITED PRO FORMA CONDENSED 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>
46
<PAGE> 48
UNAUDITED PRO FORMA CONDENSED 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>
47
<PAGE> 49
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
$83 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 approximately 4.5 million shares at an
average exercise price of $18.58 related to 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. The taxes were projected by
multiplying C-Cube's estimated combined state and federal income tax rate by
the projected net corporate level gain realized as a result of the internal
restructuring transactions and spinoff. This amount was then reduced by
certain projected C-Cube overpaid estimated taxes and tax credits. The net
corporate level gain was projected by estimating the difference between the
projected total implied market capitalization of Semiconductor and the sum of
the estimated tax basis of the Semiconductor assets, certain deductions
attributable to the projected exercise of C-Cube compensatory stock options
exercised on or after October 27, 1999 and on or before the date of the
merger, and certain projected capital expenses and other deductions. The
spin-off will be taxable to C-Cube Microsystems as a result of Section 355(e)
of the Internal Revenue Code because it is undertaken as part of the same
plan as the Harmonic merger, which will result in a change of control of
C-Cube Microsystems, and also as a result of certain internal restructuring
transactions undertaken prior to the distribution of the Semiconductor stock.
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.
48
<PAGE> 50
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............................. 42 President, Chief Executive Officer and Director
Fred Brown............................... 56 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........................ 48 Vice President, Finance and 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............................ 52 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 August 1992 and was named to his
current position in October 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 Silicon solutions for digital video discs, video compact
discs and emerging codec-based recordable products like digital video disc
recorders and editing. 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. Dr. Wang holds a
Ph.D. and a M.S. in electrical engineering from Columbia University and a B.S.
in electrical engineering from National Taiwan University.
49
<PAGE> 51
Mr. Newstead joined C-Cube Microsystems in November 1999 from NEC
Corporation where he had been Vice President and General Manager of the
Microprocessor Group. In this position, he focused on consumer market
applications including satellite and cable digital set top box and hard
disk-based personal video recorder and broadcast applications. 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. Mr. Newstead was also a founder and Chief Executive Officer 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 communications areas including Internet-enabled digital
set-top box applications and broadcast video networks. 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 Microsystems' Research and Development Program, which
has been responsible for Emmy award-winning technology breakthroughs in digital
television technology. Prior to joining C-Cube Microsystems, 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. Balkanski co-founded C-Cube Microsystems in July 1988 and served as
President and Chief Executive Officer of C-Cube Microsystems 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. 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 of C-Cube Microsystems since
February 1994. In July 1996, he founded motion picture experts group LA, LLC, a
company which was formed to provide licensing access to essential motion picture
experts group-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 of C-Cube Microsystems
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 original equipment
manufacturers Subsystems Division. Mr. McKinney worked for Silicon Graphics,
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<PAGE> 52
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.
Mr. Reyes has served on the Board of Directors of C-Cube Microsystems 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 of C-Cube Microsystems
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 of C-Cube
Microsystems 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.
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<PAGE> 53
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 C-Cube Microsystems 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
Tom Lookabaugh.............. 1999 259,791 150,000 0 100,000 0
President, DiviCom Inc., 1998 232,234 142,906 0 210,600(4) 0
a wholly owned subsidiary 1997 180,000(5) 45,000 0 127,000(4) 0
of the Company
Frederick Brown IV.......... 1999 200,000 92,432 7,200(2) 0 0
Senior Vice President, 1998 173,752(6) 205,557(7) 7,200(2) 95,000 0
Worldwide Sales 1997 150,000(6) 101,992 7,200(2) 100,000 0
Richard Foreman............. 1999 182,500 107,771 0 20,000 0
Vice President, Chief 1998 172,500 88,275 0 20,000 0
Information Officer and 1997 161,250 21,930 0 40,000 0
Corporate Secretary
</TABLE>
- ---------------
(1) The amounts shown under the Bonus column represents cash bonuses earned for
the indicated fiscal years.
(2) Consists of car allowances.
(3) Mr. Padval was hired as President, Semiconductor Division in October 1998.
(4) Includes options granted to Mr. Lookabaugh's spouse, an employee of C-Cube
Microsystems, deemed to be beneficially owned by Mr. Lookabaugh.
(5) Mr. Lookabaugh has served as President of DiviCom Inc. since December 1997.
Mr. Lookabaugh's compensation for the period prior to his appointment to
President of DiviCom includes compensation he received while serving as
Senior Vice President and General Manager of DiviCom from March 1997 to
December 1997.
(6) Mr. Brown has served as Senior Vice President, Worldwide Sales since
November 1998. Mr. Brown's compensation for the period prior to his
appointment to Senior Vice President, Worldwide Sales includes compensation
he received while serving as Vice President, Worldwide Sales from May 1998
to November 1998, and while serving as Vice President, Asia Pacific Sales
for the period prior.
(7) Includes a retention bonus of $100,000, of which $50,000 was vested on
December 31, 1999 and $50,000 will be vested on December 31, 2000, provided
Mr. Brown is an employee of C-Cube Microsystems on that date.
C-Cube Microsystems does not have employment contracts with any of the
persons named in the Summary Compensation Table, or any defined benefit or
actuarial plan under which benefits are determined primarily by final
compensation or average final compensation and years of service.
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<PAGE> 54
STOCK OPTION GRANTS
The following table provides the specified information concerning grants of
options to purchase the C-Cube Microsystems' common stock made during the year
ended December 31, 1999 to the persons named in the Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS IN FISCAL 1999
---------------------------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE
OPTIONS AT ASSUMED ANNUAL RATES OF
GRANTED TO EXERCISE STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES OR BASE FOR OPTION TERM(2)
GRANTED IN FISCAL PRICE EXPIRATION --------------------------
NAME (#) YEAR ($/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
Fred Brown.................. 0 0.0 -- -- 0 0
Umesh Padval................ 100,000 2.0 19.1250 04/02/09 1,202,761 3,048,032
Tom Lookabaugh.............. 100,000 2.0 19.1250 04/02/09 1,202,761 3,048,032
Richard Foreman............. 20,000 0.4 19.1250 04/02/09 240,552 609,606
</TABLE>
- ---------------
(1) Options were granted at an exercise price equal to the fair market value per
share of C-Cube's common stock as of the date of the grant.
(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 C-Cube Microsystems' 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.
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<PAGE> 55
STOCK OPTION EXERCISES
The following table provides the specified information concerning exercises
of options to purchase the C-Cube Microsystems' 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
Tom Lookabaugh(3)......... 6,744 153,426 204,167 340,833 8,776,057 14,851,443
Frederick Brown IV........ 0 0 158,247 135,871 7,334,881 5,888,546
Richard Foreman........... 0 0 148,485 91,515 6,950,897 3,904,103
</TABLE>
- ---------------
(1) Based upon the market price of the purchased shares on the exercise date
less the option exercise price paid for such shares.
(2) Based upon the market price of $62.25 per share, which was the closing price
per share of common stock on the Nasdaq National Market on December 31,
1999, less the option exercise price payable per share.
(3) Includes options held by Mr. Lookabaugh's spouse, an employee of C-Cube
Microsystems, deemed to be beneficially owned by Mr. Lookabaugh.
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<PAGE> 56
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 C-Cube Microsystems' common stock
by:
- 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;
- each director of C-Cube Microsystems;
- the Chief Executive Officer and the four other most highly compensated
executive officers of C-Cube Microsystems as of December 31, 1999, whose
salary and incentive compensation for the fiscal year ended December 31,
1999 exceeded $100,000; and
- all executive officers and directors of C-Cube Microsystems 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 9.9%
100 Park Avenue -- 8th Floor
New York, New York 10017
Capital Group International, Inc.(3).......................... 2,646,110 5.7%
11100 Santa Monica Blvd. -- 15th Floor
Los Angeles, California 90025
DIRECTORS AND EXECUTIVE OFFICERS:
Alexandre A. Balkanski(4)..................................... 1,302,141 2.8%
Donald T. Valentine(5)........................................ 1,129,083 2.4%
Tom Lookabaugh(6)............................................. 304,579 *
Frederick Brown IV(7)......................................... 183,253 *
Umesh Padval(8)............................................... 169,643 *
Richard Foreman(9)............................................ 168,022 *
T. J. Rodgers(10)............................................. 142,613 *
Walter Walczykowski(11)....................................... 82,730 *
Baryn S. Futa(12)............................................. 70,626 *
Donald McKinney(13)........................................... 40,101 *
Gregorio Reyes(14)............................................ 39,971 *
All executive officers and directors as a group (11
persons)(15)................................................ 3,632,762 7.9%
</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 on behalf of
Seligman Communications and Information Fund, Inc. and William C. Morris.
The filing states that Mr. Morris is the owner of the majority of
outstanding voting securities of J. & W. Seligman, and that J. & W.
Seligman is the investment advisor to the Seligman Fund; therefore, the
4,574,900 shares held by J. & W. Seligman are deemed to be beneficially
owned by Mr. Morris.
(3) Based on a filing with the Securities and Exchange Commission dated
February 10, 2000, reporting beneficial ownership as of December 31, 1999,
according to the Schedule 13G, Capital Group does
55
<PAGE> 57
not have investment power or voting power over any of the securities
reported; however, Capital Group may be deemed to beneficially own such
securities by virtue of Rule 13d-3 under the Act.
(4) Includes 764,400 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.
(5) Includes 44,168 shares subject to options that are presently exercisable or
will become exercisable within 60 days of February 4, 2000. Mr. Valentine
is a general partner of certain entities affiliated with Sequoia Capital
and, therefore, may be deemed to beneficially own the 920,687 shares of
Common Stock held by such entities. However, Mr. Valentine disclaims
beneficial ownership of all such shares held by entities affiliated with
Sequoia Capital, except those shares as to which he has a direct pecuniary
interest.
(6) Includes 236,781 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.
(7) Includes 172,004 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.
(8) Includes 166,667 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.
(9) Includes 118,454 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.
(10) Includes 136,251 shares subject to options that are presently exercisable
or will become exercisable within 60 days of February 4, 2000.
(11) Includes 79,783 shares subject to options that are presently exercisable or
will become exercisable within 60 days of February 4, 2000.
(12) Includes 70,624 shares subject to options that are presently exercisable or
will become exercisable within 60 days of February 4, 2000.
(13) Includes 38,749 shares subject to options that are presently exercisable or
will become exercisable within 60 days of February 4, 2000.
(14) Includes 34,168 shares subject to options that are presently exercisable or
will become exercisable within 60 days of February 4, 2000.
(15) Includes an aggregate of 1,862,049 shares subject to options that are
presently exercisable or will become exercisable by all executive officers
and directors as a group within 60 days of February 4, 2000, including
those shares listed in footnotes 3-13.
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<PAGE> 58
ARRANGEMENTS BETWEEN C-CUBE MICROSYSTEMS AND SEMICONDUCTOR
We have provided below a summary description of the master separation and
distribution agreement, effective as of May 2, 2000, 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 May 2,
2000. 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. 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.
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<PAGE> 59
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;
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<PAGE> 60
- 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 A 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;
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<PAGE> 61
- 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
in 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.
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<PAGE> 62
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 trading per-share price of C-Cube Microsystems common stock and the trading
per-share price of Semiconductor common stock following 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 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 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 and related transactions. 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, and for all increases in
taxes (up to the amount of certain research and development credits) related to
the DiviCom business prior to 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.
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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' 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.
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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.
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 the successor
corporation. If the outstanding options are not assumed or substituted for by
the successor corporation, the options will terminate.
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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 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
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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 director option 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 continuous service as a director of Semiconductor. Grants to
directors that will continue to be directors of Semiconductor after the
distribution will begin vesting at a rate of 1/48th per month beginning on the
date
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of grant. 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
Semiconductor 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 57 for further details.
INDEMNIFICATION AGREEMENTS
Semiconductor 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 73 and
the form of Officers' and Directors' Indemnification Agreement attached hereto
as Exhibit 10.6, for further information.
TRANSACTION WITH THOMSON MULTIMEDIA S.A.
In February 2000, Semiconductor entered into a securities purchase
agreement with Thomson Multimedia. The agreement provides that Thomson will
receive 474,747 shares of common stock for a purchase price of $19.78 per share.
Thomson will also receive a warrant for 949,494 additional shares at an exercise
price of $19.78 per share. Generally, the warrant is exercisable approximately
seven (7) years from the date of the agreement, but if Thomson reaches certain
milestones, the warrant will be accelerated and exercisable in part prior to the
seven year date. None of Thomson's shares have been registered under the
Securities Act.
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If Thomson wishes to dispose of 33% or more of the securities that it
obtained in this transaction, 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 by Semiconductor to the
potential purchaser. Transfers to qualified institutional buyers are exempt from
this right of first refusal.
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MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following discussion describes the material federal income tax
considerations of the spin-off and the merger. With respect to the tax treatment
to the stockholders of the spin-off, the following discussion sets forth the
opinion of Ernst & Young LLP. 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; for individual circumstances,
stockholders should consult their own tax advisors. 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.
Material Federal Income Tax Considerations of the Spin-Off -- Stockholder Tax
Considerations
Tax-Free Treatment. It is the opinion of Ernst & Young LLP that, 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. As a result, subject to the limitations and
qualifications described herein:
- You will not recognize income, gain or loss as a result of your receipt
of Semiconductor stock, except with respect to any cash received instead
of fractional shares.
- 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 in accordance with applicable
Treasury regulations.
- 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 provided that certain
other requirements are met, 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.
The Ernst & Young LLP opinion referred to above is based on and subject to
certain limitations, qualifications, assumptions and representations provided by
C-Cube Microsystems and Semiconductor. C-Cube Microsystems and Semiconductor are
not aware of any present facts or circumstances which would make such
assumptions or representations untrue. However, certain future events not within
the
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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.
The scope of the Ernst & Young LLP opinion is expressly limited to the
federal income tax consequences of the spin-off to those stockholders of C-Cube
Microsystems who hold their shares as capital assets and not subject to special
circumstances (such as pursuant to compensatory arrangements or subject to
hedging or similar arrangements) and such opinion was issued to C-Cube
Microsystems solely for the benefit of such C-Cube Microsystems stockholders.
Ernst & Young LLP has made no determination and expressed no opinion regarding
the tax consequences of the spin-off to any other person or entity (including
without limitation C-Cube Microsystems, Harmonic or Semiconductor) under the
laws of any jurisdiction, nor should any such determination or opinion be
inferred.
The opinion of Ernst & Young LLP regarding the tax treatment of the
spin-off to the stockholders of C-Cube Microsystems, Inc. is subject to certain
limitations and is conditioned on the following assumptions which it has not
independently verified:
- the truth, accuracy and completeness of the factual statements,
covenants, representations and warranties contained in the statement of
facts and representations provided by the management of C-Cube
Microsystems and Semiconductor to Ernst & Young LLP,
- the consummation of the spin-off and certain internal restructuring
transactions as described in the statement of facts and representations,
and in accordance with the related agreements and documents furnished
therewith.
- the reporting of the spin-off by C-Cube Microsystems (and any successors)
as qualifying as tax-free spin-off transaction pursuant to Internal
Revenue Code Section 355(a),
- the assumption that any representation or statement qualified by "to the
knowledge of," "belief" or "expect" or similar qualification remains true
without such qualification, and that as to all matters in which a person
or entity is making a statement or representation that there is no plan,
intention, understanding, or agreement inconsistent with such
representation,
- the assumption that no events material to the opinion of Ernst & Young
LLP and not disclosed in the statements of facts and representations will
take place after the spin-off and the Harmonic merger, and
- the authenticity of original documents, the accuracy of copies, the
genuineness of signatures and the legal capacity and legal authority of
signatories.
The opinion of Ernst & Young LLP is based upon an analysis of the Internal
Revenue Code as in effect on the date thereof, Treasury Regulations, current
case law, and published IRS authorities. The foregoing may change, perhaps with
retroactive effect, and Ernst & Young LLP has undertaken no obligation to update
its opinions for changes in facts or law occurring subsequent to the date
thereof. Such analysis is not binding on the IRS or courts and thus the IRS
could adopt a position contrary to that of the opinion of Ernst & Young LLP and
prevail in a court of law.
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.
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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 as a result of Section 355(e) of
the Internal Revenue Code because it is undertaken as part of the same plan as
the Harmonic merger, which will result in a change of control of C-Cube
Microsystems, and also as a result of certain internal restructuring
transactions undertaken prior to the distribution of the Semiconductor stock.
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 of $975 million for the stock of the
spun-off Semiconductor business, that this tax liability will be approximately
$203 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 likely exceed the
estimated tax liability.
Under Semiconductor's tax sharing agreement with Harmonic, Semiconductor
will be liable for the corporate tax incurred as a result of the spin-off and
related transactions, including 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 estimated to be 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 related transactions, and exceed the
retained cash reserve set aside for the payment of taxes, and Semiconductor has
agreed to indemnify Harmonic for all increases in taxes (up to the amount of
certain research and development credits) related to the DiviCom business prior
to the spin-off.
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
"Federal Income Tax Consequences of the Merger and the Spin-off" beginning on
page 45 of the joint proxy statement/prospectus/prospectus of Harmonic and
C-Cube Microsystems to which this prospectus is attached.
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DESCRIPTION OF SEMICONDUCTOR'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 equally 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 Delaware General Corporation
Law 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.
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We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, 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.
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.
72
<PAGE> 74
INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporate Law, 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:
- indemnify their officers and directors under certain circumstances,
including those circumstances in which indemnification would otherwise be
discretionary; and
- 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 Delaware General Corporate
Law. 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.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for us by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California.
EXPERTS
The consolidated financial statements as of December 31, 1997, 1998 and
1999 and for each of the three years in the period ended December 31, 1999,
included in this prospectus and the related financial statement schedule
included elsewhere in the registration statement have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein,
and have been so included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
73
<PAGE> 75
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, 1999 and
1998................................................... F-3
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997....................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997....................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 76
[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, 1999 and 1998, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of C-Cube Microsystems Inc. and
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
San Jose, California
January 20, 2000
[February 10, 2000 as to Note 17]
F-2
<PAGE> 77
C-CUBE MICROSYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
(IN THOUSANDS, EXCEPT
PAR VALUE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $144,296 $108,224
Short-term investments.................................... 175,357 99,603
Accounts receivable, net of allowances: 1999 -- $10,974 ,
1998 -- $17,034........................................ 74,850 36,980
Inventories............................................... 19,335 16,073
Deferred income taxes..................................... 14,064 11,170
Other current assets...................................... 17,725 19,977
-------- --------
Total current assets.............................. 445,627 292,027
Property and equipment -- net............................... 36,293 29,622
Production capacity rights.................................. 4,985 12,600
Distribution rights -- net.................................. 1,318 1,483
Purchased technology -- net................................. 4,194 5,921
Non-current deferred taxes.................................. 867 --
Other assets................................................ 3,025 1,518
-------- --------
Total............................................. $496,309 $343,171
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 38,882 $ 19,942
Accrued compensation and benefits......................... 14,556 12,379
Other accrued liabilities................................. 16,573 16,628
Income taxes payable...................................... 5,503 15,551
Deferred contract revenue................................. 1,921 6,706
Current portion of long-term obligations.................. 742 355
-------- --------
Total current liabilities......................... 78,177 71,561
Long-term obligations....................................... 18,869 23,557
Deferred income taxes....................................... -- 4,650
-------- --------
Total liabilities................................. 97,046 99,768
-------- --------
Minority interest in subsidiary............................. 471 28
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000 shares
authorized............................................. -- --
Common stock, $0.001 par value, 150,000 shares authorized;
shares outstanding: 1999 -- 42,441, 1998 -- 38,261..... 323,756 225,265
Accumulated other comprehensive loss...................... (2,204) (1,852)
Retained earnings......................................... 77,240 19,962
-------- --------
Total stockholders' equity........................ 398,792 243,375
-------- --------
Total............................................. $496,309 $343,171
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 78
C-CUBE MICROSYSTEMS INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net revenues............................................... $407,648 $351,797 $337,012
-------- -------- --------
Costs and expenses:
Cost of product revenues................................. 181,891 160,839 151,333
Research and development................................. 84,366 74,031 64,204
Selling, general and administrative...................... 69,437 60,512 52,732
-------- -------- --------
Total................................................. 335,694 295,382 268,269
-------- -------- --------
Income from operations..................................... 71,954 56,415 68,743
Other income (expense):
Interest income and other................................ 12,067 8,511 4,291
Interest expense and other............................... (1,611) (4,272) (6,048)
-------- -------- --------
Total................................................. 10,456 4,239 (1,757)
-------- -------- --------
Income before income taxes, minority interest and
extraordinary item....................................... 82,410 60,654 66,986
Income tax expense......................................... 24,723 18,196 22,895
-------- -------- --------
Income before minority interest and extraordinary item..... 57,687 42,458 44,091
Minority interest in net income (loss) of subsidiary....... 442 (337) (248)
-------- -------- --------
Income before extraordinary item........................... 57,245 42,795 44,339
Extraordinary gain on repurchase of convertible notes (net
of tax).................................................. 33 3,494 --
-------- -------- --------
Net income................................................. $ 57,278 $ 46,289 $ 44,339
======== ======== ========
Basic earnings per share:
Income before extraordinary item......................... $ 1.44 $ 1.14 $ 1.21
Extraordinary item (net of tax).......................... -- 0.09 --
-------- -------- --------
Net income per share..................................... $ 1.44 $ 1.24 $ 1.21
======== ======== ========
Diluted earnings per share:
Income before extraordinary item......................... $ 1.30 $ 1.11 $ 1.15
Extraordinary item (net of tax).......................... -- 0.09 --
-------- -------- --------
Net income per share..................................... $ 1.30 $ 1.19 $ 1.15
======== ======== ========
Shares used in computation:
Basic.................................................... 39,891 37,382 36,497
======== ======== ========
Diluted.................................................. 44,571 40,754 41,683
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 79
C-CUBE MICROSYSTEMS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES ACCUMULATED
COMMON STOCK DEFERRED RECEIVABLE OTHER RETAINED
----------------- STOCK FROM COMPRE- EARNINGS
SHARES AMOUNT COMPENSATION STOCKHOLDERS HENSIVE LOSS (DEFICIT) TOTAL
------ -------- ------------ ------------ ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1996.............. 36,013 $191,044 $(250) $(305) $(1,251) $(70,666) $118,572
Components of comprehensive income:
Net income............................. 44,339 44,339
Accumulated translation adjustments.... (731) (731)
Unrealized loss on investments......... (4) (4)
--------
Total comprehensive income...... 43,604
--------
Common stock issued under stock plans.... 774 9,111 9,111
Tax benefit from employee stock
transactions........................... 3,573 3,573
Amortization of deferred stock
compensation........................... 250 250
Collection of notes receivable from
stockholders........................... 305 305
------ -------- ----- ----- ------- -------- --------
BALANCES, DECEMBER 31, 1997.............. 36,787 203,728 -- -- (1,986) (26,327) 175,415
Components of comprehensive income:
Net income............................. 46,289 46,289
Accumulated translation adjustments.... 41 41
Unrealized gain on investments......... 93 93
--------
Total comprehensive income...... 46,423
--------
Common stock issued under stock plans.... 1,474 20,111 20,111
Tax benefit from employee stock
transactions........................... 1,426 1,426
------ -------- ----- ----- ------- -------- --------
BALANCES, DECEMBER 31, 1998.............. 38,261 225,265 -- -- (1,852) 19,962 243,375
Components of comprehensive income:
Net income............................. 57,278 57,278
Accumulated translation adjustments.... 202 202
Unrealized loss on investments......... (554) (554)
--------
Total comprehensive income...... 56,926
--------
Common stock issued under stock plans.... 4,119 67,740 67,740
Tax benefit from employee stock
transactions........................... 28,938 28,938
Conversion of convertible debt into
common stock........................... 61 1,813 1,813
------ -------- ----- ----- ------- -------- --------
BALANCES, DECEMBER 31, 1999.............. 42,441 $323,756 $ -- $ -- $(2,204) $ 77,240 $398,792
====== ======== ===== ===== ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 80
C-CUBE MICROSYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 57,278 $ 46,289 $ 44,339
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary gain on repurchase of convertible notes... (33) (3,494) --
Minority interest in subsidiary......................... 443 (337) (248)
Depreciation and amortization........................... 18,687 22,577 17,396
Deferred income taxes................................... (8,411) 4,107 3,356
Changes in assets and liabilities:
Receivables........................................... (37,315) 4,138 (146)
Inventories........................................... (3,211) (490) 12,712
Production capacity rights............................ 11,800 -- --
Prepaids and other assets............................. (1,664) (4,457) 10,956
Accounts payable...................................... 18,368 10,153 (8,993)
Income taxes payable.................................. (10,071) 10,680 2,147
Deferred contract revenue............................. (4,785) 2,811 (2,815)
Accrued liabilities................................... 30,803 6,352 9,926
--------- --------- --------
Net cash provided by operating activities................. 71,889 98,329 88,630
--------- --------- --------
Cash flows from investing activities:
Sales and maturities of short-term investments............ 222,765 69,736 14,850
Purchases of short-term investments....................... (296,052) (147,322) (29,956)
Capital expenditures...................................... (23,021) (20,037) (13,572)
Other assets.............................................. (3,933) 207 368
--------- --------- --------
Net cash used in investing activities..................... (100,241) (97,416) (28,310)
--------- --------- --------
Cash flows from financing activities:
Bank borrowings........................................... -- 39,541 --
Repayment of bank borrowings.............................. -- (39,541) --
Payment of purchase consideration......................... -- (1,125) --
Payments of capital lease obligations..................... (275) (369) (467)
Repurchase of convertible subordinated notes.............. (3,271) (56,099) --
Common stock issued under stock plans..................... 67,740 20,111 9,111
Collection of stockholder notes receivable................ -- -- 305
--------- --------- --------
Net cash provided by (used in) financing activities....... 64,194 (37,482) 8,949
--------- --------- --------
Exchange rate impact on cash and equivalents................ 230 (241) (476)
--------- --------- --------
Net increase (decrease) in cash and equivalents............. 36,072 (36,810) 68,793
Cash and equivalents, beginning of period................... 108,224 145,034 76,241
--------- --------- --------
Cash and equivalents, end of period......................... $ 144,296 $ 108,224 $145,034
========= ========= ========
Supplemental schedule of noncash investing and financing
activities:
Unrealized gain (loss) on investments..................... $ (554) $ 93 $ (4)
Forgiveness of note payable for production capacity
rights.................................................. -- -- 24,500
Equipment acquired under lease............................ 1,133 861 --
Conversion of convertible debt into common stock.......... 1,813 -- --
Supplemental disclosure of cash flow information --
Cash paid during the period for:
Interest................................................ $ 1,614 $ 4,410 $ 5,609
Income taxes............................................ 13,199 1,092 11,473
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 81
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
C-Cube Microsystems Inc. (the "Company" or "C-Cube") was founded in July
1988. The Company operates in two segments as a leading provider of both digital
video semiconductor solutions which implement international standards for
digital video, including MPEG-1 and MPEG-2, and digital video networks for
broadcast communications applications.
Consolidation
The consolidated financial statements include the Company, its wholly owned
subsidiaries and C-Cube Japan, Inc. (a 65% owned Japanese subsidiary) after
elimination of intercompany accounts and transactions.
Cash and Equivalents and Short-term Investments
All highly liquid debt instruments purchased with a remaining maturity of
three months or less are classified as cash equivalents.
Management determines the classification of debt and equity securities at
the time of purchase and reevaluates the classification at each balance sheet
date. Short-term investments are classified as available-for-sale when the
Company generally has the ability and intent to hold such securities to
maturity, but, in certain circumstances, may potentially dispose of such
securities prior to their maturity to implement management strategies.
Securities available-for-sale are reported at fair value with unrealized gains
and losses reported as a separate component of stockholders' equity. All
available-for-sale securities are classified as current assets.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Cost is computed using standard costs which approximate actual cost on a
first-in, first-out basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over estimated useful lives of three years. Equipment
under capital lease and leasehold improvements are amortized over the shorter of
their estimated useful lives, generally three years, or the lease term.
Investments in Companies
Investments in 20% to 50% owned companies are accounted for using the
equity method. Investments in less than 20% owned companies are accounted for
using the cost method unless the Company can exercise significant influence or
the investee is economically dependent upon the Company, in which case the
equity method is used. Such investments are included in other assets.
Production Capacity Rights
Production capacity rights are allocated between current and long-term
assets and are amortized over the shorter of the contract period or the actual
delivery of the wafers in relation to the total amount of wafers purchased under
the agreement.
F-7
<PAGE> 82
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Revenue Recognition and Accounts Receivable
The Company records product sales to customers and distributors at the time
of shipment. Certain of the Company's agreements with its distributors permit
limited stock rotation and provide for price protection. Allowances for returns
and adjustments, including price protection, are provided at the time sales are
recorded.
Revenue from systems contracts is recognized based on performance of
specific tasks with approval and acceptance by the customer. Completion of these
tasks are natural milestones used in measuring the progress to completion of the
project. Such tasks include design, assembly and configuration of equipment and
system performance tests at factory and at customer sites. Losses, if any, are
recorded when determinable. Unbilled receivables result from completion of tasks
as described above in advance of billing schedules. Deferred revenue arises from
billing schedules in advance of completion of tasks. It is anticipated that all
unbilled receivables from such contracts will be collected within one year.
Research and Development
Research and development expenses include costs and expenses associated
with the development of the Company's design methodology and the design and
development of new products, including initial nonrecurring engineering and
product verification charges from foundries. Research and development is
expensed as incurred.
Income Taxes
The accounting for income taxes requires an asset and liability approach
and requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities and net operating
loss and tax credit carryforwards.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets, liabilities, revenues and
expenses as of the dates and for the periods presented. Actual results could
differ from those estimates.
Fair Value of Financial Instruments
Financial instruments include cash equivalents, short-term investments, a
promissory note and convertible subordinated notes. Cash equivalents and
short-term investments are stated at fair value based on quoted market prices.
Fair value of convertible subordinated notes is determined using market
information and valuation methodologies considered to be appropriate. The
estimated fair value of the Company's convertible subordinated notes was $34.8
million and $23.2 million at December 31, 1999 and 1998, respectively. The
estimated fair value of all other financial instruments at December 31, 1999 and
1998 was not materially different from the values presented in the consolidated
balance sheets.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-term
investments, accounts receivable and financial instruments used in hedging
transactions. By policy, the Company places its investments only with financial
institutions meeting its credit guidelines and, other than U.S. Government
Treasury instruments, limits the amounts
F-8
<PAGE> 83
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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.
Foreign Currency Translation
The functional currency of C-Cube Japan is the Japanese yen. Accordingly
all assets and liabilities of C-Cube Japan are translated at the current
exchange rate at the end of the period and revenues and costs at average
exchange rates in effect during the period. Gains and losses from foreign
currency translation are recorded as a separate component of stockholders'
equity.
Forward Exchange Contracts
In the normal course of business, the Company has exposure to foreign
currency fluctuations arising from foreign currency purchases and inter-company
sales, among other things. The Company enters into forward exchange contracts to
neutralize the impact of foreign currency fluctuations on assets and
liabilities. All foreign exchange contracts are designated as and effective as
hedges. Gains and losses on forward exchange contracts are deferred and
recognized in income when the related transactions being hedged are recognized.
The costs of entering into such contracts are not material to the Company's
financial results. The fair value of exchange contracts is determined by
obtaining quoted market prices of comparable contracts at the balance sheet
date, adjusted by interpolation where necessary for maturity differences. The
Company's risk in these contracts is the cost of replacing, at current market
rates, these contracts in the event of default by the other party. These
contracts are executed with credit worthy financial institutions and are
denominated in the currency of major industrial nations.
At December 31, 1999, the Company had $3.1 million of outstanding foreign
exchange contracts to sell Japanese yen, $1.5 million of outstanding foreign
exchange contracts to sell Great Britain pounds and $0.2 million of outstanding
foreign exchange contracts to sell French francs. The estimated fair values of
these contracts at December 31, 1999 were not materially different from the net
carrying values. These contracts mature through January 2000. Unrealized losses
on forward exchange contracts at December 31, 1999 were not material.
At December 31, 1998, the Company had $0.6 million of outstanding foreign
exchange contracts to buy Japanese yen and $1.6 million of outstanding foreign
exchange contracts to sell Japanese yen. The net carrying value and estimated
fair value of those contracts at December 31, 1998 was $1.0 million. Also, at
December 31, 1998, the Company had $4.2 million of outstanding foreign exchange
contracts to sell British pounds. The estimated fair value of those contracts
was $4.2 million. Unrealized losses on forward exchange contracts at December
31, 1998 were not material.
Intangibles
The Company amortizes distribution rights over 15 years and other
intangible assets over 5 years. The Company reviews intangibles and other
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of intangibles and other long-lived assets is measured by
comparison of its carrying amount to future net cash flows the intangibles and
other long-lived assets are expected to generate. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the intangible or other long-lived asset exceeds
its fair market value, as determined by discounted cash flows using a discount
rate reflecting the Company's average cost of funds.
F-9
<PAGE> 84
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Earnings Per Share
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that would occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.
Stock-Based Compensation
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees."
Recent Accounting Standards
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP"') 98-1, "Accounting for the Costs
of Computer Software Developed for Internal Use." SOP 98-1 requires the
capitalization of certain expenditures for software that is purchased or
internally developed, once certain criteria are met. As required, the Company
adopted SOP 98-1 in fiscal year 1999. At December 31, 1999, the Company had
capitalized approximately $1.6 million of costs. Capitalized costs represent
external direct costs as well as direct payroll related costs incurred during
the application development and integration stages of the project in accordance
with the provisions of SOP 98-1. All costs incurred during the preliminary
assessment of the project were expensed as incurred. When the software is placed
into service, such capitalized costs will be amortized over the estimated useful
life of the asset of three years.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities," which requires costs of start-up activities and
organization costs to be expensed as incurred. As required under SOP 98-5, the
Company will expense the start-up costs associated with the merger and spin-off
as they are incurred in 2000.*
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Adoption of this statement is not expected to
materially impact the Company's consolidated financial position, results of
operations or cash flows. The Company is required to adopt this statement in the
first quarter of fiscal year 2001, with early adoption permitted.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation. These reclassifications had no effect on net income, net loss
or stockholders' equity.
NOTE 2. MERGER
On October 27, 1999, C-Cube entered into an Agreement and Plan of Merger
and Reorganization with Harmonic Inc., a Delaware corporation ("Harmonic"),
pursuant to which, subsequent to the spin-off of C-Cube's semiconductor
business, C-Cube has agreed to merge with and into Harmonic (the "Merger"). The
Merger will be effected through the issuance of 0.5427 shares of Harmonic stock
for each share of common stock of C-Cube outstanding immediately prior to the
consummation of the Merger. The
F-10
<PAGE> 85
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Merger is subject to the approval of the stockholders of each company, customary
closing conditions, including applicable regulatory clearances, and the spin-off
of the semiconductor business.
NOTE 3. PRODUCTION CAPACITY RIGHTS
In the second quarter of 1996, the Company expanded and formalized its
relationship with Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC) to provide
wafer production capacity in the years 1996 to 2001. The agreement with TSMC
provided that TSMC would produce and ship wafers to the Company at specified
prices and required the Company to make two advance payments totaling $49.0
million. An advance payment of $24.5 million was made in June 1996. In May 1997,
the Company amended its agreement with TSMC which resulted in a reduction of the
Company's future wafer purchase commitments and the forgiveness of the second
advance payment of $24.5 million. In January 1999, the Company signed a second
amendment to its agreement with TSMC which resulted in a refund to the Company
of $11.7 million and an extension of the term of the agreement to 2003. Advance
payments associated with wafer production capacity rights are amortized over the
shorter of the contract period or the actual delivery of wafers in relation to
the total amount of wafers purchased under the agreement. At December 31, 1999,
remaining production capacity rights were $6.4 million, of which $1.4 million
was included in other current assets and $5.0 million was classified as a
non-current asset.
In the fourth quarter of 1999, the Company signed a production capacity
agreement with United Microelectronics Corporation (UMC) to provide wafer
production capacity in the years 2000 through 2002, for which the Company has
paid a $20 million refundable deposit in January 2000. This deposit allows for
certain discounts on purchased capacity based upon the quantities purchased. The
agreement does not commit the Company to purchase wafers, but does guarantee the
availability of a set capacity of wafers at "not to exceed" prices.
4. SHORT-TERM INVESTMENTS
Short-term investments include the following available-for-sale securities:
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1999:
Commercial paper............................ $ 95,322 $ 3 $ (61) $ 95,264
Municipal bonds............................. 36,552 4 (202) 36,354
U.S. government agencies.................... 23,397 1 (101) 23,297
Corporate bonds............................. 20,564 -- (122) 20,442
-------- ---- ----- --------
Total short-term investments........ $175,835 $ 8 $(486) $175,357
======== ==== ===== ========
DECEMBER 31, 1998:
Commercial paper............................ $ 40,554 $ 20 $ (24) $ 40,550
Municipal bonds............................. 32,856 88 (15) 32,929
U.S. government agencies.................... 26,117 7 -- 26,124
-------- ---- ----- --------
Total short-term investments........ $ 99,527 $115 $ (39) $ 99,603
======== ==== ===== ========
</TABLE>
F-11
<PAGE> 86
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The amortized cost and market value of short-term investments at December
31, 1999 by contractual maturity are as follows:
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Due in 1 year or less....................................... $131,675 $131,522
Due in 1 to 2 years......................................... 44,160 43,835
-------- --------
Total short-term investments...................... $175,835 $175,357
======== ========
</TABLE>
During the years ended 1999, 1998 and 1997, net realized gains and losses
on investments were not material.
NOTE 5. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Finished goods.............................................. $11,248 $ 3,566
Work-in-process............................................. 5,481 6,281
Raw materials............................................... 2,606 6,226
------- -------
Total............................................. $19,335 $16,073
======= =======
</TABLE>
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Equipment under capital lease............................... $ 3,225 $ 2,108
Machinery and equipment -- principally computers............ 71,711 52,355
Furniture and fixtures...................................... 5,055 4,542
Leasehold improvements...................................... 8,358 5,529
-------- --------
Total............................................. 88,349 64,534
Accumulated depreciation and amortization................... (52,056) (34,912)
-------- --------
Property and equipment -- net............................... $ 36,293 $ 29,622
======== ========
</TABLE>
NOTE 7. LINE OF CREDIT
At December 31, 1999, the Company had an available bank line of credit of
$30,000,000 which expires May 1, 2001. Borrowings bear interest at LIBOR plus
1.25% or the bank's prime rate (8.50% at December 31, 1999). The line of credit
agreement requires the Company, among other things, to maintain a minimum
tangible net worth, annual net income (no quarterly loss exceeding $3,000,000)
and certain financial ratios. In addition, the bank agreement prohibits the
payment of cash dividends. At December 31, 1999, the Company was in compliance
with these covenants, and there were no outstanding balances under this line.
F-12
<PAGE> 87
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 8. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Convertible notes (see below)............................... $17,570 $22,790
Capital lease obligations (see Note 9)...................... 1,382 717
Other long-term obligations................................. 659 405
------- -------
19,611 23,912
Current portion............................................. (742) (355)
------- -------
Long-term portion........................................... $18,869 $23,557
======= =======
</TABLE>
In November 1995, the Company completed a public debt offering of $86.3
million of convertible subordinated notes (the "notes"). The notes mature in
2005. Interest is payable semi-annually at 5.875% per annum. The notes are
convertible at the option of the note holders into the Company's common stock at
an initial conversion price of $30.70 per share, subject to adjustment.
Beginning in November 1997, the notes are redeemable at the option of the
Company at an initial redemption price of 104.7% of the principal amount.
During 1999, the Company repurchased $3.4 million of the notes at 95.5% of
the principal amount, with accrued interest to the date of repurchase, and
recognized an extraordinary gain of $33,000, net of related income taxes of
$23,000. During 1998, the Company repurchased $63.5 million of the face value of
the notes at 88.4% of the principal amount, with accrued interest to the date of
repurchase, and recognized an extraordinary gain of $3.5 million, or $0.09 per
diluted share, net of related income taxes of $2.4 million.
In December 1999, the Company announced its intention to call the
outstanding balance of all notes at 103.5% of the principal amount.
Subsequently, through January 20, 2000 all note holders elected the option to
convert their notes into shares of the Company's common stock at a price of
$30.70.
NOTE 9. LEASE COMMITMENTS
Equipment with a cost of $3,225,000 and $2,108,000 and accumulated
depreciation of $1,661,000 and $1,391,000 was leased under capital leases at
December 31, 1999 and 1998, respectively. In addition, the Company rents office
and research facilities under operating lease agreements which expire through
April 2005.
F-13
<PAGE> 88
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Future minimum annual operating and capital lease commitments at December
31, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- -------
(IN THOUSANDS)
<S> <C> <C>
2000........................................................ $ 4,961 $ 704
2001........................................................ 2,997 552
2002........................................................ 2,026 196
2003........................................................ 1,905 --
2004........................................................ 1,127 --
Thereafter.................................................. 457 --
------- ------
Total minimum lease payments................................ $13,473 1,452
=======
Amount representing interest................................ (70)
------
Present value of minimum lease payments..................... 1,382
Current portion............................................. (643)
------
Long-term portion........................................... $ 739
======
</TABLE>
Rent expense for operating leases was approximately $5,306,000, $3,586,000
and $3,385,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
NOTE 10. STOCKHOLDERS' EQUITY
Preferred Stock
The number of shares of preferred stock authorized to be issued is
5,000,000 with a par value of $0.001 per share. Preferred stock may be issued
from time-to-time in one or more series. The Board of Directors is authorized to
provide for the rights, preferences, privileges and restrictions of the shares
of such series. As of December 31, 1999, no shares of preferred stock had been
issued.
Common Stock
The Company has authorized 34,488,838 shares of its common stock for
issuance to founders, employees and others as designated by the Board of
Directors through the Company's stock option plans or through stock purchase
agreements.
Employee Stock Option Plans
The Company's stock option plans (the "Plans") authorize the issuance of
31,639,838 shares of common stock (included in the 34,488,838 authorized shares
discussed above) for the grant of incentive or nonstatutory stock options and
the direct award or sale of shares to employees, directors, contractors and
consultants. Under the Plans, options are generally granted at fair value at the
date of grant. Such options become exercisable over periods of one to five years
and expire up to 10 years from the grant date.
On July 14, 1997, the Company repriced 6,429,078 options to $19.94, the
market price on that date. The repriced shares are treated as canceled and
regranted; however, the vesting terms were extended six months.
F-14
<PAGE> 89
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Option activity under the Plans was as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Outstanding, December 31, 1996 (2,301,108 exercisable at a
weighted average price of $9.36).......................... 9,001,717 $24.63
Granted (weighted average fair value of $13.02)............. 11,025,405 21.38
Exercised................................................... (570,164) (8.47)
Canceled.................................................... (7,542,412) (31.90)
----------
Outstanding, December 31, 1997 (3,699,655 exercisable at a
weighted average price of $12.93)......................... 11,914,546 17.80
Granted (weighted average fair value of $11.82)............. 5,416,528 18.60
Exercised................................................... (1,250,803) (13.14)
Canceled.................................................... (1,861,978) (19.95)
----------
Outstanding, December 31, 1998 (3,848,998 exercisable at a
weighted average price of $17.88)......................... 14,218,293 18.23
Granted (weighted average fair value of $16.84)............. 5,123,368 25.52
Exercised................................................... (3,816,514) (16.28)
Canceled.................................................... (2,242,618) (19.81)
----------
Outstanding, December 31, 1999.............................. 13,282,529 $21.34
==========
</TABLE>
Additional information regarding options outstanding as of December 31,
1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ----------------------------
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.14 - $ 3.00 288,942 3.24 $ 1.48 288,942 $ 1.48
6.00 - 14.56 666,715 5.13 8.44 655,886 8.35
14.75 - 19.50 5,878,643 8.65 18.06 1,081,053 17.84
19.56 - 19.94 2,566,907 6.78 19.93 1,194,859 19.93
20.00 - 36.00 2,878,788 8.74 25.93 461,277 23.95
36.38 - 63.00 1,002,534 9.10 45.25 166,981 52.47
---------- ---------
$ 0.14 - $63.00 13,282,529 8.05 $21.34 3,848,998 $17.88
========== =========
</TABLE>
At December 31, 1999, C-Cube exceeded the total number of shares available
for grant by 481,295 shares. C-Cube's 1994 Stock Option Plan has an automatic
refresh on January 1, 2000, equal to 4% of shares outstanding, which will cover
this negative balance.
Employee Stock Purchase Plan
The Company has an employee stock purchase plan, under which eligible
employees may authorize payroll deductions of up to 10% of their compensation
(as defined in the plan) to purchase common stock at a price equal to 85% of the
lower of the fair market values as of the beginning of the offering period or
end of the purchase period. Stock issued under the plan was 328,000, 223,000 and
211,000 shares in 1999, 1998 and 1997 at weighted average prices of $17.16,
$15.52 and $20.52, respectively. The weighted average
F-15
<PAGE> 90
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
fair market value of the 1999, 1998 and 1997 awards was $7.96, $7.06 and $9.46,
respectively. At December 31, 1999, 855,000 shares of common stock were
available for issuance under this plan.
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees"
and its related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements which are
granted with exercise prices equal to the fair market value at grant date.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) requires the disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method as
of the beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 5.80 in 1999, 5.60 in
1998 and 5.50 years in 1997; stock volatility, 68% in 1999, 68% in 1998 and 63%
in 1997; risk free interest rates, 5.5% in 1999, 5.2% in 1998 and 6.1% in 1997;
and no dividends during the expected term. The Company's calculations are based
on a single option valuation approach and forfeitures are recognized as they
occur. If the computed fair values of the 1999, 1998 and 1997 awards had been
amortized to expense over the vesting period of the awards, pro forma net income
would have been $25.7 million ($0.66 per share) in 1999, $15.2 million ($0.52
per share) in 1998 and $18.0 million ($0.54 per share) in 1997. Per share
amounts above represent diluted earnings per share under SFAS 128 (see Note 1).
Employee Benefit Plan
The Company has a 401(k) tax-deferred savings plan under which participants
may contribute up to 20% of their compensation, subject to certain Internal
Revenue Service limitations. The Company is not required to contribute and has
not contributed to the plan to date.
F-16
<PAGE> 91
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------
DEC. 31, DEC. 31, DEC. 31,
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Numerator:
Net income before extraordinary item...................... $57,245 $42,795 $44,339
Extraordinary item........................................ 33 3,494 --
------- ------- -------
Numerator for basic earnings per share.................... 57,278 46,289 44,339
Add back interest expense after tax related to convertible
shares................................................. 750 2,242 3,532
------- ------- -------
Numerator for diluted earnings per share.................. $58,028 $48,531 $47,871
======= ======= =======
Denominator:
Weighted-average shares -- denominator for basic earnings
per share.............................................. 39,891 37,382 36,497
Convertible shares........................................ 645 1,871 2,809
Dilutive common stock equivalents, using treasury stock
method................................................. 4,035 1,501 2,377
------- ------- -------
Denominator for diluted earnings per share................ 44,571 40,754 41,683
======= ======= =======
Basic earnings per share.................................... $ 1.44 $ 1.24 $ 1.21
======= ======= =======
Diluted earnings per share.................................. $ 1.30 $ 1.19 $ 1.15
======= ======= =======
</TABLE>
NOTE 12. COMPREHENSIVE INCOME
The Company has presented its comprehensive income in the Statement of
Changes in Stockholders' Equity. The following are the components of accumulated
other comprehensive loss:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Unrealized gain (loss) on investments....................... $ (478) $ 76
Accumulated translation adjustments......................... (1,726) (1,928)
------- -------
Total............................................. $(2,204) $(1,852)
======= =======
</TABLE>
F-17
<PAGE> 92
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 13. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................. $27,254 $10,348 $14,336
State............................................... 3,910 1,598 2,938
Foreign............................................. 1,970 2,143 2,265
------- ------- -------
Total....................................... 33,134 14,089 19,539
Deferred:
Federal............................................. (6,591) 4,430 3,105
State............................................... (1,820) (323) (899)
Foreign............................................. -- -- 1,150
------- ------- -------
Total....................................... (8,411) 4,107 3,356
------- ------- -------
Total................................................. $24,723 $18,196 $22,895
======= ======= =======
</TABLE>
The tax benefit associated with dispositions from employee stock plans
reduced taxes currently payable by $28,938,000, $1,426,000 and $3,573,000 for
1999, 1998 and 1997, respectively.
Income tax expense differs from the amount computed by applying the federal
statutory income tax rate to income before taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax expense computed at federal statutory rate........ $28,844 $21,228 $23,445
State income taxes, net of federal effect............. (37) 1,329 1,248
Tax credits........................................... (3,174) (2,609) (2,646)
Foreign operations taxed at different rates........... (2,267) (2,533) 1,068
Non-deductible expenses............................... 720 269 246
Other................................................. 637 512 (466)
------- ------- -------
Income tax expense.......................... $24,723 $18,196 $22,895
======= ======= =======
</TABLE>
F-18
<PAGE> 93
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The components of the net deferred tax asset as of December 31 were as
follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accruals and reserves recognized in different periods..... $12,687 $11,719
Net operating loss carryforwards.......................... -- 444
Tax credit carryforwards.................................. 12,731 --
Deferred revenue.......................................... 21 1,700
Tax basis depreciation.................................... 1,515 --
------- -------
Total............................................. 26,954 13,863
Valuation allowance......................................... -- (444)
------- -------
Net............................................... 26,954 13,419
Deferred tax liabilities:
Purchased technology...................................... (1,267) (2,925)
Unrepatriated foreign earnings............................ (10,756) (3,974)
------- -------
Total............................................. (12,023) (6,899)
------- -------
Net deferred tax assets..................................... $14,931 $ 6,520
======= =======
</TABLE>
At December 31, 1999, the Company has tax credit carryforwards of
approximately $17 million expiring through 2006.
U.S. income taxes were not provided on a cumulative total of approximately
$20 million and $17 million of undistributed earnings from foreign subsidiaries
for the years ending December 31, 1999 and 1998, respectively. The Company
intends to reinvest these earnings indefinitely in foreign operations. It is not
practicable to estimate the income tax liability that might be incurred upon the
remittance of such earnings.
NOTE 14. EXTRAORDINARY ITEM
During 1999, the Company repurchased $3.4 million of the Company's 5.875%
subordinated convertible notes due in 2005 (the "notes") at 95.5% of the
principal amount, with accrued interest to the date of repurchase, and
recognized an extraordinary gain of $33,000, net of related income taxes of
$23,000. During 1998, the Company repurchased $63.5 million of the face value of
the notes at 88.4% of the principal amount, with accrued interest to the date of
repurchase, and recognized an extraordinary gain of $3.5 million, or $0.09 per
diluted share, net of related income taxes of $2.4 million.
NOTE 15. ROYALTIES
The Company is required to pay royalties based on a percentage of the net
sales of products developed under certain development agreements. Royalty
expense was $2,105,000 in 1999, $587,000 in 1998 and $1,960,000 in 1997.
NOTE 16. SEGMENT INFORMATION, GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker. By this definition, C-Cube has two operating
segments: DiviCom, a wholly-owned subsidiary, and Semiconductor, a division of
C-Cube Microsystems Inc. Each of these operating segments requires its own
development and
F-19
<PAGE> 94
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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.
The Company evaluates performance and allocates resources based on profit
or loss from operations before interest, income taxes and extraordinary items.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Revenues are shown net of
elimination of inter-segment revenues. This presentation is consistent with the
Company's internal presentation of financial information to management.
Segment Profit and Assets
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Semiconductor........................................ $222,148 $209,082 $218,252
DiviCom.............................................. 185,500 142,715 118,760
-------- -------- --------
Consolidated net revenues.............................. $407,648 $351,797 $337,012
======== ======== ========
Income from operations:
Semiconductor........................................ $ 41,382 $ 33,113 $ 38,648
DiviCom.............................................. 30,572 23,302 30,095
-------- -------- --------
Consolidated income from operations.................... $ 71,954 $ 56,415 $ 68,743
======== ======== ========
Segment assets:
Semiconductor........................................ $397,335 $259,297 $233,959
DiviCom.............................................. 98,974 83,874 70,149
-------- -------- --------
Consolidated net assets................................ $496,309 $343,171 $304,108
======== ======== ========
Interest expense:
Semiconductor........................................ $ 1,431 $ 3,782 $ 5,619
DiviCom.............................................. 131 -- --
-------- -------- --------
Consolidated interest expense.......................... $ 1,562 $ 3,782 $ 5,619
======== ======== ========
Interest income:
Semiconductor........................................ $ 10,352 $ 5,789 $ 3,941
DiviCom.............................................. 964 1,852 718
-------- -------- --------
Consolidated interest income........................... $ 11,316 $ 7,641 $ 4,659
======== ======== ========
</TABLE>
F-20
<PAGE> 95
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Depreciation and amortization:
Semiconductor........................................ $ 12,919 $ 19,138 $ 13,925
DiviCom.............................................. 5,768 3,439 3,471
-------- -------- --------
Consolidated depreciation and amortization............. $ 18,687 $ 22,577 $ 17,396
======== ======== ========
Capital expenditures:
Semiconductor........................................ $ 13,462 $ 12,867 $ 7,918
DiviCom.............................................. 9,559 7,170 5,654
-------- -------- --------
Consolidated capital expenditures...................... $ 23,021 $ 20,037 $ 13,572
======== ======== ========
</TABLE>
Geographic Information
Revenues are broken out geographically by the ship-to location of the
customer.
<TABLE>
<CAPTION>
YEARS ENDED OR AS OF DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
NET NET NET
REVENUES PROPERTY REVENUES PROPERTY REVENUES PROPERTY
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
North America............... $163,545 $34,113 $132,513 $27,462 $119,575 $22,392
China....................... 83,531 127 120,348 155 123,100 122
Europe...................... 69,416 956 42,441 629 31,464 174
Japan....................... 39,136 436 20,143 483 23,443 480
Other Asia.................. 43,452 661 30,345 893 38,854 393
Rest of World............... 8,568 -- 6,007 -- 576 --
-------- ------- -------- ------- -------- -------
Total............. $407,648 $36,293 $351,797 $29,622 $337,012 $23,561
======== ======= ======== ======= ======== =======
</TABLE>
Major Customers
During 1999 and 1998, no customer accounted for 10% or more of the
Company's consolidated revenues. During 1997, one customer of the Company's
semiconductor segment accounted for $67.7 million of the Company's consolidated
revenues.
NOTE 17. SUBSEQUENT EVENTS
On February 10, 2000, C-Cube and Thomson Multimedia S.A. ("Thomson"), a
French Societe Anonyme, entered into a Securities Purchase Agreement (the
"Agreement") whereby C-Cube will issue to Thomson 474,747 shares of common stock
and a warrant exercisable for up to 949,494 shares of common stock at a price of
$19.78 per share. The warrant expires in 2007 and becomes exercisable upon
Thomson's satisfaction of certain conditions, including design wins
incorporating C-Cube's silicon, and milestones based on revenues generated from
the sale of the Company's products to Thomson. The Agreement is subject to
customary closing conditions, including the spin-off of the semiconductor
business.
F-21
<PAGE> 96
1297-S1-00
<PAGE> 97
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of Common Stock being registered. All
amounts are estimates except the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
--------
<S> <C>
Registration Fee............................................ $316,800
NASD Fee.................................................... 6,000
Nasdaq National Market Listing Fee..........................
Printing and Engraving...................................... 300,000
Legal Fees and Expenses..................................... 400,000
Accounting Fees and Expenses................................ 300,000
Blue Sky Fees and Expenses.................................. 6,000
Transfer Agent Fees......................................... 20,000
Miscellaneous............................................... $100,000
--------
Total.....................................................
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's certificate of incorporation includes a provision that eliminates
the personal liability of its directors for monetary damages for breach or
alleged breach of their duty of care to the Company or its stockholders. In
addition, as permitted by Section 145 of the Delaware General Corporation Law,
the certificate of incorporation of the Registrant provides, inter alia, that
each person who is made a party or is threatened to be made a party to or
otherwise involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "proceeding"), by reason of the
fact that he or she is or was a director or officer of the Company or, while a
director or officer of the Company, is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan (hereinafter an "indemnitee"), whether the
basis of such proceeding is alleged action in an official capacity as a director
or officer or in any other capacity while serving as a director or officer, is
authorized to be indemnified and held harmless by the Company to the fullest
extent authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended, against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such indemnitee in
connection therewith and such indemnification shall continue as to an
indemnitee's heirs, executors and administrators; provided, however, that,
except with respect to the proceedings brought by an indemnitee to enforce
rights to indemnification (subject to certain restrictions and as more fully
described in the Registrant's certificate of incorporation), the Company shall
indemnify any such indemnitee in connection with a proceeding (or part thereof)
initiated by such indemnitee only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Company. The right to
indemnification conferred in the Registrant's certificate of incorporation
includes the right to be paid by the Company the expenses incurred in connection
with any such proceeding in advance of its final disposition; provided, however,
that, if and to the extent that the Delaware General Corporation Law requires,
such an advancement of expenses incurred by an indemnitee in his or her capacity
in which service was or is rendered by such indemnitee, including, without
limitation, service with respect to an employee benefit plan, shall be made only
upon delivery to the Company of an undertaking by or on behalf of such
indemnitee, to repay all amounts so advanced if it
II-1
<PAGE> 98
shall ultimately be determined by final judicial decision from which there is no
further right to appeal that such indemnitee is not entitled to be indemnified
for such expenses under the Company's certificate of incorporation or otherwise.
The Registrant's policy is to enter into indemnification agreements with
each of its directors and executive officers that provide the maximum indemnity
allowed to directors and executive officers by Section 145 of the Delaware
General Corporation Law and the Bylaws, as well as certain additional procedural
protections. The indemnity agreements provide that directors and executive
officers will be indemnified to the fullest possible extent not prohibited by
law against all expenses (including attorney's fees) and settlement amounts paid
or incurred by them in any action or proceeding, including any derivative action
by or in the right of the Registrant, on account of their services as directors
or executive officers of the Registrant or as directors or officers of any other
company or enterprise when they are serving in such capacities at the request of
the Registrant. Pursuant to the indemnity agreements, the Company will not be
obligated to indemnify or advance expenses to an indemnified party with respect
to proceedings or claims initiated by the indemnified party and not by way of
defense, except with respect to proceedings specifically authorized by the Board
of Directors or brought to enforce a right to indemnification under such
indemnity agreement, the Company's certificate of incorporation, Bylaws or any
statute or law, or as otherwise required under Section 145 of the Delaware
General Corporation Law. Also under the indemnity agreements, the Company is not
obligated to indemnify the indemnified party for (i) any expenses incurred by
the indemnified party with respect to any proceeding instituted by the
indemnified party to enforce or interpret the agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
indemnified party in such proceeding was not made in good faith or was
frivolous, (ii) acts, omissions or transactions on the part of the indemnified
party from which such party may not be relieved of liability under applicable
law or (iii) expenses and the payment of profits arising from the purchase and
sale by the indemnified party of securities in violation of Section 16(b) of the
Exchange Act, or any similar or successor statute.
The indemnification provisions in the certificate of incorporation and the
indemnification agreements entered into between the Registrant and its directors
and executive officers, may be sufficiently broad to permit indemnification of
the Registrant's officers and directors for liabilities arising under the 1933
Act.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth information regarding all securities sold by
Semiconductor since its date of incorporation:
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 and a warrant to
purchase 949,494 shares of Semiconductor's common stock at an exercise price of
$19.78. 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. 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 by Semiconductor to the
potential purchaser. Transfers to qualified institutional buyers are exempt from
this right of first refusal.
II-2
<PAGE> 99
The foregoing transaction did not involve any underwriters, underwriting
discounts or commissions, or any public offering, and we believe that the
transaction was exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) thereof and Regulation D promulgated thereunder. The
recipients in such transactions represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access to information about the Company.
ITEM 16. EXHIBITS AND FINANCIAL SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
-------------------
<C> <S>
3.1* Certificate of Incorporation of C-Cube Semiconductor Inc.
3.2* Bylaws of C-Cube Semiconductor Inc.
5.1 Form of Legal Opinion
8.1 Form of Tax Opinion
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.
21.1 List of Subsidiaries
23.1 Form of Accountant's Consent
24.1** Power of Attorney (see page II-5)
</TABLE>
- ------------------------
* Previously filed as an exhibit to Semiconductor's Registration Statement on
Form 10.
** Previously filed as an exhibit to Semiconductor's Registration Statement on
Form S-1.
+ Confidential treatment.
(b) FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report S-1
Valuation and Qualifying Accounts and Reserves S-2
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referenced in Item 14 of this Registration
Statement or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person
II-3
<PAGE> 100
of the Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered hereunder, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
<PAGE> 101
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Milpitas, State of
California, on the 22nd day of March, 2000.
C-CUBE SEMICONDUCTOR INC.
By: /s/ UMESH PADVAL
------------------------------------
Umesh Padval
President, Chief Executive Officer
and Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ UMESH PADVAL President and Chief Executive Officer and Director March 22, 2000
- ------------------------------- (Principal Executive Officer)
Umesh Padval
* Chairman of the Board of Directors March 22, 2000
- -------------------------------
Donald T. Valentine
/s/ ALEXANDRE A. BALKANSKI Director March 22, 2000
- -------------------------------
Alexandre A. Balkanski
* Director March 22, 2000
- -------------------------------
T. J. Rodgers
* Director March 22, 2000
- -------------------------------
Donald McKinney
* Director March 22, 2000
- -------------------------------
Baryn S. Futa
* Director March 22, 2000
- -------------------------------
Gregorio Reyes
*By: /s/ ALEXANDRE A.
BALKANSKI
- -------------------------------
Alexandre A. Balkanski
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 102
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
C-Cube Microsystems Inc.:
We have audited the consolidated financial statements of C-Cube
Microsystems Inc. as of December 31, 1999 and 1998, and for each of the three
years in the period ended December 31, 1999, and have issued our report thereon
dated January 20, 2000 (February 10, 2000, as to Note 17). Our audits also
included the consolidated financial statement schedule of C-Cube Microsystems
Inc., listed in the Index at Item 14(a)(2). This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
- ---------------------------------------------
DELOITTE & TOUCHE LLP
San Jose, California
January 20, 2000
S-1
<PAGE> 103
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND OTHER FROM AT END
OF PERIOD EXPENSES ACCOUNTS RESERVES OF PERIOD
---------- ---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999:
Sales returns allowance............ $13,124 $ 2,439 $ -- $8,798 $ 6,765
Allowance for doubtful accounts.... 3,910 300 -- -- 4,210
Warranty........................... 1,558 97 -- 348 1,307
YEAR ENDED DECEMBER 31, 1998:
Sales returns allowance............ $ 6,740 $12,553 $ -- $6,169 $13,124
Allowance for doubtful accounts.... 3,435 479 -- 4 3,910
Warranty........................... 1,573 316 -- 331 1,558
YEAR ENDED DECEMBER 31, 1997:
Sales returns allowance............ $11,529 $ 3,297 $ -- $8,086 $ 6,740
Allowance for doubtful accounts.... 2,563 1,010 -- 138 3,435
Warranty........................... 1,859 547 -- 833 1,573
</TABLE>
S-2
<PAGE> 104
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
-------------------
<C> <S>
3.1* Certificate of Incorporation of C-Cube Semiconductor Inc.
3.2* Bylaws of C-Cube Semiconductor Inc.
5.1 Form of Legal Opinion
8.1 Form of Tax Opinion
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.
21.1 List of Subsidiaries
23.1 Independent Auditors' Consent
24.1** Power of Attorney (see page II-5)
</TABLE>
- ------------------------
* Previously filed as an exhibit to Semiconductor's Registration Statement on
Form 10.
** Previously filed as an exhibit to Semiconductor's Registration Statement on
Form S-1.
+ Confidential treatment.
<PAGE> 1
EXHIBIT 5.1
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Telephone (650) 493-9300 Facsimile (650) 493-6811
March 21, 2000
C-Cube Semiconductor Inc.
1778 McCarthy Blvd.
Milpitas, California 95035
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No. 333-____)
to be filed by you with the Securities and Exchange Commission on March __, 2000
(the "Registration Statement") in connection with the registration under the
Securities Act of 1933, as amended, of 47,000,000 shares of Common Stock of
C-Cube Semiconductor Inc. (the "Shares"). As your counsel in connection with
this transaction, we have examined the proceedings proposed to be taken in
connection with said sale and issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
various states, where required, the Shares when issued and sold in the manner
referred to in the Registration Statement will be legally and validly issued,
fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
and any amendment thereto.
Very truly yours,
/s/ Wilson Sonsini Goodrich & Rosati
------------------------------------
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE> 1
EXHIBIT 8.1
[ERNST & YOUNG LLP LETTERHEAD]
March 21, 2000
Dr. Alexandre A. Balkanski
Chief Executive Officer
C-Cube Microsystems Inc.
1778 McCarthy Blvd.
Milpitas, CA 95035
Dear Dr. Balkanski:
You have requested our opinion as to certain U.S. federal income tax
consequences to the shareholders of C-Cube Microsystems Inc. ("C-Cube" or
"Distributing"), a Delaware corporation, (the "Shareholders") relating to the
proposed distribution (the "Distribution") of the stock of C-Cube Semiconductor
Inc. ("Semiconductor I" or "Controlled"), a Delaware corporation, by C-Cube, as
described in the Documents (defined below).
In rendering these opinions, Ernst & Young LLP ("E&Y") has relied upon the
following documents (together referred to as the "Documents") attached hereto:
1. The factual Statement of Facts and Representations, dated March __,
2000 provided by the managements of Distributing and of Controlled to
E&Y (the "Statement of Facts and Representations"), including the
factual descriptions therein of the transactions effected by the
Development and Requirements Agreement, dated as of April 20, 1993,
between C-Cube and DiviCom Inc., the Marketing Agreement dated as of
November 17, 1994, between C-Cube and DiviCom, Inc., and the Joint
Venture and Shareholders Agreement, dated as of April 20, 1993,
between Eurodec, SAGEM International S.A., Tregor Electronique,
C-Cube, Nolan Daines, and DiviCom Inc. (collectively, the "DiviCom
Agreements");
2. The Amended and Restated Agreement and Plan of Merger and
Reorganization By and Between C-Cube Microsystems, Inc., and Harmonic,
Inc., ("Harmonic") dated as of Dec. 9, 1999 (the "Harmonic Merger
Agreement");
3. The execution of the Master Separation and Distribution Agreement, the
Assignment and Assumption Agreement, the Transitional Services
Agreement, the Employee Matters Agreement, the Tax Sharing Agreement,
the Master Confidential Disclosure Agreement, the Indemnification and
Insurance Matters Agreement, and the Real Estate Matter Agreement
(collectively, the "Separation Agreements") between Distributing and
entities affiliated with Distributing, and Controlled and entities
affiliated with Controlled, in substantially the form of the drafts
current as of the date hereof.
<PAGE> 2
Page 2
March 21, 2000
4. The Thomson Agreement between Controlled and Thomson Multimedia S.A.,
an entity formed under the laws of France, dated as of February 10,
2000 (together with the Harmonic Merger Agreement and the Separation
Agreements, the "Agreements").
You have advised us that the Documents provide a complete and accurate
description of all relevant facts and circumstances surrounding the
Distribution. E&Y has made no independent verification of any of the facts and
representations set forth in the Documents and, therefore, has relied upon the
completeness, truth and accuracy of the Documents for purposes of rendering this
opinion. While E&Y has had discussions with management personnel of Distributing
and Controlled and their affiliates in connection with rendering this opinion,
(i) the substance of those discussions is in all material respects reflected in
the factual STATEMENT OF FACTS AND REPRESENTATIONS, (ii) the management
personnel of Distributing have imparted no information materially additional to
or inconsistent with that contained in the factual STATEMENT OF FACTS AND
REPRESENTATIONS, (iii) E&Y has assumed that any information imparted in such
discussions with management personnel is true, and has not made (and has at no
time had any means of making) any independent verification of any information
imparted in such discussions, and (iv) the issuance of this opinion shall not
imply anything to the contrary of (i)-(iii) preceding. For purposes of rendering
this opinion, E&Y has assumed that all representations or warranties (including
representations as to future conduct, e.g. that no inconsistent filing or return
position will be taken) qualified by "to the knowledge of," "belief" or "expect"
or similar qualifications are true without any such qualification. Any
inaccuracies in, omissions from, or modifications to the Documents may affect
the conclusions stated herein, perhaps in an adverse manner.
OPINION
Based on the Documents, the facts as summarized therein, and the applicable
law, and subject to the limitations and qualifications stated herein, it is our
opinion that for U.S. federal income tax purposes:
1. Except with respect to any cash received in lieu of any fractional
share, no gain or loss will be recognized to (and no amount will be
included in the income of) the Shareholders on the receipt of the
stock of Controlled in the Distribution (Section 355(a)).
2. The aggregate bases of the Distributing stock and of the Controlled
stock in the hands of each Shareholder after the Distribution
(including any fractional share interests to which such Shareholder is
entitled) will equal the aggregate basis of the Distributing stock
held by such Shareholder immediately before the Distribution,
allocated between the Distributing and Controlled stock in proportion
to the fair market value of each in accordance with Treas. Reg.
Section 1.358-2(a)(2) (Sections 358(a)(1), (b)(2), and (c)).
3. The holding period of the Controlled stock received by each
Shareholder will include the period during which such Shareholder has
held the Distributing shares on which the Distribution is made
(Section 1223(1)).
<PAGE> 3
Page 3
March 21, 2000
4. Any payments of cash in lieu of fractional shares of Controlled stock
will be treated for federal income tax purposes as if the fractional
shares were issued in the Distribution and then were redeemed by
Controlled. The cash payments will be treated as having been received
as a distribution in full payment in exchange for the shares treated
as so redeemed, subject to the provisions of Section 302. If such cash
payments are treated as payments in exchange for such fractional
shares under Section 302, then, provided the fractional share
interests are capital assets in the hands of the recipient
shareholders, the gain or loss on such deemed exchanges will
constitute capital gain or loss subject to the provisions and
limitations of Subchapter P of Chapter 1 of the Code.
SCOPE OF OPINION
The scope of the opinion is expressly limited solely to the federal income tax
consequences set forth in the section above entitled "Opinion." No opinion has
been requested, no determination has been made, nor has any opinion been
expressed on any other issues including, but not limited to, any state, foreign,
consolidated return, employee benefit, or alternative minimum tax issues, or on
the Section 306 or Section 382 (or any other Code section) consequences to the
parties to this transaction. In addition, no opinion has been expressed
regarding (i) the valuation of any assets or stock of Distributing or
Controlled; (ii) the U.S. federal income tax consequences of the acquisition of
Distributing by Harmonic; (iii) the U.S. federal income tax consequences of the
"Internal Restructuring" (as defined in the Statement of Facts and
Representations) to occur prior to the Distribution; (iv) the U.S. federal
income tax consequences of the exchange or conversion of any options, warrants
or similar interests, (v) the tax treatment of shareholders who acquired their
shares in compensatory transactions, who do not hold their shares as capital
assets or who hold shares that are subject to constructive sale, straddle,
heading, conversions or similar transactions, (vi) the federal income tax
consequences of the Distribution or of the Harmonic Merger to Distributing or to
Controlled or to Harmonic, or (vii) the federal income tax consequences of any
other transactions or events that may take place subsequent to the Distribution.
Our opinion relates solely to the tax consequences of the Distribution to the
Shareholders under the federal income tax laws of the United States, and we
express no opinion (and no opinion should be inferred) regarding the
consequences of the Distribution to any other person or entity (including
without limitation C-Cube, Harmonic, or Controlled) under the laws of any
jurisdiction.
No opinion is expressed as to any transaction other than the Distribution as
described in the Documents or as to any transaction whatsoever, including the
Distribution, (i) if all of the transactions described in the Agreements are not
consummated in accordance with the terms of the Agreements and without waiver or
breach of any material provision thereof, (ii) if all the representations,
warranties, statements and assumptions in the Documents upon which we rely are
not true and accurate in all material respects at all relevant times, or (iii)
if material transactions occur after the Distribution that are not described in
the Documents. In addition, the above opinion is based on the information
contained in the factual Statement of Facts and Representations, and assumes
that the facts and representations contained therein could, in fact, be
established in a court of law in accordance with the appropriate governing laws
and burdens of proof. In the event any one of the statements, representations,
warranties or assumptions upon which we rely to issue this opinion is
<PAGE> 4
Page 4
March 21, 2000
incorrect, our opinion might be adversely affected and may not be relied upon.
If any of the certifications and representations contained in Statement of Facts
and Representations ceases to be true at any time prior to the Distribution,
Controlled or C-Cube as the case may be, shall deliver to E&Y a written
statement to that effect.
The opinions and conclusions contained herein, as stated above, are based upon
an analysis of the Internal Revenue Code as in effect on the date hereof,
Treasury Regulations, current case law, and published IRS authorities. The
foregoing, including future interpretations thereof, are subject to change, and
such change may be retroactively effective. If so, the opinions and conclusions,
as set forth above, may be affected and may not be relied upon. In addition, the
above opinions are based on the information contained in the Documents. Any
variation or differences in the Documents may affect the opinions and
conclusions contained herein, perhaps in an adverse manner. E&Y has undertaken
no obligation to update these opinions for changes in facts or law occurring
subsequent to the date hereof. The opinions merely represent our interpretation
of existing federal income tax law, and are not binding on the IRS or any court
of law. You should also be aware that as to certain of our assessments contained
therein, there are currently no rulings or cases on point. No assurance can be
given that the IRS would not adopt a position contrary to our opinion and
prevail in a court of law.
This opinion is being delivered to you solely for the benefit of Shareholders.
We hereby consent to the use of our name and the reference to this opinion (and
its use as an exhibit) in the Form S-1 and S-4 to be filed with the Securities
and Exchange Commission.
Respectfully submitted,
/s/ ERNST & YOUNG LLP
-----------------------
Ernst & Young LLP
<PAGE> 1
EXHIBIT 10.1
FORM OF
MASTER SEPARATION AND DISTRIBUTION AGREEMENT
AMONG
C-CUBE MICROSYSTEMS INC.,
C-CUBE SEMICONDUCTOR INC.
AND
C-CUBE SEMICONDUCTOR II INC.
EFFECTIVE AS OF
__________ ____, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I SEPARATION......................................................2
Section 1.1 Separation Date.............................................2
Section 1.2 Closing of Transactions.....................................2
Section 1.3 Exchange of Secretary's Certificates........................2
ARTICLE II DOCUMENTS AND ITEMS TO BE DELIVERED ON THE SEPARATION DATE......2
Section 2.1 Documents to Be Delivered By C-Cube.........................2
Section 2.2 Retention of Cash Reserves..................................3
Section 2.3 Documents to Be Delivered by Semiconductor I and
Semiconductor II............................................4
ARTICLE III THE DISTRIBUTION................................................4
Section 3.1 The Distribution............................................4
Section 3.2 Actions Prior To The Distribution...........................5
Section 3.3 Sole Discretion of C-Cube...................................6
Section 3.4 Conditions To Distribution..................................6
Section 3.5 Fractional Shares...........................................6
ARTICLE IV COVENANTS AND OTHER MATTERS.....................................7
Section 4.1 Other Agreements............................................7
Section 4.2 Further Instruments.........................................7
Section 4.3 Transitional Services Agreement.............................8
Section 4.4 Agreement For Exchange of Information.......................8
Section 4.5 Payment of Expenses.........................................9
Section 4.6 Dispute Resolution..........................................9
Section 4.7 Governmental Approvals.....................................10
Section 4.8 Cooperation in Obtaining New Agreements....................11
Section 4.9 Property Damage to Semiconductor Assets Prior to the
Separation Date............................................11
ARTICLE V MISCELLANEOUS..................................................11
Section 5.1 Limitation of Liability....................................11
Section 5.2 Entire Agreement...........................................12
Section 5.3 Governing Law..............................................12
Section 5.4 Termination................................................12
Section 5.5 Notices....................................................12
Section 5.6 Counterparts...............................................12
Section 5.7 Binding Effect; Assignment.................................12
Section 5.8 Severability...............................................12
Section 5.9 Failure or Indulgence Not Waiver; Remedies Cumulative......13
Section 5.10 Amendment..................................................13
</TABLE>
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Section 5.11 Authority..................................................13
Section 5.12 Interpretation.............................................13
Section 5.13 Conflicting Agreements.....................................13
ARTICLE VI DEFINITIONS....................................................13
Section 6.1 Affiliated Company.........................................13
Section 6.2 Ancillary Agreements.......................................14
Section 6.3 Assignment Agreement.......................................14
Section 6.4 Business Day...............................................14
Section 6.5 Code.......................................................14
Section 6.6 Commission.................................................14
Section 6.7 Disputes...................................................14
Section 6.8 Distribution...............................................14
Section 6.9 Distribution Agent.........................................14
Section 6.10 Distribution Date..........................................14
Section 6.11 Exchange Act...............................................14
Section 6.12 Governmental Approvals.....................................14
Section 6.13 Governmental Authority.....................................14
Section 6.14 Information................................................14
Section 6.15 Nasdaq.....................................................15
Section 6.16 NYSE.......................................................15
Section 6.17 Person.....................................................15
Section 6.18 Prime Rate.................................................15
Section 6.19 Record Date................................................15
Section 6.20 Semi Spin Taxes............................................15
Section 6.21 Semiconductor Assets.......................................15
Section 6.22 Semiconductor Business.....................................15
Section 6.23 Semiconductor Pro Forma Balance Sheet......................15
Section 6.24 Separation.................................................15
Section 6.25 Separation Date............................................15
Section 6.26 Subsidiary.................................................15
Section 6.27 WSGR.......................................................16
</TABLE>
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<PAGE> 4
EXHIBITS
Exhibit A Certificate of Secretary of C-Cube
Exhibit B Certificate of Secretary of Semiconductor
Exhibit C General Assignment and Assumption Agreement
Exhibit D Transitional Services Agreement
Exhibit E Employee Matters Agreement
Exhibit F Tax Sharing Agreement
Exhibit G Master Confidential Disclosure Agreement
Exhibit H Indemnification and Insurance Matters Agreement
Exhibit I Real Estate Matters Agreement
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<PAGE> 5
SCHEDULES
Schedule 2.1(b) Subsidiaries of C-Cube to be Transferred to Semiconductor I or
Semiconductor II
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<PAGE> 6
MASTER SEPARATION AND DISTRIBUTION AGREEMENT
This Master Separation and Distribution Agreement (this "AGREEMENT") is
entered into as of _______ ___, 2000, by and among C-Cube Microsystems Inc., a
Delaware corporation ("C-CUBE"), C-Cube Semiconductor Inc., a Delaware
corporation ("SEMICONDUCTOR I"), and C-Cube Semiconductor II Inc., a Delaware
corporation ("SEMICONDUCTOR II"). Capitalized terms used herein and not
otherwise defined shall have the meanings ascribed to such terms in Article VI
hereof.
RECITALS
WHEREAS, C-Cube has entered into the Agreement and Plan of Merger and
Reorganization, dated as of October 27, 1999 (the "MERGER AGREEMENT"), with
Harmonic Inc. ("HARMONIC") pursuant to which C-Cube will merge with and into
Harmonic (the "MERGER"), contingent on the sale or distribution by C-Cube of the
Semiconductor Business;
WHEREAS, C-Cube and Harmonic entered into an Amended and Restated
Agreement and Plan of Merger and Reorganization dated as of December 9, 1999
(the "RESTATED MERGER AGREEMENT");
WHEREAS, the Boards of Directors of C-Cube, Semiconductor I and
Semiconductor II have each determined that, if the Merger receives all required
approvals, it would be appropriate and desirable for C-Cube to contribute and
transfer to Semiconductor I and Semiconductor II, and for Semiconductor to
receive and assume, directly or indirectly, substantially all of the assets and
liabilities currently associated with the Semiconductor Business, including the
stock, investments or similar interests currently held by C-Cube in subsidiaries
and other entities that conduct such business (the "SEPARATION");
WHEREAS, C-Cube currently contemplates that, following the transfer and
assumption of such assets and liabilities to Semiconductor I and Semiconductor
II and immediately prior to and in connection with the Merger, C-Cube will
distribute to the holders of its common stock, $0.01 par value, by means of a
pro rata distribution, all of the shares of Semiconductor I common stock owned
by C-Cube (the "DISTRIBUTION");
WHEREAS, C-Cube and Semiconductor I intend the Distribution to qualify
as a distribution tax-free to stockholders under Section 355(a) of the Code,
although C-Cube and Semiconductor I anticipate that C-Cube will incur corporate
tax in connection with the Distribution; and
WHEREAS, the parties intend in this Agreement, including the Exhibits
and Schedules hereto, to set forth the principal arrangements between them
regarding the separation of the Semiconductor Business.
<PAGE> 7
NOW, THEREFORE, in consideration of the foregoing and the covenants and
agreements set forth below, the parties hereto agree as follows:
ARTICLE I
SEPARATION
SECTION 1.1 SEPARATION DATE. Unless otherwise provided in this
Agreement, or in any agreement to be executed in connection with this Agreement,
the effective time and date of each transfer of property, assumption of
liability, license, undertaking, or agreement in connection with the Separation
shall be 12:01 a.m., Pacific Time, _______ ___, 2000 or such other date as may
be fixed by the Board of Directors of C-Cube (the "SEPARATION DATE").
SECTION 1.2 CLOSING OF TRANSACTIONS. Unless otherwise provided herein,
the closing of the transactions contemplated in ARTICLE II shall occur by the
lodging of each of the executed instruments of transfer, assumptions of
liability, undertakings, agreements, instruments or other documents executed or
to be executed with Wilson Sonsini Goodrich & Rosati, Professional Corporation
("WSGR"), 650 Page Mill Road, Palo Alto, California 94304, to be held in escrow
for delivery as provided in SECTION 1.3 of this Agreement.
SECTION 1.3 EXCHANGE OF SECRETARY'S CERTIFICATES. Upon receipt of a
certificate of the Secretary or an Assistant Secretary of C-Cube in the form
attached to this Agreement as Exhibit A, WSGR shall deliver to Semiconductor I
and Semiconductor II on behalf of C-Cube all of the items required to be
delivered by C-Cube hereunder pursuant to SECTION 2.1 of this Agreement and each
such item shall be deemed to be delivered to Semiconductor I and Semiconductor
II as of the Separation Date upon delivery of such certificate. Upon receipt of
a certificate of the Secretary or an Assistant Secretary of Semiconductor I and
Semiconductor II in the form attached to this Agreement as EXHIBIT B, WSGR shall
deliver to C-Cube on behalf of Semiconductor I and Semiconductor II all of the
items required to be delivered by Semiconductor I and Semiconductor II hereunder
and each such item shall be deemed to be delivered to C-Cube as of the
Separation Date upon receipt of such certificate.
ARTICLE II
DOCUMENTS AND ITEMS TO BE DELIVERED ON THE SEPARATION DATE
SECTION 2.1 DOCUMENTS TO BE DELIVERED BY C-CUBE. (a) On the Separation
Date, C-Cube will deliver, or will cause its appropriate Subsidiaries to
deliver, to Semiconductor I and Semiconductor II all of the following items and
agreements (collectively, together with all agreements and documents
contemplated by such agreements, the "ANCILLARY AGREEMENTS"):
(b) A duly executed General Assignment and Assumption Agreement (the
"ASSIGNMENT AGREEMENT") substantially in the form attached hereto as EXHIBIT C;
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<PAGE> 8
(c) Certificates representing the stock and/or investments in the
Subsidiaries and other holdings of C-Cube set forth on SCHEDULE 2.1(B) with duly
executed stock powers in the form proper for transfer;
(d) A duly executed Transitional Services Agreement substantially in the
form attached hereto as EXHIBIT D;
(e) A duly executed Employee Matters Agreement substantially in the form
attached hereto as EXHIBIT E;
(f) A duly executed Tax Sharing Agreement substantially in the form
attached hereto as EXHIBIT F;
(g) A duly executed Master Confidential Disclosure Agreement
substantially in the form attached hereto as EXHIBIT G;
(h) A duly executed Indemnification and Insurance Matters Agreement
substantially in the form attached hereto as EXHIBIT H;
(i) A duly executed Real Estate Matters Agreement substantially in the
form attached hereto as EXHIBIT I;
(j) Resignations of each person who is an officer or director of any
member of C-Cube or its Subsidiaries, immediately prior to the Separation Date,
and who will be employees of Semiconductor I or Semiconductor II or any of their
Subsidiaries from and after the Separation Date; and
(k) Such other agreements, documents or instruments as the parties may
agree are necessary or desirable in order to achieve the purposes hereof,
including, without limitation, all service level agreements entered into in
accordance with SECTION 4.3 and those documents referred to in SECTION 4.4.
SECTION 2.2 RETENTION OF CASH RESERVES. (a) On or around the Separation
Date, C-Cube will provide to Semiconductor I all cash of C-Cube and its
Subsidiaries other than the following amounts (collectively, the "Retained
Cash"), the sum of (i) sixty million dollars ($60,000,000), (ii) cash in an
amount reasonably estimated to be sufficient to pay all Taxes of C-Cube and its
Subsidiaries accrued through the Distribution Date but not including, as
determined pursuant to the Tax Sharing Agreement, Semi Spin Taxes (the "Pre-Semi
Disposition Taxes"), (iii) 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's investment
bankers, attorneys, accountants and other professional advisors, (iv) cash in an
amount reasonably estimated to be sufficient to pay the Semi Spin Taxes, as
determined pursuant to the Tax Sharing Agreement, and (v) cash in an amount
sufficient to make all severance payments to any employee of C-Cube who is not a
Continuing Employee nor an employee of the Semiconductor Business, it being
understood that any cash retained under this paragraph in excess of the actual
amounts required to be
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<PAGE> 9
paid will be included in C-Cube's basis in Semiconductor I or the Semiconductor
Business assets for purposes of calculating the Semi Spin Taxes.
(b) The amount of cash retained under Sections 2.2(a)(ii) and (iv) shall
be subject to adjustment pursuant to Sections 4.2 and 4.3 of the Tax Sharing
Agreement. For purposes of calculating the Semi Spin Taxes, any such adjustment
shall be treated as an adjustment to C-Cube's basis in the stock of
Semiconductor I in accordance with Sections 4.2(b) or 4.3(e) of the Tax Sharing
Agreement.
(c) Prior to the Distribution, C-Cube shall certify the amount of the
Retained Cash to Harmonic, which schedule shall include a breakdown of the
amount retained for Pre-Semi Disposition Taxes and Semi Spin Taxes (in each case
on a Tax-by-Tax basis).
SECTION 2.3 DOCUMENTS TO BE DELIVERED BY SEMICONDUCTOR I AND
SEMICONDUCTOR II. As of the Separation Date, Semiconductor I and Semiconductor
II will or will cause their appropriate Subsidiaries to deliver to C-Cube all of
the following:
(a) In each case where Semiconductor I or Semiconductor II or any of
their subsidiaries is a party to any agreement or instrument referred to in
SECTION 2.1, a duly executed counterpart of such agreement or instrument; and
(b) Resignations of each person who is an officer or director of C-Cube,
or any of its Subsidiaries, immediately prior to the Separation Date, and who
will be employees of Semiconductor I or Semiconductor II or any of their
Subsidiaries from and after the Separation Date.
ARTICLE III
THE DISTRIBUTION
SECTION 3.1 THE DISTRIBUTION.
(a) Delivery of Shares for Distribution. Subject to SECTION 3.4 hereof,
on or prior to the date the Distribution is effective (the "DISTRIBUTION DATE"),
C-Cube will deliver to the distribution agent (the "DISTRIBUTION AGENT") to be
appointed by C-Cube to distribute to the stockholders of C-Cube the shares of
common stock of Semiconductor I held by C-Cube pursuant to the Distribution for
the benefit of holders of record of common stock of C-Cube on the Record Date, a
single stock certificate, endorsed by C-Cube in blank, representing all of the
outstanding shares of common stock of Semiconductor I then owned by C-Cube, and
shall cause the transfer agent for the shares of common stock of C-Cube to
instruct the Distribution Agent to distribute on the Distribution Date the
appropriate number of such shares of common stock of Semiconductor I to each
such holder or designated transferee or transferees of such holder.
(b) Shares Received. Subject to SECTIONS 3.4 and 3.5, each holder of
common stock of C-Cube on the Record Date (or such holder's designated
transferee or transferees) will be entitled to receive in the Distribution a
number of shares of common stock of Semiconductor I equal
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<PAGE> 10
to the number of shares of common stock of C-Cube held by such holder on the
Record Date multiplied by a fraction the numerator of which is the number of
shares of common stock of Semiconductor I beneficially owned by C-Cube on the
Record Date and the denominator of which is the number of shares of common stock
of C-Cube outstanding on the Record Date.
(c) Obligation to Provide Information. Semiconductor I and C-Cube, as
the case may be, will provide to the Distribution Agent all share certificates
and any information required in order to complete the Distribution on the basis
specified above.
SECTION 3.2 ACTIONS PRIOR TO THE DISTRIBUTION.
(a) Transfer of Semiconductor II Stock. C-Cube will, (i) before the
Separation, cause Semiconductor II to issue all outstanding shares of Non-Voting
Series A Preferred Stock to WSGR in exchange for legal and other related
services, and (ii) after the Separation, will transfer all outstanding shares of
Common Stock of Semiconductor II to Semiconductor I.
(b) Information Statement. C-Cube and Semiconductor I shall prepare and
mail, prior to the Distribution Date, to the holders of common stock of C-Cube,
such information concerning the Semiconductor Business and the Distribution and
such other matters as C-Cube shall reasonably determine are necessary and as may
be required by law. C-Cube and Semiconductor I will prepare, and Semiconductor I
will, to the extent required under applicable law, file with the Securities and
Exchange Commission (the "COMMISSION") any such documentation which C-Cube and
Semiconductor I determine is necessary or desirable to effectuate the
Distribution, and C-Cube and Semiconductor I shall each use its reasonable
commercial efforts to obtain all necessary approvals from the Commission with
respect thereto as soon as practicable.
(c) Blue Sky. C-Cube, Semiconductor I and Semiconductor II shall take
and shall cause any of their Subsidiaries to take all such actions as may be
necessary or appropriate under the securities or blue sky laws of the United
States (and any comparable laws under any foreign jurisdiction) in connection
with the Distribution.
(d) NYSE or Nasdaq Listing. Semiconductor I shall prepare and file, and
shall use its reasonable commercial efforts to have approved, an application for
the listing of the common stock of Semiconductor I to be distributed in the
Distribution on the New York Stock Exchange (the "NYSE") or the Nasdaq National
Market (the "NASDAQ"), subject to official notice of distribution.
(e) Retained Cash. The amount of case required to be retained by C-Cube
pursuant to Section 2.2(a) hereof shall have been retained.
(f) Conditions. C-Cube, Semiconductor I and Semiconductor II shall take
and shall cause any of their Subsidiaries to take all reasonable steps necessary
and appropriate to cause the conditions set forth in SECTION 3.4 to be satisfied
and to effect the Distribution on the Distribution Date.
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<PAGE> 11
SECTION 3.3 SOLE DISCRETION OF C-CUBE. C-Cube shall, in its sole and
absolute discretion, determine the date of the consummation of the Distribution
and all terms of the Distribution, including, without limitation, the form,
structure and terms of any transaction(s) and/or offering(s) to effect the
Distribution and the timing of and conditions to the consummation of the
Distribution. In addition, C-Cube may at any time and from time to time until
the completion of the Distribution modify or change the terms of the
Distribution, including, without limitation, by accelerating or delaying the
timing of the consummation of all or part of the Distribution. Semiconductor I
and Semiconductor II shall cooperate with C-Cube in all respects to accomplish
the Distribution and shall, at C-Cube's direction, promptly take any and all
actions necessary or desirable to effect the Distribution, including, without
limitation, the registration under the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT") of the common stock of Semiconductor I on an
appropriate registration form or forms to be designated by C-Cube. C-Cube shall
select any financial printer, solicitation and/or exchange agent and outside
counsel for C-Cube; provided, however, that nothing herein shall prohibit
Semiconductor I from engaging (at its own expense) its own financial, legal,
accounting and other advisors in connection with the Distribution.
SECTION 3.4 CONDITIONS TO DISTRIBUTION. The following are conditions to
the consummation of the Distribution. The conditions are for the sole benefit of
C-Cube and shall not give rise to or create any duty on the part of C-Cube or
the C-Cube Board of Directors to waive or not waive any such condition.
(a) Government Approvals. Any material governmental approvals and
consents necessary to consummate the Distribution shall have been obtained and
be in full force and effect;
(b) No Legal Restraints. No order, injunction or decree issued by any
court or agency of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the Distribution shall be in effect
and no other event outside the control of C-Cube shall have occurred or failed
to occur that prevents the consummation of the Distribution; and
(c) Transfer of Semiconductor II Stock. The transfer of all outstanding
shares of Common Stock of Semiconductor II to Semiconductor I shall have been
effected.
SECTION 3.5 FRACTIONAL SHARES. As soon as practicable after the
Distribution Date, C-Cube shall direct the Distribution Agent to determine the
number of whole shares and fractional shares of common stock of Semiconductor I
allocable to each holder of record or beneficial owner of common stock of C-Cube
as of the Record Date, to aggregate all such fractional shares and sell the
whole shares obtained thereby at the direction of C-Cube, in open market
transactions, at then prevailing trading prices, and to cause to be distributed
to each such holder or for the benefit of each such beneficial owner to which a
fractional share shall be allocable such holder's or owner's ratable share of
the proceeds of such sale, after making appropriate deductions of the amount
required to be
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<PAGE> 12
withheld for federal income tax purposes and after deducting an amount equal to
all brokerage charges, commissions and transfer taxes attributed to such sale.
C-Cube and the Distribution Agent shall use their reasonable commercial efforts
to aggregate the shares of common stock of C-Cube that may be held by any
beneficial owner thereof through more than one account in determining the
fractional share allocable to such beneficial owner.
ARTICLE IV
COVENANTS AND OTHER MATTERS
SECTION 4.1 OTHER AGREEMENTS. In addition to the specific agreements,
documents and instruments annexed to this Agreement, C-Cube and Semiconductor I
agree to execute or cause to be executed by the appropriate parties and deliver,
as appropriate, such other agreements, instruments and other documents as may be
necessary or desirable in order to effect the purposes of this Agreement and the
Ancillary Agreements.
SECTION 4.2 FURTHER INSTRUMENTS. At the request of Semiconductor I or
Semiconductor II and without further consideration, C-Cube will execute and
deliver, and will cause its applicable Subsidiaries to execute and deliver, to
Semiconductor I or Semiconductor II or any of their Subsidiaries such other
instruments of transfer, conveyance, assignment, substitution and confirmation
and take such action as Semiconductor I or Semiconductor II may reasonably deem
necessary or desirable in order to more effectively transfer, convey and assign
to Semiconductor I or Semiconductor II or any of their Subsidiaries and confirm
Semiconductor I's, Semiconductor II's and their Subsidiaries' title to all of
the assets, rights and other things of value contemplated to be transferred to
Semiconductor I or Semiconductor II or any of their Subsidiaries pursuant to
this Agreement, the Ancillary Agreements, and any documents referred to therein,
to put Semiconductor I or Semiconductor II or any of their Subsidiaries in
actual possession and operating control thereof and to permit Semiconductor I or
Semiconductor II or any of their Subsidiaries to exercise all rights with
respect thereto (including, without limitation, rights under contracts and other
arrangements as to which the consent of any third party to the transfer thereof
shall not have previously been obtained). At the request of C-Cube and without
further consideration, Semiconductor I and Semiconductor II will execute and
deliver, and will cause their applicable Subsidiaries to execute and deliver, to
C-Cube and its Subsidiaries all instruments, assumptions, novations,
undertakings, substitutions or other documents and take such other action as
C-Cube may reasonably deem necessary or desirable in order to have Semiconductor
I and Semiconductor II fully and unconditionally assume and discharge the
liabilities contemplated to be assumed by Semiconductor I, Semiconductor II or
any of their Subsidiaries under this Agreement or any document in connection
herewith and to relieve the C-Cube or any of its Subsidiaries of any liability
or obligation with respect thereto and evidence the same to third parties. None
of C-Cube, Semiconductor I or Semiconductor II shall be obligated, in connection
with the foregoing, to expend money other than reasonable out-of-pocket
expenses, attorneys' fees and recording or similar fees. If any additional fees
arise for any reason, such fees shall be the responsibility of Semiconductor I.
Furthermore, each party, at the request of another party hereto, shall execute
and deliver such other
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<PAGE> 13
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of the transactions
contemplated hereby.
SECTION 4.3 TRANSITIONAL SERVICES AGREEMENT. C-Cube and Semiconductor I
and Semiconductor II will enter into a Transitional Services Agreement covering
the provisions of various transitional services, including telecommunications,
networks, enterprise applications and other services by Semiconductor I or
Semiconductor II to C-Cube or, in certain circumstances, vice versa. The
Transitional Services Agreement will generally provide for a term of two (2)
years.
SECTION 4.4 AGREEMENT FOR EXCHANGE OF INFORMATION. Each of C-Cube,
Semiconductor I and Semiconductor II, for itself and on behalf of its
Subsidiaries, agrees to provide, or cause to be provided, to each other, at any
time before or after the Distribution Date, as soon as reasonably practicable
after written request therefor, any Information in the possession or under the
control of such party that the requesting party reasonably needs (i) to comply
with reporting, disclosure, filing or other requirements imposed on the
requesting party (including under applicable securities laws) by a Governmental
Authority having jurisdiction over the requesting party, (ii) for use in any
other judicial, regulatory, administrative or other proceeding or in order to
satisfy audit, accounting, claims, regulatory, litigation or other similar
requirements, (iii) to comply with its obligations under this Agreement or any
Ancillary Agreement or (iv) in connection with the ongoing businesses of C-Cube,
Semiconductor I or Semiconductor II, as the case may be; provided, however, that
in the event that any party determines that any such provision of Information
could be commercially detrimental, violate any law or agreement, or waive any
attorney-client privilege, the parties shall take all reasonable measures to
permit the compliance with such obligations in a manner that avoids any such
harm or consequence.
(a) Internal Accounting Controls; Financial Information. After the
Separation Date, (i) each party shall maintain in effect at its own cost and
expense adequate systems and controls for its business to the extent necessary
to enable the other party to satisfy its reporting, accounting, audit and other
obligations, and (ii) each party shall provide, or cause to be provided, to the
other party and its Subsidiaries in such form as such requesting party shall
request, at no charge to the requesting party, all financial and other data and
information as the requesting party determines necessary or advisable in order
to prepare its financial statements and reports or filings with any Governmental
Authority.
(b) Ownership of Information. Any Information owned by a party that is
provided to a requesting party pursuant to this SECTION 4.4 shall be deemed to
remain the property of the providing party. Unless specifically set forth
herein, nothing contained in this Agreement shall be construed as granting or
conferring rights of license or otherwise in any such Information.
(c) Record Retention. (i) To facilitate the possible exchange of
Information pursuant to this SECTION 4.4 and other provisions of this Agreement
after the Distribution Date, each party agrees to use its reasonable commercial
efforts to retain all Information in their respective possession or control on
the Distribution Date. However, except as set forth in the Tax Sharing
Agreement, at any time after the Distribution Date, each party may amend their
respective record retention policies at such party's discretion; provided,
however, that if a party desires to effect the amendment within
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<PAGE> 14
three (3) years after the Distribution Date, the amending party must give thirty
(30) days prior written notice of such change in the policy to the other party
to this Agreement.
(ii) No party will destroy, or permit any of its Subsidiaries to
destroy, any Information that exists on the Separation Date (other than
Information that is permitted to be destroyed under the current record retention
policy of such party) without first using its reasonable commercial efforts to
notify the other party of the proposed destruction and giving the other party
the opportunity to take possession of such Information prior to such
destruction.
(d) Limitation of Liability. No party shall have any liability to any
other party in the event that any Information exchanged or provided pursuant to
this Section is found to be inaccurate, in the absence of willful misconduct by
the party providing such Information. No party shall have any liability to any
other party if any Information is destroyed or lost after reasonable commercial
efforts by such party to comply with the provisions of SECTION 4.4(C).
(e) Other Agreements Providing For Exchange of Information. The rights
and obligations granted under this SECTION 4.4 are subject to any specific
limitations, qualifications or additional provisions on the sharing, exchange or
confidential treatment of Information set forth in this Agreement and any
Ancillary Agreement.
(f) Production of Witnesses; Records; Cooperation. After the
Distribution Date, except in the case of a legal or other proceeding by one
party against another party (which shall be governed by such discovery rules as
may be applicable under SECTION 4.8 or otherwise), each party hereto shall use
its reasonable commercial efforts to make available to each other party, upon
written request, the former, current and future directors, officers, employees,
other personnel and agents of such party as witnesses and any books, records or
other documents within its control or which it otherwise has the ability to make
available, to the extent that any such person (giving consideration to business
demands of such directors, officers, employees, other personnel and agents) or
books, records or other documents may reasonably be required in connection with
any legal, administrative or other proceeding in which the requesting party may
from time to time be involved, regardless of whether such legal, administrative
or other proceeding is a matter with respect to which indemnification may be
sought hereunder. The requesting party shall bear all costs and expenses in
connection therewith.
SECTION 4.5 PAYMENT OF EXPENSES. Except as otherwise provided in this
Agreement, the Ancillary Agreements or any other agreement between the parties
relating to the Separation or the Distribution, all costs and expenses of the
parties hereto in connection with the Distribution and certain costs and
expenses of the parties hereto in connection with the Separation shall be paid
by Semiconductor I or Semiconductor II.
SECTION 4.6 DISPUTE RESOLUTION. Except as otherwise set forth in the
Ancillary Agreements, resolution of any and all disputes arising from or in
connection with this Agreement, whether based on contract, tort, or otherwise
(collectively, "DISPUTES"), shall be exclusively governed by and settled in
accordance with the provisions of this SECTION 4.7.
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<PAGE> 15
(a) Negotiation. The parties shall make a good faith attempt to resolve
any Dispute arising out of or relating to this Agreement through negotiation.
Within thirty (30) days after notice of a Dispute is given by either party to
the other party, each party shall select a negotiating team comprised of vice
president level employees of such party and shall meet within thirty (30) days
after the end of the first thirty (30) day negotiating period to attempt to
resolve the matter. During the course of negotiations under this SECTION 4.7(A),
all reasonable requests made by one party to the other for information,
including requests for copies of relevant documents, will be honored. The
specific format for such negotiations will be left to the discretion of the
designated negotiating teams but may include the preparation of agreed upon
statements of fact or written statements of position furnished to the other
party.
(b) Non-Binding Mediation. In the event that any Dispute arising out of
or related to this Agreement is not settled by the parties within fifteen (15)
days after the first meeting of the negotiating teams under SECTION 4.7(A), the
parties will attempt in good faith to resolve such Dispute by non-binding
mediation in accordance with the American Arbitration Association Commercial
Mediation Rules. The mediation shall be held within thirty (30) days of the end
of such fifteen (15) day negotiation period of the negotiating teams. Except as
provided below in SECTION 4.7(C), no litigation for the resolution of such
dispute may be commenced until the parties try in good faith to settle the
dispute by such mediation in accordance with such rules and either party has
concluded in good faith that amicable resolution through continued mediation of
the matter does not appear likely. The costs of mediation shall be shared
equally by the parties to the mediation. Any settlement reached by mediation
shall be recorded in writing, signed by the parties, and shall be binding on
them.
(c) Proceedings. Nothing herein, however, shall prohibit either party
from initiating litigation or other judicial or administrative proceedings if
such party would be substantially harmed by a failure to act during the time
that such good faith efforts are being made to resolve the Dispute through
negotiation or mediation. In the event that litigation is commenced under this
SECTION 4.7(C), the parties agree to continue to attempt to resolve any Dispute
according to the terms of SECTIONS 4.7(A) and 4.7(B) during the course of such
litigation proceedings under this SECTION 4.7(C).
(d) Pay and Dispute. Except as provided herein or in any Ancillary
Agreement, in the event of any dispute regarding payment of a third-party
invoice (subject to standard verification of receipt of products or services),
the party named in a third party's invoice must make timely payment to such
third party, even if the party named in the invoice desires to pursue the
dispute resolution procedures outlined in this SECTION 4.7. If the party that
paid the invoice is found pursuant to this SECTION 4.7 to not be responsible for
such payment, such paying party shall be entitled to reimbursement, with
interest accrued at a compound annual rate of the Prime Rate plus 2%, from the
party found responsible for such payment.
SECTION 4.7 GOVERNMENTAL APPROVALS. To the extent that the Separation
requires any Governmental Approvals, the parties will use their reasonable
commercial efforts to obtain any such Governmental Approvals.
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<PAGE> 16
SECTION 4.8 COOPERATION IN OBTAINING NEW AGREEMENTS. Each of C-Cube,
Semiconductor I and Semiconductor II understand that, prior to the Separation
Date, all parties have derived benefits under certain agreements amongst
themselves and third parties, which agreements are not being assigned to C-Cube,
Semiconductor I or Semiconductor II in connection with the Separation. Upon the
request of C-Cube, Semiconductor I or Semiconductor II, the other party agrees
to make introductions to appropriate personnel at such third parties, and agrees
to provide reasonable assistance to the other party at its own expense, so that
the other party may obtain agreements from such third parties under
substantially equivalent terms and conditions, including financial terms and
conditions, that apply to it. Such assistance may include, but is not limited
to, requesting and encouraging such third parties to enter into such
agreements. All parties also understand that there are certain agreements
between themselves and third parties, which agreements are being assigned to the
other party in connection with the Separation but which may require the consent
of the applicable third party. Upon request, one party agrees to assist the
other party in seeking and obtaining the consent of such third parties to such
assignment. The parties expect that the activities contemplated by this Section
will be substantially completed by the Distribution Date, but in no event will
either party have any obligations hereunder after the first anniversary of the
Distribution Date.
SECTION 4.9 PROPERTY DAMAGE TO SEMICONDUCTOR ASSETS PRIOR TO THE
SEPARATION DATE. In the event of any property damage to any Semiconductor Assets
prior to the Separation Date, C-Cube shall repair or otherwise address such
damage in the ordinary course of business consistent with past practices;
provided, however, that nothing in this clause shall restrict C-Cube from
disposing of any Assets in the ordinary course of business consistent with past
practices.
ARTICLE V
MISCELLANEOUS
SECTION 5.1 LIMITATION OF LIABILITY. IN NO EVENT SHALL C-CUBE OR ANY OF
ITS SUBSIDIARIES OR SEMICONDUCTOR I, SEMICONDUCTOR II OR ANY OF THEIR
SUBSIDIARIES BE LIABLE TO C-CUBE OR ANY OF ITS SUBSIDIARIES OR SEMICONDUCTOR I,
SEMICONDUCTOR II OR ANY OF THEIR SUBSIDIARIES FOR ANY SPECIAL, CONSEQUENTIAL,
INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES OR LOST PROFITS, HOWEVER CAUSED AND ON
ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY OUT OF THIS
AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES, EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, THE RESTATED MERGER
AGREEMENT, THE ANCILLARY AGREEMENTS, AND THE EXHIBITS AND SCHEDULES REFERENCED
OR ATTACHED HERETO OR THERETO; PROVIDED, HOWEVER, THAT THE FOREGOING LIMITATIONS
SHALL NOT LIMIT EACH PARTY'S INDEMNIFICATION OBLIGATIONS FOR LIABILITIES TO
THIRD PARTIES AS SET FORTH IN THE INDEMNIFICATION AND INSURANCE MATTERS
AGREEMENT.
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<PAGE> 17
SECTION 5.2 ENTIRE AGREEMENT. This Agreement, the Restated Merger
Agreement, the other Ancillary Agreements and the Exhibits and Schedules
referenced or attached hereto and thereto, constitute the entire agreement
between the parties with respect to the subject matter hereof and shall
supersede all prior written and oral and all contemporaneous oral agreements and
understandings with respect to the subject matter hereof. In the event any
provision of any agreement conflicts with a provision of the Restated Merger
Agreement, the Restated Merger Agreement will govern.
SECTION 5.3 GOVERNING LAW. This Agreement shall be governed and
construed and enforced in accordance with the laws of the State of Delaware as
to all matters regardless of the laws that might otherwise govern under the
principles of conflicts of laws applicable thereto.
SECTION 5.4 TERMINATION. This Agreement may be terminated at any time
before the Distribution Date by mutual consent of C-Cube, Semiconductor I and
Semiconductor II and in any event, shall terminate three years after the date
first referenced above. In the event of termination pursuant to this Section, no
party shall have any liability of any kind to the other party.
SECTION 5.5 NOTICES. Any notice, demand, offer, request or other
communication required or permitted to be given by either party pursuant to the
terms of this Agreement shall be in writing and shall be deemed effectively
given the earlier of (i) when received, (ii) when delivered personally, (iii)
one (1) business day after being delivered by facsimile (with receipt of
appropriate confirmation), (iv) one (1) business day after being deposited with
an overnight courier service or (v) four (4) days after being deposited in the
U.S. mail, First Class with postage prepaid, and addressed to the attention of
the party's General Counsel at the address of its principal executive office or
such other address as a party may request by notifying the other in writing.
SECTION 5.6 COUNTERPARTS. This Agreement, including the Schedules and
Exhibits hereto and the other documents referred to herein, may be executed in
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
SECTION 5.7 BINDING EFFECT; ASSIGNMENT. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective legal
representatives and successors, and nothing in this Agreement, express or
implied, is intended to confer upon any other Person any rights or remedies of
any nature whatsoever under or by reason of this Agreement. This Agreement may
not be assigned by any party hereto. This Agreement may be enforced separately
by C-Cube, Semiconductor I, Semiconductor II and any of their Subsidiaries.
SECTION 5.8 SEVERABILITY. If any term or other provision of this
Agreement or the Schedules or Exhibits attached hereto is determined by a
nonappealable decision by a court, administrative agency or arbitrator to be
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to either party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties
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<PAGE> 18
as closely as possible in an acceptable manner to the end that transactions
contemplated hereby are fulfilled to the fullest extent possible.
SECTION 5.9 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No
failure or delay on the part of either party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement herein,
nor shall any single or partial exercise of any such right preclude other or
further exercise thereof or of any other right. All rights and remedies existing
under this Agreement or the Schedules or Exhibits attached hereto are cumulative
to, and not exclusive of, any rights or remedies otherwise available.
SECTION 5.10 AMENDMENT. No change or amendment will be made to this
Agreement except by an instrument in writing signed on behalf of each of the
parties to such agreement.
SECTION 5.11 AUTHORITY. Each of the parties hereto represents to the
other that (a) it has the corporate or other requisite power and authority to
execute, deliver and perform this Agreement, (b) the execution, delivery and
performance of this Agreement by it have been duly authorized by all necessary
corporate or other actions, (c) it has duly and validly executed and delivered
this Agreement, and (d) this Agreement is a legal, valid and binding obligation,
enforceable against it in accordance with its terms subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and general equity principles.
SECTION 5.12 INTERPRETATION. The headings contained in this Agreement,
in any Exhibit or Schedule hereto and in the table of contents to this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Any capitalized term used in any Schedule or
Exhibit but not otherwise defined therein, shall have the meaning assigned to
such term in this Agreement. When a reference is made in this Agreement to an
Article or a Section, Exhibit or Schedule, such reference shall be to an Article
or Section of, or an Exhibit or Schedule to, this Agreement unless otherwise
indicated.
SECTION 5.13 CONFLICTING AGREEMENTS. In the event of conflict between
this Agreement and any Ancillary Agreement or other agreement executed in
connection herewith, the provisions of such other agreement shall prevail.
ARTICLE VI
DEFINITIONS
SECTION 6.1 AFFILIATED COMPANY. "AFFILIATED COMPANY" means, with respect
to C-Cube, any entity in which C-Cube holds a 50% or less ownership interest and
that is listed on SCHEDULE 6.1(A) hereto and, with respect to Semiconductor I
and II, any entity in which Semiconductor I and II holds a 50% or less ownership
interest and that is listed on SCHEDULE 6.1(B) hereto. SCHEDULES 6.1(A) and
6.1(B) may be amended from time to time after the date hereof upon mutual
written consent of the parties.
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<PAGE> 19
SECTION 6.2 ANCILLARY AGREEMENTS. "ANCILLARY AGREEMENTS" has the meaning
set forth in SECTION 2.1 hereof.
SECTION 6.3 ASSIGNMENT AGREEMENT. "ASSIGNMENT AGREEMENT" has the meaning
set forth in SECTION 2.1(A) hereof.
SECTION 6.4 BUSINESS DAY. "BUSINESS DAY" means a day other than a
Saturday, a Sunday or a day on which banking institutions located in the State
of California are authorized or obligated by law or executive order to close.
SECTION 6.5 CODE. "CODE" means the Internal Revenue Code of 1986, as
amended from time to time.
SECTION 6.6 COMMISSION. "COMMISSION" means the Securities and Exchange
Commission.
SECTION 6.7 DISPUTES. "Disputes" has the meaning set forth in Section
4.6 hereof.
SECTION 6.8 DISTRIBUTION. "Distribution" has the meaning set forth in
the Recitals hereof.
SECTION 6.9 DISTRIBUTION AGENT. "Distribution Agent" has the meaning set
forth in Section 3.1 hereof.
SECTION 6.10 DISTRIBUTION DATE. "Distribution Date" has the meaning set
forth in Section 3.1 hereof.
SECTION 6.11 EXCHANGE ACT. "EXCHANGE ACT" means the Securities and
Exchange Act of 1934, as amended.
SECTION 6.12 GOVERNMENTAL APPROVALS. "GOVERNMENTAL APPROVALS" means any
notices, reports or other filings to be made, or any consents, registrations,
approvals, permits or authorizations to be obtained from, any Governmental
Authority.
SECTION 6.13 GOVERNMENTAL AUTHORITY. "GOVERNMENTAL AUTHORITY" shall mean
any federal, state, local, foreign or international court, government,
department, commission, board, bureau, agency, official or other regulatory,
administrative or governmental authority.
SECTION 6.14 INFORMATION. "Information" means information, whether or
not patentable or copyrightable, in written, oral, electronic or other tangible
or intangible forms, stored in any medium, including studies, reports, records,
books, contracts, instruments, surveys, discoveries, ideas, concepts, know-how,
techniques, designs, specifications, drawings, blueprints, diagrams, models,
prototypes, samples, flow charts, data, computer data, disks, diskettes, tapes,
computer programs or other software, marketing plans, customer names,
communications by or to attorneys (including attorney-client privileged
communications), memos and other materials prepared by
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<PAGE> 20
attorneys or under their direction (including attorney work product), and other
technical, financial, employee or business information or data.
SECTION 6.15 NASDAQ. "Nasdaq" means the Nasdaq National Market.
SECTION 6.16 NYSE. "NYSE" means the New York Stock Exchange.
SECTION 6.17 PERSON. "PERSON" means an individual, a partnership, a
corporation, a limited liability company, an association, a joint stock company,
a trust, a joint venture, an unincorporated organization and a governmental
entity or any department, agency or political subdivision thereof.
SECTION 6.18 PRIME RATE. "PRIME RATE" means the prime rate as published
in the Wall Street Journal on the date of determination.
SECTION 6.19 RECORD DATE. "RECORD DATE" means the close of business on
the date to be determined by the Board of Directors of C-Cube as the record date
for determining the stockholders of C-Cube entitled to receive shares of common
stock of Semiconductor in the Distribution.
SECTION 6.20 SEMI SPIN TAXES. "SEMI SPIN TAXES" has the meaning set
forth in ARTICLE I of the Tax Sharing Agreement.
SECTION 6.21 SEMICONDUCTOR ASSETS. "SEMICONDUCTOR ASSETS" has the
meaning set forth in SECTION 1.2 of the Assignment Agreement.
SECTION 6.22 SEMICONDUCTOR BUSINESS. "SEMICONDUCTOR BUSINESS" means the
business and operations of C-Cube defined as the Semiconductor Business in the
Restated Merger Agreement.
SECTION 6.23 SEMICONDUCTOR PRO FORMA BALANCE SHEET. "SEMICONDUCTOR PRO
FORMA BALANCE SHEET" means the unaudited pro forma condensed consolidated
balance sheet as set forth in C-Cube Semiconductor I's Registration Statement on
Form 10, filed on December 29, 1999, as amended.
SECTION 6.24 SEPARATION. "Separation" has the meaning set forth in the
Recitals hereof.
SECTION 6.25 SEPARATION DATE. "Separation Date" has the meaning set
forth in Section 1.1 hereof.
SECTION 6.26 SUBSIDIARY. "SUBSIDIARY" means with respect to any
specified Person, any corporation, any limited liability company, any
partnership or other legal entity of which such Person or its Subsidiaries owns,
directly or indirectly, more than 50% of the stock or other equity interest
entitled to vote on the election of the members of the board of directors or
similar governing body. Unless context otherwise requires, reference to C-Cube
and its Subsidiaries shall not include the subsidiaries of C-Cube that will be
transferred to Semiconductor I or Semiconductor II after
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<PAGE> 21
giving effect to the Separation, and those subsidiaries will be treated as
Subsidiaries of Semiconductor I and Semiconductor II, as applicable.
SECTION 6.27 WSGR. "WSGR" means Wilson Sonsini Goodrich & Rosati,
Professional Corporation.
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<PAGE> 22
WHEREFORE, the parties have signed this Master Separation and
Distribution Agreement effective as of the date first set forth above.
C-CUBE MICROSYSTEMS INC. C-CUBE SEMICONDUCTOR INC.
By: By:
----------------------------- --------------------------------------
Name: Name:
----------------------------- ------------------------------------
Title: Title:
-------------------------- -----------------------------------
C-CUBE SEMICONDUCTOR II INC.
By:
----------------------------
Name:
---------------------------
Title:
--------------------------
<PAGE> 23
SCHEDULE 2.1(b)
SUBSIDIARIES AND OTHER HOLDINGS OF C-CUBE TO BE TRANSFERRED TO
SEMICONDUCTOR I OR SEMICONDUCTOR II
C-Cube Microsystems International Ltd.
C-Cube U.S. Inc.
C-Cube Japan, Inc.
C-Cube Technology Limited
Media Computer Technologies, Inc.
<PAGE> 24
EXHIBIT A
C-CUBE SECRETARY'S CERTIFICATE
<PAGE> 25
EXHIBIT B
SEMICONDUCTOR I AND SEMICONDUCTOR II
SECRETARY CERTIFICATE
<PAGE> 1
EXHIBIT 10.2
FORM OF
TAX SHARING AGREEMENT
This TAX SHARING AGREEMENT ("Agreement") is made effective as of
_______________, 2000 by and among C-Cube Microsystems Inc. ("C-Cube"), a
Delaware corporation, on behalf of itself and the C-Cube Subgroup (as defined
below), C-Cube Semiconductor Inc. ("Semiconductor"), a Delaware corporation, and
Harmonic Inc., a Delaware corporation ("Harmonic"). Capitalized terms used and
not otherwise defined herein shall have the meanings assigned to them in Section
1 below.
RECITALS
WHEREAS, C-Cube is the common parent corporation of an affiliated group
of corporations (as defined in Section 1504(a) of the Code) which includes
Semiconductor;
WHEREAS, C-Cube files Consolidated Group Returns on behalf of the
Affiliated Group and C-Cube files or causes to be filed Combined Returns and
other Returns on behalf of itself and its subsidiaries;
WHEREAS, as set forth in the Reorganization Agreement and the Separation
Agreement, and subject to the terms and conditions thereof, C-Cube wishes to
transfer and assign to Semiconductor substantially all of the assets and
liabilities currently associated with the Semiconductor Business, including the
stock, investments and similar interests currently held by C-Cube in certain
subsidiaries and other entities that conduct such business (the "Separation");
WHEREAS, following the Separation and in connection with the merger of
C-Cube and Harmonic (the "Merger"), C-Cube intends to distribute all of its
shares of Semiconductor Common Stock, on a pro rata basis, to the holders of the
common stock of C-Cube, subject to the terms and conditions of the Separation
Agreement (the "Public Distribution");
WHEREAS, the Separation and Public Distribution are intended to cause
the recognition of gain by C-Cube, and Semiconductor has agreed to bear the
resulting tax liability; and
WHEREAS, as a result of the Public Distribution, Semiconductor and its
domestic subsidiaries will cease to be members of the Affiliated Group, and the
parties hereto have determined to enter into this Agreement, setting forth their
agreement with respect to certain tax matters.
AGREEMENT
NOW THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties agree as follows:
1. DEFINITIONS
All terms not defined in this Agreement shall have the meaning set forth
in the Separation Agreement and the Reorganization Agreement.
<PAGE> 2
"Adjustment" means an adjustment determined on an issue-by-issue or
transaction-by-transaction basis, as appropriate, made or proposed with respect
to any amount that previously formed the basis for the computation of an amount
due hereunder, whether such adjustment arises as a result of a Tax Contest or
otherwise.
"Affiliated Group" means the group of corporations including C-Cube as
the common parent corporation and all other corporations which are eligible or
required to be included in a Consolidated Group Return with C-Cube as the common
parent corporation, which group shall include, for periods prior to the Public
Distribution, Semiconductor and its subsidiaries that are so eligible.
"After-Tax Basis" in reference to an indemnity payment shall mean an
amount that, after (i) subtraction of the aggregate additional Taxes (if any)
incurred or to be incurred by the party receiving the indemnity payment as a
result of the receipt of a payment hereunder and (ii) addition of the tax
benefit (if any) to the party receiving the indemnity payment on account of the
Adjustment to which such payment relates, is equal to the amount of the Tax
Adjustment. "After-Tax Basis" in reference to a benefit payment, including a
refund, shall mean an amount that, after (i) addition of the aggregate
additional Taxes (if any) incurred or to be incurred by the party making the
benefit payment on account of the Tax benefit to which such benefit payment
relates and (ii) subtraction of the Tax benefit (if any) to the party making the
benefit payment as a result of the making of such payment, is equal to the
amount of the Tax benefit. For purpose of determining such additional Taxes
incurred or to be incurred and such Tax benefit, the following assumptions will
be used: (a) in the case of any income Tax, the highest marginal Tax rate or, in
the case of any other Tax, the highest applicable Tax rate, in each case in
effect with respect to that Tax for the Taxable period or any portion of the
Taxable period to which the indemnity payment or benefit payment relates; and
(b) such determination shall be made without regard to whether any actual
additional Taxes or Tax benefit will in fact be realized with respect to the
Return to which such payment relates, due to tax attributes of a party (or lack
thereof) unrelated to the item giving rise to such indemnity payment or benefit
payment.
"Carryforward Tax Attribute" means a deductible or creditable
consolidated Federal tax attribute or state or local tax attribute that can be
carried forward from one tax period to subsequent tax periods, including, but
not limited to, (i) a consolidated net operating loss, a consolidated net
capital loss, a consolidated unused foreign investment credit, a consolidated
unused foreign tax credit, or a consolidated excess charitable contribution, and
(ii) the consolidated minimum tax credit, or other consolidated general business
credits.
"C-Cube Separate Company Return" shall mean any Return of C-Cube or any
direct or indirect subsidiary of C-Cube other than a Consolidated Group Return,
a Combined Return, or a Semiconductor Separate Company Return.
"C-Cube Straddle Period Return" shall mean any Return with respect to a
Straddle Period other than a Semiconductor Straddle Period Return.
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<PAGE> 3
"C-Cube Subgroup" means C-Cube and its present and future subsidiaries
(other than Semiconductor and its present and future subsidiaries).
"C-Cube Tax Adjustment" shall mean, with respect to any Taxable period
or portion of a Taxable period, and as computed separately with respect to each
Tax, the net increase in each such Tax equal to the sum of all Tax Adjustments
with respect to which a Final Determination has been made for each such Taxable
period or portion of a Taxable period that are attributable to the income,
assets and/or business of any member of the C-Cube Subgroup; provided, however,
Semiconductor Tax Adjustment shall not be treated as, and shall be excluded from
the definition of, C-Cube Tax Adjustment.
"C-Cube Tax Benefit" shall mean, with respect to any Taxable period or
portion of a Taxable period, and as computed separately with respect to each
Tax, the net decrease in each such Tax equal to the sum of all Tax Adjustments
with respect to which a Final Determination has been made such Tax for each such
Taxable period or portion of a Taxable period that are attributable to the
income, assets and/or business of any member of the C-Cube Subgroup, the
Semiconductor Subgroup, and/or the Semiconductor Business; provided, however,
that any Semiconductor Tax Benefit shall not be a C-Cube Tax Benefit.
"Code" means the U.S. Internal Revenue Code of 1986, as amended.
"Combined Return" means the Return of state income or franchise Tax
required to be filed by a group of corporations on a unitary basis as opposed to
a separate company basis.
"Consolidated Group Return" means a consolidated federal income Tax
Return filed pursuant to Section 1501 of the Code and the Regulations
thereunder.
"Consolidated Period" means that period of time during which
Semiconductor is a member of the Affiliated Group.
"Consolidated Return Year" means any taxable year or period with respect
to which C-Cube is required to file a Consolidated Group Return as the common
parent corporation.
"Distribution Date" means the date on which the Public Distribution
occurs.
"Divicom" means DiviCom Inc., which was a wholly-owned subsidiary of
C-Cube until it merged into C-Cube on January 28, 2000.
"Divicom Merger Taxes" means all Taxes incurred by Divicom or C-Cube
prior to or upon the occurrence of the Merger that would not have been incurred
but for the merger of Divicom into C-Cube. Such Taxes shall not be reduced by
any amounts that could be mitigated by a restructuring of the ownership of all
or any portion of the assets owned by Divicom prior to such merger.
"Final Determination" means (a) a decision, judgment, decree or other
order by any court of competent jurisdiction, which has become final and is
either no longer subject to appeal or for which
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<PAGE> 4
a determination not to appeal has been made; (b) a closing agreement made under
Section 7121 of the Code or any comparable foreign, state, local, municipal or
other Taxing statute; (c) a final disposition by any Taxing Authority of a claim
for refund; or (d) any other written agreement or state of facts which results
in an Adjustment becoming final and prohibits such Taxing Authority from seeking
any further legal or administrative remedies with respect to an Adjustment.
"Group Refund Claim" means any claim filed by C-Cube on behalf of the
Affiliated Group for a refund of federal income Taxes or on behalf of the
Unitary Group for a refund of state income or franchise Taxes to the extent such
claim is either (a) filed prior to the Distribution Date, or (b) filed in
accordance with Section 2.5 or Section 5.
"Initial Stock Price" has the meaning set forth in the definition of A
in Section 4.1(a) hereof.
"IRS" means the United States Internal Revenue Service.
"Mailing Date" has the meaning set forth in Section 4.1(a).
"Merger Date" means the date on which the Merger occurs.
"Pre-Semi Disposition Non-Semiconductor Tax Deficiency" means the sum of
(i) the excess, if any, of Pre-Semi Disposition Non-Semiconductor Taxes (other
than such Taxes that are attributable to an Adjustment) over the amount included
in the Tax Offset Amount attributable to Pre-Semi Disposition Non-Semiconductor
Taxes, and (ii) the amount of any Tax Adjustment attributable to any Pre-Semi
Disposition Non-Semiconductor Taxes with respect to which there has been a Final
Determination.
"Pre-Semi Disposition Non-Semiconductor Taxes" shall mean Taxes
attributable to periods prior to the Distribution Date that are not Semi Spin
Taxes and are not otherwise attributable to the Semiconductor Business;
provided, however, that the term Pre-Semi Disposition Non-Semiconductor Taxes
shall not include Divicom Merger Taxes.
"Pre-Semi Disposition Taxes" shall mean Taxes of C-Cube and its
subsidiaries attributable to periods through the Distribution Date but not
including (i) Semi Spin Taxes and (ii) except as provided in Section 6.3,
Pre-Semi Disposition Non-Semiconductor Taxes (or any reduction or refund
thereof) arising from an Adjustment. The parties agree that the Section 41
Credits shall not be taken into account as a credit in determining Pre-Semi
Disposition Taxes, but rather shall be treated as provided in Section 5 hereof.
Notwithstanding the foregoing, Pre-Semi Disposition Taxes shall also include all
Divicom Merger Taxes.
"Public Distribution" has the meaning set forth in the recitals hereto.
"Regulations" means the Regulations issued by the Secretary of the
Treasury interpreting the Code.
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<PAGE> 5
"Reorganization Agreement" means the Amended and Restated Agreement and
Plan of Merger and Reorganization by and between C-Cube Microsystems Inc. and
Harmonic Inc. dated as of December 9, 1999.
"Retained Cash" means cash retained by C-Cube pursuant to Sections
4.1(a) and 4.1(b) in order to pay Semi Spin Taxes and Pre-Semi Disposition
Taxes, respectively.
"Return" means any return, report, form or similar statement or document
(including, without limitation, any related or supporting information or
schedule attached thereto and any information return, claim for, amended return
and declaration of estimated Tax) that has been or is required to be filed with
any Taxing Authority or that has been or is required to be furnished to any
Taxing Authority in connection with the determination, assessment or collection
of any Taxes or the administration of any laws, regulations or administrative
requirements relating to any Taxes.
"Section 41 Credits" shall have the meaning set forth in Section 5
hereof.
"Semi Spin Taxes" shall mean the corporate Tax liability incurred as a
direct result of the Semi Spin, and any Taxes incurred in any internal
restructuring undertaken in connection with the Separation and the Public
Distribution (including but not limited to all of the steps described the
Separation Agreement and Ancillary Agreements thereto, and including all
intercompany stock and asset transfers and related incorporations and issuances
of stock undertaken in preparation for the Separation and the Public
Distribution), and any Taxes and other amounts incurred by C-Cube, Semiconductor
or their affiliates as a result of a claim by any person arising from the tax
treatment of the Separation, the Public Distribution or any such internal
restructuring. The parties agree that the Section 41 Credits shall not be taken
into account as a credit in determining Semi Spin Taxes, but rather shall be
treated as provided in Section 5 hereof.
"Semiconductor Business" shall have the meaning set forth in the
Separation Agreement.
"Semiconductor Separate Company Return" shall mean any Return (including
but not limited to a Semiconductor Straddle Period Return) with respect to a
taxable period of any member of the Semiconductor Subgroup, other than any
Consolidated Group Return or Combined Return.
"Semiconductor Straddle Period Return" shall mean any Return with
respect to a Straddle Period that is also a taxable period of a member of the
Semiconductor Subgroup or that relates principally to the Semiconductor
Business, and that is not a Consolidated Group Return or a Combined Return.
"Semiconductor Subgroup" shall mean Semiconductor and its past, present
and future subsidiaries.
"Semiconductor Tax Adjustment" shall mean, with respect to any Pre-Semi
Disposition Tax or a Semi Spin Tax for any Taxable period or portion of a
Taxable period, and as computed separately with respect to each Tax, the net
increase in each such Tax equal to the sum of all Tax Adjustments pertaining to
such Pre-Semi Disposition Tax and Semi Spin Tax with respect to which
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a Final Determination has been made. In the event an Adjustment pertains to both
a Semiconductor Tax Adjustment and a C-Cube Tax Adjustment, the parties shall
equitably allocate such Tax Adjustment and treat it as a C-Cube Tax Adjustment
in part and a Semiconductor Tax Adjustment in part in a manner consistent with
the intent of this Agreement. If any portion of the item giving rise to the Tax
Adjustment can reasonably be allocated to each party based on such party's
contribution to the underlying Adjustment, such portion shall be so allocated,
and any portion that is not capable of being so allocated shall be allocated
based on any reasonable method, provided that in the event of a dispute the
dispute resolution provisions of Section 4.3 shall apply.
"Semiconductor Tax Benefit" shall mean, with respect to any Pre-Semi
Disposition Tax or a Semi Spin Tax for any Taxable period or portion of a
Taxable period, and as computed separately with respect to each Tax, the net
decrease in each such Tax equal to the sum of all Tax Adjustments pertaining to
such Tax (i) attributable to the income, assets and/or business of any member of
the Semiconductor Subgroup or the Semiconductor Business and (ii) with respect
to which a Final Determination has been made for each such Taxable period or
portion of a Taxable period (including, but not limited to, periods prior to the
Public Distribution). In the event a net decrease in Tax is attributable to both
the Semiconductor Subgroup or the Semiconductor Business, on one hand, and to
the C-Cube Subgroup, on the other hand, the parties shall equitably allocate
such net decrease and treat it as a C-Cube Tax Benefit in part and a
Semiconductor Tax Benefit in part in a manner consistent with the intent of this
Agreement. If any portion of the item giving rise to the net decrease can
reasonably be allocated to each party based on such party's contribution to the
underlying Adjustment, such portion shall be so allocated, and any portion that
is not capable of being so allocated shall be allocated based on any reasonable
method, provided that in the event of a dispute the dispute resolution
provisions of Section 4.3 shall apply.
"Separate Return Period" means that period of time following the
Distribution Date during which Semiconductor (or any member of the Semiconductor
Subgroup) is not a member of the Affiliated Group.
"Separation Agreement" means the Master Separation and Distribution
Agreement, dated as of ____________________, 2000 by and among C-Cube,
Semiconductor, and C-Cube Semiconductor II Inc.
"Straddle Period" shall mean any Taxable period that begins before and
ends after the Distribution Date.
"Tax" (and, with correlative meanings, "Taxes" and "Taxable") means,
without limitation, and as determined on a jurisdiction-by-jurisdiction basis,
each foreign or U.S. federal, state, local or municipal income, alternative or
add-on minimum, gross receipts, sales, use, ad valorem, transfer, franchise,
profits, license, withholding, payroll, employment, excise, severance, stamp,
occupation, premium, property, value added or any other tax, custom, tariff,
impost, levy, duty, governmental fee or other like assessment or charge of any
kind whatsoever, together with any interest or penalty, addition to tax or
additional amount related thereto, imposed by any Taxing Authority.
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"Tax Adjustment" shall mean the increase or decrease in Tax (which for
the sake of clarity shall include all interest, penalties, additions to tax and
additional amounts related thereto), using the assumptions set forth in the next
sentence, resulting from an Adjustment. For purpose of determining such deemed
increase or decrease in Tax, the following assumptions will be used: (a) in the
case of any income Tax (or franchise tax based on income), the highest marginal
Tax rate or, in the case of any other Tax, the highest applicable Tax rate, in
each case in effect with respect to that Tax for the Taxable period or any
portion of the Taxable period to which the adjustment relates; and (b) such
determination shall be made without regard to whether any actual increase or
decrease in such Tax will in fact be realized with respect to the Return to
which such adjustment relates. Notwithstanding the foregoing sentence, a capital
loss Tax Adjustment shall be considered to result in a decrease in Tax only when
and to the extent such capital loss is utilized, and for this purpose a capital
loss shall be deemed utilized only if it would be utilized after taking account
of all other items of income, gain, loss, deduction or credit.
"Tax Contest" means any audit, examination, claim, suit, action or other
proceeding relating to Taxes.
"Tax Offset Amount" shall have the meaning given in Section 3.2.
"Tax Retention Schedule" has the meaning set forth in Section 4.1(c).
"Taxing Authority" means any governmental authority or any subdivision,
agency, commission or authority thereof, or any quasi-governmental or private
body having jurisdiction over the assessment, determination, collection or other
imposition of Taxes.
"Unitary Group" means the group of corporations having C-Cube as the
common parent corporation that is eligible or required to be included in a
Combined Return with C-Cube.
2. FILING OF CONSOLIDATED GROUP RETURNS
2.1 Consent to File. Semiconductor hereby consents, on its behalf
and on behalf of every other member of the Semiconductor Subgroup, to the filing
of Consolidated Group Returns by C-Cube on behalf of the Affiliated Group, for
each Consolidated Return Year in which any member of the Semiconductor Subgroup
is included, and to any applications for extensions of time to file such Returns
which C-Cube in its sole judgment shall make to the IRS. Semiconductor hereby
consents, on its behalf and on behalf of every other member of the Semiconductor
Subgroup, to the filing of Combined Returns by C-Cube on behalf of the Unitary
Group in which any member of the Semiconductor Subgroup is included, and to any
applications for extensions of time to file such Returns which application
C-Cube in its sole judgment shall make to the applicable Taxing Authorities.
2.2 Responsibility for Preparing and Filing Returns for Periods
Commencing Prior to the Distribution Date. Semiconductor shall be entitled to
prepare and shall be responsible for the preparation of all Consolidated Group
Returns for the Affiliated Group, all Combined Returns for the Unitary Group,
and all C-Cube Separate Company Returns and Semiconductor
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Separate Company Returns for all the periods that commence prior to the
Distribution Date (including C-Cube Straddle Period Returns and Semiconductor
Straddle Period Returns), including but not limited to determining all Return
positions and making Tax elections relating to such Returns. Semiconductor shall
provide each such Return to C-Cube for its review at least 60 days prior to the
due date, including extensions, for filing such Return. C-Cube shall have the
right to review and approve those Returns provided that approval shall not be
unreasonably withheld. All Returns described in this Section 2.2 shall be filed
in accordance with the past practices consistently applied, provided that
Semiconductor shall provide C-Cube with reasonable notice of actions needed to
be taken by C-Cube in connection with such filing. Such Returns shall also be
prepared in a manner consistent with the final computation of Semi Spin Taxes
and Pre-Semi Disposition Taxes pursuant to Section 4.3. C-Cube and Semiconductor
agree to cooperate in connection with the filing of all Returns described in
this Section 2.2, including providing reasonably requested information and
taking the actions necessary to file such Returns. Semiconductor shall give to
C-Cube immediately upon request by C-Cube a copy of any Return that has been
prepared by Semiconductor. Notwithstanding the foregoing, Returns claiming the
Section 41 Credits shall be filed in accordance with Section 5.
2.3 Responsibility for Preparing and Filing Returns for Periods
Commencing After the Distribution Date. C-Cube shall be responsible for the
preparation and filing of C-Cube Separate Company Returns with respect to any
member of the C-Cube Subgroup, all Consolidated Group Returns for members of the
Affiliated Group, and all Combined Returns for the Unitary Group, in each case
for all periods commencing on or after the Distribution Date. Semiconductor
shall be responsible for the preparation and filing of Semiconductor Separate
Company Returns with respect to any member of the Semiconductor Subgroup for all
periods commencing on or after the Distribution Date. C-Cube shall provide to
Semiconductor portions of the Returns that are prepared by it pursuant to this
Section 2.3 and that relates to Taxes for which Semiconductor is or could be
liable under this Agreement at least 60 days prior to the anticipated filing
date of such Returns and Semiconductor shall have the right to approve those
portions of the Returns, provided that approval may not be unreasonably
withheld.
2.4 Further Action. Each of Semiconductor and C-Cube agrees, at
C-Cube's or Semiconductor's request, respectively, to furnish to the requesting
party and/or any Taxing Authority upon reasonable request any and all necessary
information (including but not limited to any Tax information relevant to
periods prior to the Public Distribution) and to execute all reasonably
requested elections and other documents which may be necessary or appropriate,
in the reasonable judgment of Semiconductor or C-Cube, to evidence
Semiconductor's or C-Cube's consent or to facilitate the preparing and filing of
such Returns and applications for extension of time to file the Returns
described in this Section 2. This obligation applies to Consolidated Group
Returns and Combined Returns that include any member of the Semiconductor
Subgroup even if such Return is filed after such member is no longer a member of
the Affiliated Group or the Unitary Group.
2.5 Amended Returns. Semiconductor shall have the right to prepare
and to cause C-Cube to file any amended Return or claim for refund prepared by
Semiconductor relating to any Return or portion thereof that Semiconductor has
the right to prepare under this Section 2, provided
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that no such amended Return shall be filed unless Semiconductor has paid to
C-Cube, on an After-Tax Basis, all costs (including Taxes and reasonable
out-of-pocket costs) that will be incurred by C-Cube in connection with or as a
result of the filing thereof; and, provided, further, that claims for refund of
Section 41 Credits may only be filed in accordance with Section 5. C-Cube shall
have the right to review and approve such amended Returns or claims for refund,
if any, provided that approval may not be unreasonably withheld. C-Cube agrees
to cooperate with Semiconductor in connection with the filing of any such
amended Returns or claims for refund, including providing reasonably requested
information and taking reasonably requested actions necessary to file such
Returns or claims for refund. C-Cube shall not have the right to file any
amended Return or claim for refund increasing the Taxes payable by Semiconductor
under this Agreement without the consent of Semiconductor (not to be
unreasonably withheld) or unless C-Cube reasonably determines that such Return
or claim is required by law to be filed or necessary in order to avoid any
material penalty amount with respect to which C-Cube is not indemnified by
Semiconductor under this Agreement.
3. ALLOCATION AND PAYMENT OF LIABILITIES FOR TAXES
3.1 Payment Responsibility.
(a) Taxes for Which Semiconductor is Liable.
(i)Consolidated Group Returns, Combined Returns and C-Cube
Separate Company Returns. Semiconductor shall be responsible for, and shall pay
on a timely basis and indemnify and hold C-Cube harmless on an After-Tax Basis
from and against, all Pre-Semi Disposition Taxes and all Semi Spin Taxes, and to
the extent such amounts are required to be reflected in any Consolidated Group
Return, Combined Return and C-Cube Separate Company Return, such amounts shall
be paid to C-Cube no later than three days prior to the time C-Cube is required
to pay such Taxes without penalty or interest.
(ii) Semiconductor Separate Company Returns. Semiconductor
shall be responsible for, and shall pay on a timely basis and indemnify and hold
C-Cube harmless on an After-Tax Basis from and against, all Taxes required to be
reflected in any Semiconductor Separate Company Return or Semiconductor Straddle
Period Return.
(iii) Allocation in the Case of C-Cube Straddle Period
Return. For purposes of Section 3.1(a)(i), in the event of a C-Cube Separate
Company Return that is a C-Cube Straddle Period Return, the amount of Taxes that
will be treated as Pre-Semi Disposition Taxes will be determined as if the
relevant taxable period ended on the close of the Distribution Date (except that
Taxes imposed on a basis other than net or gross income, receipts, sales,
payroll or the like shall be prorated on a daily basis).
(b) Taxes for Which C-Cube is Liable. Except as provided in
Section 3.1(a), C-Cube shall be responsible for, and shall pay on a timely basis
and indemnify and hold Semiconductor harmless on an After-Tax Basis, from and
against, (i) all Taxes required to be
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reflected in a C-Cube Separate Company Return, and (ii) except as provided in
Section 6.3, Pre-Semi Disposition Non-Semiconductor Taxes attributable to an
amended Return (other than an amended Return prepared by or at the request of
Semiconductor) or to an Adjustment.
3.2 Credit for Amounts Retained/Deficiencies in Amounts Retained.
Semiconductor's liability under Section 3.1(a) with respect to any Tax shall be
treated as having been paid to the extent of the amount set forth with respect
to such Tax on the Tax Retention Schedule and retained by C-Cube pursuant to
Section 4 hereof ("Tax Offset Amounts").
3.3 Refunds. To the extent any Tax for which Semiconductor or C-Cube
is liable pursuant to this Agreement or the Reorganization Agreement is
subsequently refunded or credited to the other party by a Taxing Authority,
other than as a result of or in connection with an Adjustment governed by
Section 6, the receiving party shall reimburse the responsible party no later
than three (3) days following the receipt of such refund of Tax or reduction in
Tax otherwise payable, after subtracting the aggregate additional Taxes (if any)
incurred or to be incurred by the party receiving the refund or credit as a
result of the receipt of that refund or credit and any other amounts due from
the other party pursuant to this Agreement. For purposes of this Section 3.3,
C-Cube shall be treated as the party liable pursuant to this Agreement and the
Reorganization Agreement for Pre-Semi Disposition Non-Semiconductor Taxes.
3.4 Separate Return Indemnity. C-Cube shall indemnify and hold
Semiconductor and the Semiconductor Subgroup harmless on an After-Tax Basis for
any Taxes of C-Cube or the C-Cube Subgroup attributable to any period (or
portion thereof) following the Distribution Date (other than any such Taxes that
are Pre-Semi Disposition Taxes or Semi Spin Taxes) and Semiconductor shall
indemnify and hold C-Cube and the C-Cube Subgroup harmless on an After-Tax Basis
for any Taxes relating to Semiconductor Separate Period Returns.
3.5 Interest. To the extent any amount is not paid by the due date
set forth in this Agreement, interest shall accrue on such unpaid amount at a
rate of [__] %.
4. RETENTION OF CASH BY C-CUBE; TAX LIABILITY CALCULATION.
4.1 Retention of Cash. Under the Reorganization Agreement, C-Cube is
to retain cash sufficient to pay Semi Spin Taxes and Pre-Semi Disposition Taxes.
This Section 4 sets forth the mechanisms for (i) determining the amount of the
cash to be retained by C-Cube to pay such Taxes, and (ii) adjustments to such
retained cash.
(a) Calculation of Amount Initially Retained to Pay Semi Spin
Taxes ("T").
T = r (A- B - C - D + E) - F
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Where:
r = C-Cube's estimated combined state and federal income tax rate. An
initial good-faith written estimate of r shall be communicated to Harmonic by
C-Cube no later than [10] days after the date on which the proxy materials
relating to the Merger and Distribution have been mailed to Harmonic and C-Cube
stockholders, as appropriate (the "Mailing Date"). Harmonic may comment up to
[20] days after the Mailing Date (or, if later, 10 days following receipt of
such written estimate from C-Cube), and C-Cube agrees to give careful
consideration to Harmonic's comments. In the event of a disagreement between
C-Cube and Harmonic, the provisions of Section 4.1(e) shall apply.
A = the total implied market capitalization of Semiconductor on the
Distribution Date, which shall equal the number of shares of Semiconductor's
common stock to be distributed in the Public Distribution multiplied by the
closing trading price of Semiconductor's common stock (which will be trading on
a "when issued" basis) at 4:00 PM (the close of trading) on the third trading
day before the Distribution Date; provided, however, that the closing trading
price of the Semiconductor common stock on a date closer to the Distribution
Date shall be used if practicable (the "Initial Stock Price").
B = the estimated tax basis of the Semiconductor stock immediately prior
to the Public Distribution, which basis shall include, pursuant to Regulations
Section 1.1502-32(b)(3)(iv)(D), an estimate of the Section 41 Credits to be
received from C-Cube pursuant to Section 5. An initial good-faith estimate of
the value of B shall be communicated to Harmonic by C-Cube no later than [10]
days after the the Mailing Date. Harmonic may comment up to [20] days after the
the Mailing Date (or, if later, 10 days following receipt of such written
estimate from C-Cube), and C-Cube agrees to give careful consideration to
Harmonic's comments. In the event of a disagreement between C-Cube and Harmonic,
the provisions of Section 4.1(e) shall apply.
C = the estimated deductions attributable to the exercise of C-Cube
compensatory stock options exercised on or after October 27, 1999, and on or
before the record date for the Public Distribution (the "Exercise Period"),
based on C-Cube's option exercise records and assuming that "disqualifying
dispositions" occur with respect to 80% of all C-Cube stock acquired pursuant to
the exercise of C-Cube options that are "incentive stock options" under Section
422 of the Code, and provided that no deductions that offset Pre-Semi
Disposition Taxes shall be included in the calculation of C (it being the
intention of the parties that such deductions shall not factor into the
computations of Pre-Semi Disposition Taxes). To the extent that, as of the date
of determination of C, there are actual disqualifying dispositions of shares of
C-Cube stock that were acquired pursuant to the exercise of C-Cube "incentive
stock options" during the Exercise Period, and C-Cube has knowledge of the
actual amount realized from the disposition, the value of C shall be determined
by using the actual sales price of the stock for purposes of applying Section
422(c)(2) of the Code. Except as provided in the immediately preceding sentence,
the portion of the value of C attributable to the deemed disqualifying
disposition of shares acquired pursuant to the exercise of incentive stock
options shall be determined by assuming that the amount realized from the sale
is equal to the fair market value of the stock received upon exercise. An
initial good-faith written estimate of the value of C shall be communicated to
Harmonic by C-Cube no later than [10] days after the Mailing Date.
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Harmonic may comment up to [20] days after the Mailing Date (or, if later, 10
days following receipt of such written estimate from C-Cube), and C-Cube agrees
to give careful consideration to Harmonic's comments. In the event of a
disagreement between C-Cube and Harmonic, the provisions of Section 4.1(e) shall
apply. C-Cube shall provide Harmonic with a revised written good-faith estimate
of C no later than 5 PM, Pacific Time, on the date that is three (3) business
days before the scheduled Distribution Date. Harmonic may comment up to 24 hours
following receipt of such revised estimate, and C-Cube agrees to give careful
consideration to Harmonic's comments. In the event of a disagreement between
C-Cube and Harmonic, the provisions of Section 4.1(e) shall apply.
D = the estimated capitalized expenses, plus the estimated deductible
expenses (other than those covered or included in B and C), attributable to the
Separation and the Public Distribution that will reduce the amount of gain to be
recognized by C-Cube as a result of the Public Distribution, and provided that
no amounts that offset Pre-Semi Disposition Taxes shall be included in the
calculation of D (it being the intention of the parties that such deductions
shall not factor into the computation of Pre-Semi Disposition Taxes). An initial
good-faith estimate of D shall be communicated to Harmonic by C-Cube no later
than [10] days after the Mailing Date. Harmonic may comment up to [20] days
after the Mailing Date (or, if later, 10 days following receipt of such estimate
from C-Cube), and C-Cube agrees to give careful consideration to Harmonic's
comments. In the event of a disagreement between C-Cube and Harmonic, the
provisions of Section 4.1(e) shall apply.
E = the taxable income arising from transfers of assets and other
transactions undertaken by C-Cube and its subsidiaries outside of the ordinary
course of business of C-Cube prior to and in contemplation of the Public
Distribution, including all such amounts arising from the internal restructuring
undertaken in connection with the Separation and Public Distribution but not
including taxable income, if any, arising from the merger of Divicom into
C-Cube, which taxable income, if any, shall be taken into account in determining
Pre-Semi Disposition Taxes to the extent provided elsewhere in this Agreement.
An initial good-faith estimate of E shall be communicated to Harmonic by C-Cube
no later than [10] days after the Mailing Date. Harmonic may comment up to [20]
days after the Mailing Date (or if later, 10 days following receipt of such
estimate from C-Cube), and C-Cube agrees to give careful consideration to
Harmonic's comments. In the event of a disagreement between C-Cube and Harmonic,
the provisions of Section 4.1(e) shall apply.
F = any tax credits of the Affiliated Group attributable to periods (or
portions of periods) prior to the Distribution Date (but not including Section
41 Credits covered in Section 5) and estimated tax payments paid by C-Cube prior
to the Distribution Date which did not offset Pre-Semi Disposition Taxes (with
such credits and estimated tax payments applied first to Pre-Semi Disposition
Taxes). An initial estimate of F shall be communicated to Harmonic by C-Cube no
later [10] days after the Mailing Date. Harmonic may comment up to [20] days
after the Mailing Date (or, if later, 10 days following receipt of such estimate
from C-Cube), and C-Cube agrees to give careful consideration to Harmonic's
comments. In the event of a disagreement between C-Cube and Harmonic, the
provisions of Section 4.1(e) shall apply.
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(b) Calculation of Amount Retained to Pay Pre-Semi Disposition
Taxes. C-Cube shall provide Harmonic with an initial good-faith written estimate
of the Pre-Semi Disposition Taxes no later than [10] days after the Mailing
Date. Harmonic may comment up to [20] days after the Mailing Date (or, if later,
10 days following receipt of such written estimate from C-Cube), and C-Cube
agrees to give careful consideration to Harmonic's comments. In the event of a
disagreement between C-Cube and Harmonic, the provisions of Section 4.1(e) shall
apply.
(c) Pursuant to Section 2.2 of the Separation Agreement, C-Cube
shall certify the amount of its cash reserve to Harmonic prior to the merger of
C-Cube and Harmonic, which schedule shall include a breakdown of the amount
retained for Pre-Semi Disposition Taxes, Semi Spin Taxes, and Pre-Semi
Disposition Non-Semiconductor Taxes (in each case on a Tax-by-Tax basis) (the
"Tax Retention Schedule").
(d) All interest earned by C-Cube on the Retained Cash from the
Distribution Date to the date the underlying Taxes are paid or (if applicable)
returned to Semiconductor, after subtraction of the aggregate additional Taxes
incurred or to be incurred by C-Cube (if any) as a result of interest received
or accrued with respect to the Retained Cash, shall be paid to Semiconductor.
(e) It is the intent of the parties that, at least 10 days prior
to the scheduled Distribution Date, the parties shall have agreed on the amount
of Retained Cash, including all amounts that are included in the computation of
Retained Cash other than the Initial Stock Price but computed using a nonbinding
estimate for the Initial Stock Price. If C-Cube and Harmonic fail to reach an
agreement by such time, either party shall be entitled to submit the matter to a
mutually acceptable arbitrator, provided that such arbitrator and its affiliates
shall not have had C-Cube, Harmonic or any affiliate thereof as a client within
two years of such time (and neither party reasonably objects to the independence
of such arbitrator on other grounds). If C-Cube and Harmonic are unable to
mutually agree upon an arbitrator within one week of a party's notification to
the other party of its desire to arbitrate such a dispute, then each party shall
select an arbitrator and such two arbitrators shall have one week to select a
third arbitrator who shall have final authority to resolve such dispute within
ten (10) days of such arbitrator's selection. C-Cube and Harmonic shall share
equally in the fees and expenses of such arbitrators. The determination by such
arbitrator shall be final and binding on the parties for purposes of applying
this Section 4.1, absent fraud or manifest error. Pursuant to Section 3.2(e) of
the Separation Agreement, the final determination of Retained Cash pursuant to
this Section 4.1 shall be a condition to the Distribution.
4.2 Interim Recalculation of Taxes and True-Up.
(a) Semi Spin Taxes.
(i) No later than twenty (20) days after the Public
Distribution, Semiconductor shall deliver to Harmonic a written recalculation of
the Semi Spin Taxes using the equation described in Section 4.1 above, and
submit the recalculation to weighted-average price Harmonic for review. In such
recalculation, Semiconductor shall use the weighted average price of
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Semiconductor stock on the date on which Semiconductor Stock first trades
publicly (not including trading on a "when issued" basis), which the parties
anticipate will be the trading date immediately following the Distribution Date,
in lieu of the Initial Stock Price in the computation of A. In addition,
Semiconductor shall use the actual tax rate for each jurisdiction in which
C-Cube files a Return, actual tax basis, actual option deductions and actual
other capitalized and deductible expenses , and other actual amounts, each to
the extent available at such time, in calculating variables r, B, C, D, E and F,
respectively, in lieu of the estimates set forth above. Notwithstanding the
foregoing, in the event Semiconductor does not deliver such recalculation to
Harmonic within such time period, Harmonic shall have the right, but not the
obligation, to prepare such calculations and deliver the same to Semiconductor,
in which case references to Harmonic and Semiconductor in clause (ii) below
shall be read to refer to Semiconductor and Harmonic, respectively.
(ii) In the event that Harmonic disagrees with Semiconductor
as to the recalculation of the Semi Spin Taxes as provided in (i), Harmonic
shall notify Semiconductor no more than 20 days after Semiconductor submits its
recalculation to Harmonic. Semiconductor and Harmonic shall then discuss the
computation of the Semi Spin Taxes in a good faith effort to reach an agreement
as to the amount of the Semi Spin Taxes.
(iii) If Semiconductor and Harmonic fail to reach an
agreement by the day which is 60 days after the Distribution Date, either party
shall be entitled to submit the matter to a mutually acceptable third-party
arbitrator. If the parties are unable to mutually agree upon an arbitrator
within one week of a party's notification to the other party of its desire to
arbitrate such a dispute, then each party shall have one week to select an
arbitrator and such two arbitrators shall have one week to select a third
arbitrator who shall have final authority to resolve such dispute within twenty
(20) days of such arbitrator's selection. Semiconductor and Harmonic shall share
equally in the fees and expenses of such arbitrators.
(iv) If the recalculated Semi Spin Taxes (after completion
of any discussion or arbitration regarding said recalculation) exceed the
related Tax Offset Amounts, Semiconductor shall pay Harmonic such excess within
three (3) days of the completion of any discussion or arbitration regarding said
recalculation. If the recalculated Semi Spin Taxes (after completion of any
discussion or arbitration regarding said recalculation) are less than the
related Tax Offset Amounts, Harmonic shall pay Semiconductor such difference
within three (3) days of the completion of any discussion or arbitration
regarding said recalculation. Any such payments shall be reflected appropriately
on the Tax Retention Schedule.
(b) Basis Adjustment. Unless otherwise determined by the
third-party arbitrator in accordance with this Section 4.2, or unless otherwise
required pursuant to the terms of any Final Determination, payments made by
Harmonic to Semiconductor under this Section 4.2 shall be treated as an increase
in the basis of Semiconductor stock, for purposes of calculating Semi Spin
Taxes. Payments made by Semiconductor to Harmonic under this Section 4.2 shall
be treated as a decrease in the basis of Semiconductor stock for purposes of
calculating Semi Spin Taxes.
4.3 Recalculation of Semi Spin Taxes and Pre-Semi Disposition Taxes.
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(a) In connection with the preparation of the Returns for which
it is responsible under Sections 2.2 and 2.3 hereof, Semiconductor shall prepare
a final calculation of Semi Spin Taxes and Pre-Semi Disposition Taxes, based on
actual figures available for such taxable periods. Semiconductor shall submit
such written calculation to Harmonic no later than sixty (60) days prior to
filing the relevant Return with respect to the Tax involved, provided that
failure to deliver such calculation by such time shall not affect
Semiconductor's liability hereunder (but shall be taken into account in
determining whether Semiconductor owes any interest or penalties).
Notwithstanding the foregoing, in the event Semiconductor does not deliver such
final calculation to Harmonic within such time period, Harmonic shall have the
right, but not the obligation, to prepare such calculations and deliver the same
to Semiconductor, in which case references to Harmonic and Semiconductor in
subSection (b) below shall be read refer to Semiconductor and Harmonic,
respectively.
(b) Harmonic shall have twenty (20) days after receiving such
written calculation to review the calculation. In the event that Harmonic
disagrees with Semiconductor as to the amount of the Semi Spin Taxes or Pre-Semi
Disposition Taxes to which such calculation relates, Harmonic shall notify
Semiconductor no more than 20 days after Semiconductor submits such
recalculation to Harmonic. Semiconductor and Harmonic shall then discuss the
computation of the Semi Spin Taxes and Pre-Semi Disposition Taxes in a good
faith effort to reach an agreement as to the amount of the Semi Spin Taxes and
Pre-Semi Disposition Taxes.
(c) If Semiconductor and Harmonic fail to reach an agreement by
the day which is 60 days after the date Semiconductor provided its calculations
to Harmonic, either party shall be entitled to submit the matter to a mutually
acceptable third-party arbitrator. If the parties are unable to mutually agree
upon an arbitrator within one week of a party's notification to the other party
of its desire to arbitrate such a dispute, then each party shall have one week
to select an arbitrator and such two arbitrators shall have one week to select a
third arbitrator who shall have final authority to resolve such dispute within
twenty (20) days of such arbitrator's selection. Semiconductor and Harmonic
shall share equally in the fees and expenses of such arbitrators.
(d) If the recalculated Semi Spin Taxes and Pre-Semi Disposition
Taxes (after completion of any discussion or arbitration regarding said
recalculation) exceed the related Tax Offset Amounts (adjusted for amounts paid
pursuant to Sections 3.1(a) and 4.2), Semiconductor shall pay Harmonic such
excess within three (3) days of the completion of any discussion or arbitration
regarding said recalculation. If the recalculated Semi Spin Taxes and Pre-Semi
Disposition Taxes (after completion of any discussion or arbitration regarding
said recalculation) are less than the related Tax Offset Amounts (adjusted for
amounts paid pursuant to Sections 3.1(a) and 4.2), Harmonic shall pay
Semiconductor such difference within three (3) days of the completion of any
discussion or arbitration regarding said recalculation.
(e) Basis Adjustment. Unless otherwise determined by the
third-party arbitrator in accordance with this Section 4.3, or unless otherwise
required pursuant to the terms of any Final Determination, payments made by
Harmonic to Semiconductor under this Section 4.3 shall be treated as an increase
in the basis of Semiconductor stock, for purposes of calculating Semi Spin
-15-
<PAGE> 16
Taxes. Unless otherwise required pursuant to the terms of any Final
Determination, payments made by Semiconductor to Harmonic under this Section 4.3
shall be treated as a decrease in the basis of Semiconductor stock for purposes
of calculating Semi Spin Taxes.
4.4 Liability for the Divicom Merger Taxes. The liability for state
and local Taxes of Harmonic or the C-Cube Subgroup that would not have been
incurred but for the merger of Divicom into C-Cube shall be allocated by the
mutual agreement of the parties in accordance with Schedule 4.4, provided,
however, that the liability for the Divicom Merger Taxes shall be allocated as
provided elsewhere in this Agreement. Nothing in this Section 4 shall be deemed
to limit a party's liability under Section 3 or Section 6 hereof.
5. SECTION 41 RESEARCH CREDITS
In accordance with Section 502 of the Ticket to Work and Work Incentives
Improvement Act of 1999, Semiconductor shall prepare and submit to C-Cube U.S.
Federal Income Tax Returns on or after October 1, 2000, which Returns will
reflect claims for refund of all Section 41 research credits attributable to the
period commencing on July 1, 1999, and ending on the Distribution Date (the
"Section 41 Credits"). Harmonic shall review such Returns and have the right to
approve such Returns, provided that approval may not be unreasonably withheld.
If Harmonic approves of such Returns, Harmonic shall file such Returns within a
reasonable period after receiving such Returns from Semiconductor (but in no
event earlier than October 1, 2000). In the event of a disagreement regarding
such Returns, procedures similar to those described in Section 4.3(c) shall
apply. C-Cube shall pay to Semiconductor the portion of the refund of such
credits actually received to the extent such credits are attributable to the
period commencing on July 1, 1999, and ending on the Distribution Date, less any
Pre-Semi Disposition Non-Semiconductor Tax Deficiency.
6. DISPUTES WITH TAXING AUTHORITIES
6.1 Tax Contests.
(a) Subject to Section 6.1(b), in the event of a Tax Contest
concerning the amount of any Tax liability for which Semiconductor is or could
be liable pursuant to this Agreement or refund due to or in respect of such Tax
liability (including but not limited to the Semi Spin Taxes), C-Cube hereby
expressly grants to Semiconductor the authority to act on behalf of C-Cube and
the Affiliated Group in matters related to such Tax liability. Subject to
Section 6.1(b), the parties hereby expressly appoint (subject to the consent of
the relevant Taxing Authority) Semiconductor to act as agent for the Affiliated
Group in any Tax Contest related to such Tax liability. Following receipt from
Harmonic of notice of the existence of such a Tax Contest and subject to Section
6.1(b), Semiconductor shall have the responsibility with respect to any such Tax
Contest and shall handle such Tax Contest in a prudent and diligent manner;
provided, however, that
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<PAGE> 17
Harmonic shall be given copies of all correspondence with the relevant Taxing
Authority promptly upon receipt or transmission of such correspondence, and
shall receive reasonable advance notice of and opportunity to participate in, at
its sole cost and expense, all meetings and proceedings pertaining to such Tax
Contest, and shall be consulted prior to the making or accepting (tentatively or
otherwise) of any offers to settle such Tax Contest. No decision to pursue,
settle, or appeal any Tax Contest, Group Refund Claim or other claim for refund
of Tax related shall be made by Semiconductor without the prior written approval
of C-Cube, which consent shall not be unreasonably withheld. Notwithstanding the
foregoing, until such time as C-Cube receives notice that the Taxing Authority
intends to raise issues with respect to which Semiconductor could have liability
hereunder, C-Cube shall be entitled to deal directly with such Taxing Authority.
Semiconductor and C-Cube shall each bear their own costs (including attorneys
and accountants fees) in carrying out their responsibilities under this Section
6.1(a).
(b) Semiconductor shall, as a condition to exercising its
authority under Section 6.1(a) above, acknowledge in a writing reasonably
satisfactory to C-Cube its obligation to indemnify C-Cube on an After-Tax Basis
for any Tax liability arising from such Tax Contest and for which Semiconductor
is liable under this Agreement. Harmonic shall have the right to assume the
defense of any Tax Contest described in Section 6.1(a) in the event it
reasonably determines that cause exists for doing so, and Semiconductor shall
reimburse Harmonic for all reasonable out of pocket costs in assuming such
defense. Cause shall be deemed to exist if (i) Harmonic reasonably determines
that its interests would be jeopardized by a failure of Semiconductor to
adequately defend a Tax Contest in a prudent and diligent manner (including by
failure to make the acknowledgment in the first sentence of this Section
6.1(b)), (ii) Harmonic gives written notice of its determination, and (iii)
Semiconductor fails to act within 10 days of such notice to cure the defect
cited by Harmonic in such notice; provided, however, that clauses (ii) and (iii)
shall not apply if and to the extent that Harmonic reasonably determines that
providing such notice and awaiting Semiconductor's response would materially
jeopardize Harmonic's interests. In the event Harmonic has assumed the defense
of a Tax Contest for cause, Semiconductor shall reassume the defense of such Tax
Contest upon providing proof reasonably satisfactory to Harmonic that it shall
adequately defend such Tax Contest and payment to Harmonic of all reasonable
costs incurred in assuming such defense and defending such Tax Contest in the
interim; provided, however, that Semiconductor shall be given no more than one
opportunity to reassume the defense of any Tax Contest during any twelve-month
period.
6.2 Agreement to Cooperate. Each of C-Cube and Semiconductor agrees
to cooperate and cause their affiliates to cooperate fully and in a timely
manner in connection with the preparation of Returns, the pursuit of any Group
Refund Claim or other claim for refund of Taxes or the conduct of any Tax
Contest. The parties will bear their own expenses in connection with such
cooperation except as otherwise provided herein. This agreement to cooperate
extends beyond the date after which Semiconductor is no longer a member of the
Affiliated Group.
6.3 Adjustments.
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<PAGE> 18
(a) In the event there is a C-Cube Tax Adjustment, Semiconductor
Tax Adjustment, C-Cube Tax Benefit, or Semiconductor Tax Benefit:
(i)Semiconductor shall be liable for, and shall indemnify
and hold the C-Cube Subgroup harmless on an After-Tax Basis, against any and all
Semiconductor Tax Adjustments (and any reasonable fees and other out-of-pocket
costs incurred by C-Cube in connection with such Semiconductor Tax Adjustments);
(ii) Subject to Section 6.3(d), Semiconductor shall be
entitled to any Semiconductor Tax Benefits on an After-Tax Basis;
(iii) Subject to Section 6.3(d), C-Cube shall be liable for,
and shall indemnify and hold Semiconductor harmless, on an After-Tax Basis
against any and all C-Cube Tax Adjustments (and any reasonable fees and other
out-of pocket costs incurred by Semiconductor in connection with such
Semiconductor Tax Adjustments); and
(iv) C-Cube shall be entitled to receive on an After-Tax
Basis the amount of any C-Cube Tax Benefits.
(b) C-Cube and Semiconductor shall share the amount of any Tax
Adjustment if, and to the extent, each party is liable for and/or has an
obligation to make, or has the right to receive, as the case may be, an
indemnity payment, or other payment with respect to such Tax Adjustment under
Section 6.3(a), in proportion to the amounts of the underlying Adjustments
giving rise to such Tax Adjustment attributable to the C-Cube Subgroup
(excluding for this purpose the Semiconductor Business) and the Semiconductor
Subgroup (including for this purpose the Semiconductor Business), respectively.
(c) Indemnity payments required by Section 6.3(a) and 6.3(b)
shall be paid within 30 days of the date of such Final Determination provided
that all payments shall include interest at the statutory underpayment rate (if
applicable) through the date of payment by the party obligated hereunder. Each
party shall provide the other with prompt written notice of each such Final
Determination.
(d) Notwithstanding anything herein to the contrary, C-Cube
shall have the right to receive from Semiconductor on an After-Tax Basis the
amount of any Section 41 Credits theretofore paid to Semi in accordance with
Section 5 hereof to the extent of any Pre-Semi Disposition Non-Semiconductor Tax
Deficiency, regardless of whether such deficiency arises from an Adjustment.
Such amount shall be paid to C-Cube no later than five (5) days following notice
from C-Cube that such Pre-Semi Disposition Non-Semiconductor Tax Deficiency has
been paid or incurred. Any amount not paid by Semi when due shall bear interest
at the rate provided in Section 3.5.
6.4 State Sales Tax Responsibilities. Schedule A hereto sets forth a
list of states to which C-Cube has made commitments relating to sales taxes,
including but not limited to commitments to register to do business, and the
nature of such commitments with each of those states. Harmonic shall assume
C-Cube's responsibilities and commitments in connection with
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<PAGE> 19
ongoing discussions with state sales tax authorities to the extent set forth on
Schedule A, subject to Semiconductor's obligations to indemnify C-Cube hereunder
for all Pre-Semi Disposition Taxes and Semi Spin Taxes. Harmonic agrees to
register to do business in those states where C-Cube has committed to register
to do business, as set forth on Schedule A.
7. TAX ATTRIBUTE CARRYOVERS
7.1 Carryforward Tax Attributes. C-Cube and Semiconductor shall
reasonably cooperate to allocate Carryover Tax Attributes among the members of
the C-Cube Subgroup and the Semiconductor Subgroup in a manner that enables such
members to succeed to such attributes attributable to C-Cube (other than the
Semiconductor Business) and the Semiconductor Business, respectively; provided,
however, that any such attribute that may not be so allocated under applicable
law shall remain the property of the member entitled to such attribute under
applicable law, and there shall be no obligation of such member or its
affiliates to compensate any other member for the use of such Carryforward Tax
Attribute.
7.2 Carryback Items from Separate Return Tax Periods. With respect
to carrybacks of Semiconductor or net operating losses, net capital losses,
unused tax credits and other deductible or creditable Tax attributes to a
Consolidated Period from a Separate Return Period which would be permitted under
the Code and the Regulations (or state law or state regulations), Semiconductor
shall make an irrevocable election under Regulations Section 1.1502-21(b)(3)(i)
(or comparable state law or state regulations), to relinquish any carryback
period which would include the Consolidated Period. In cases where Semiconductor
cannot relinquish the carryback period (other than by reason of Semiconductor
failing to make such irrevocable election) or, if the parties otherwise agree,
C-Cube shall cooperate with Semiconductor in seeking Tax refunds from the
appropriate Taxing Authority, at Semiconductor's expense, and Semiconductor
shall be entitled to such refund on an After-Tax Basis, including interest paid
by the Taxing Authority in connection with such refund, less any reasonable out
of pocket costs incurred by C-Cube in connection with such refund; provided
however, that Semiconductor shall indemnify and hold C-Cube harmless from and
against any and all collateral Tax consequences resulting from or caused by the
carryback of deductible or creditable Tax attributes by Semiconductor from a
Separate Return Period to a Consolidated Period, including but not limited to,
Tax attributes of C-Cube that expire unused (including Tax attributes that
expire during a Tax period subsequent to the Tax period during which the
Semiconductor Tax attribute carried back was generated or taxes paid that are no
longer available for refund) and which would have been used but for
Semiconductor's carryback. The amount of such indemnity shall be limited to the
actual Tax benefits to which C-Cube would have been entitled in the absence of
the carryback of the deductible or creditable Tax attribute of Semiconductor,
plus interest at the rate of [__] % from the date any additional tax cost or
lost benefit was incurred by C-Cube. Semiconductor shall have the right to
review the collateral Tax consequences being indemnified. The amount of the
refund due to Semiconductor from C-Cube shall be reduced and offset by the
amount of the indemnification, if any, to which C-Cube is entitled.
8. RECORDS
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<PAGE> 20
8.1 Retention by C-Cube. C-Cube shall, until the end of the
applicable statute of limitations for each Tax year (giving effect to any
extensions thereof), retain all material, including but not limited to, returns,
supporting schedules, workpapers, correspondence, and other documents relating
to the Affiliated Group and the Unitary Group in which any member of the
Semiconductor Subgroup was a member, to the extent such materials are in
C-Cube's possession and transferred to Harmonic in the Merger, and shall make
such items available to Semiconductor for inspection or copying (at
Semiconductor's expense) during C-Cube's regular business hours.
8.2 Retention by Semiconductor. Semiconductor shall, until the end
of the applicable statute of limitations for each Tax year (giving effect to any
extensions thereof), retain all material, supporting schedules, workpapers,
correspondence, and other documents relating to the Affiliated Group and any
Unitary Group and shall make such items available to C-Cube for inspection or
copying (at C-Cube's expense) during Semiconductor's regular business hours.
9. TERM AND TERMINATION
9.1 Term. This Agreement shall be effective as of the date hereof
and shall apply to and govern all subsequent Taxable periods, unless the parties
hereto each agree in writing to terminate this Agreement. Notwithstanding any
such termination, this Agreement shall continue in effect with respect to any
payment due from one party to the other with respect to any Taxable period
occurring prior to the effective date of the termination of this Agreement.
10. MISCELLANEOUS
10.1 Except as otherwise provided in this Agreement, in no event
shall any member of the C-Cube Group or the Semiconductor Group be liable to any
other member of the C-Cube Group or the Semiconductor Group for any special,
consequential, indirect, incidental or punitive damages or lost profits, however
caused and on any theory of liability (including negligence) arising in any way
out of this Agreement, whether or not such party has been advised of the
possibility of such damages.
10.2 Entire Agreement. This Agreement, the Restated Merger
Agreement, the other Ancillary Agreements and the Exhibits and Schedules
referenced or attached hereto and thereto, constitute the entire agreement
between the parties with respect to the subject matter hereof and shall
supersede all prior written and oral and all contemporaneous oral agreements and
understandings with respect to the subject matter hereof. In the event any
provision of any agreement conflicts with a provision of the Restated Merger
Agreement or any other Ancillary Agreement, this Agreement will govern.
10.3 Governing Law. This Agreement shall be governed and construed
and enforced in accordance with the laws of the State of Delaware as to all
matters regardless of the laws that might otherwise govern under the principles
of conflicts of laws applicable thereto.
10.4 Assignment; Binding Upon Successors and Assigns. This Agreement
shall inure to the benefit of and be binding upon the parties hereto and their
respective legal
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<PAGE> 21
representatives and successors, and nothing in this Agreement, express or
implied, is intended to confer upon any other Person any rights or remedies of
any nature whatsoever under or by reason of this Agreement. This Agreement may
not be assigned by any party hereto. Any member corporation which leaves the
Affiliated Group shall be bound by this Agreement.
10.5 Severability. If any term or other provision of this Agreement
is determined by a nonappealable decision by a court, administrative agency or
arbitrator to be invalid, illegal or incapable of being enforced by any rule of
law or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated hereby is not affected in any
manner materially adverse to either party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in an
acceptable manner to the end that transactions contemplated hereby are fulfilled
to the fullest extent possible.
10.6 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original but all of which shall
constitute one and the same agreement.
10.7 Failure or Indulgence Not Waiver; Remedies Cumulative. No
failure or delay on the part of either party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement herein,
nor shall any single or partial exercise of any such right preclude other or
further exercise thereof or of any other right. All rights and remedies existing
under this Agreement are cumulative to, and not exclusive of, any rights or
remedies otherwise available.
10.8 Amendment and Waivers. No change or amendment will be made to
this Agreement and no waiver will be made under this Agreement except by an
instrument in writing signed on behalf of each of the parties to such agreement.
10.9 Expenses. Unless otherwise provided, all fees and expenses
incurred in connection with this Agreement will be paid by the party incurring
such fees or expenses.
10.10 Dispute Resolution. In the event of any dispute arising under
this Agreement, the dispute resolution procedure provided for such dispute in
this Agreement, if any, shall control. If no dispute resolution procedure is
provided for such dispute, the dispute resolution provisions of Section 4.6 of
the Separation Agreement shall control.
10.11 Notices. Any notice, demand, offer, request or other
communication required or permitted to be given by either party pursuant to the
terms of this Agreement shall be in writing and shall be deemed effectively
given the earlier of (i) when received, (ii) when delivered personally, (iii)
one (1) business day after being delivered by facsimile (with receipt of
appropriate confirmation), (iv) one (1) business day after being deposited with
an overnight courier service or (v) four (4) days after being deposited in the
U.S. mail, First Class with postage prepaid, and
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<PAGE> 22
addressed to the attention of the party's General Counsel at the address of its
principal executive office or such other address as a party may request by
notifying the other in writing.
10.12 Construction of Agreement. A reference to a Section will mean
a Section in this Agreement unless otherwise explicitly set forth. The titles
and headings herein are for reference purposes only and will not in any manner
limit the construction of this Agreement which will be considered as a whole.
10.13 Jurisdiction and Venue. The parties hereto irrevocably consent
to and agree that any litigation or other dispute resolution proceeding among
the parties relating to this Agreement will take place in Santa Clara County,
California. The parties hereby irrevocably consent to the personal jurisdiction
or and the venue in the state and federal court within such county.
10.14 Further Assurances. Each party agrees to cooperate fully with
the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances as may be reasonably
requested by any other party to evidence and reflect the transactions
contemplated hereby and to carry into effect the intents and purposes of this
Agreement.
10.15 Intention of the Parties. It is the intention of the parties
that Semiconductor shall make C-Cube whole, on an After-Tax Basis, for (i) any
Pre-Semi Disposition Taxes, (ii) Semi Spin Taxes, (iii) any increase in those
Taxes as a result of Adjustments, except for any Adjustments with respect to
Pre-Semi Disposition Non-Semiconductor Taxes (other than as provided in Section
6.3). It is also the intention of the parties to avoid double payment,
double-crediting or other double-counting of any items (including items set
forth in Section 4) which would result in an inequitable and unintended benefit
to one party or parties to the detriment of the other party or parties. The
parties agree that the provisions of this Agreement shall be interpreted in
accordance with the intent stated in this paragraph, and if there are other
issues not addressed by this Agreement, the parties agree to pay to each other
such other amounts as are consistent with the intent stated in this paragraph.
10.16 References to and Obligations of C-Cube. The parties agree
that Semiconductor shall indemnify and hold Harmonic harmless from and against
any breach of this Agreement by C-Cube prior to the Merger (or after the Merger
if such breach is a result of actions or inaction of C-Cube or Semiconductor
prior to the Merger), and that following the Merger, references in this
Agreement shall be deemed where appropriate, including where consistent with
Semiconductor's obligation to indemnify C-Cube as specified in this Agreement,
to constitute references to Harmonic as the successor to C-Cube.
10.17 Semiconductor Authorization. Semiconductor hereby represents
and warrants that it has received the necessary authorization to execute this
Agreement on behalf of itself and its subsidiaries, including all members of the
Semiconductor Subgroup.
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<PAGE> 23
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers.
C-CUBE MICROSYSTEMS INC. C-CUBE SEMICONDUCTOR INC.
ON ITS OWN BEHALF AND ON BEHALF THE
C-CUBE SUBGROUP
By: By:
---------------------------------- ---------------------------------
Name: Name:
-------------------------------- -------------------------------
Title: Title:
------------------------------- ------------------------------
HAROMONIC INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
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SCHEDULE 4.4
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SCHEDULE A TO TAX SHARING AGREEMENT
BY AND AMONG C-CUBE, SEMICONDUCTOR, AND HARMONIC
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
STATE/LOCALITY SALES TAX REGISTRATION REQUIREMENTS AGREEMENTS RELATING
TO SALES TAXES (NONE UNLESS NOTED)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Arizona Negotiated agreement with respect to
past taxes with commitment to file
Registration required in all listed states. returns for 8-year future period.
- --------------------- ----------------------------------------
California
- --------------------- ----------------------------------------
Colorado
- --------------------- ----------------------------------------
Colorado (Boulder)
- --------------------- ----------------------------------------
Florida Negotiated agreement with respect to past
taxes with commitment to file returns for
8-year future period.
- --------------------- ----------------------------------------
Georgia Negotiated agreement with respect to past
taxes with indefinite commitment to file
future returns.
- --------------------- ----------------------------------------
Hawaii Negotiated agreement with respect to past
taxes with commitment to file returns for
8-year future period.
- --------------------- ----------------------------------------
Illinois Negotiated agreement with respect to past
taxes with indefinite commitment to file
future returns.
- --------------------- ----------------------------------------
Louisiana
- --------------------- ----------------------------------------
Maryland Negotiated agreement with respect to past
taxes with commitment to file returns for
8-year future period.
- --------------------- ----------------------------------------
Massachusetts Negotiated agreement with respect to past
taxes with commitment to file returns for
8-year future period.
- --------------------- ----------------------------------------
Minnesota
- --------------------- ----------------------------------------
Nevada
- --------------------- ----------------------------------------
New Jersey
- --------------------- ----------------------------------------
New Mexico
- --------------------- ----------------------------------------
New York Negotiated agreement with respect to
past taxes with indefinite commitment to
file future returns.
- --------------------- ----------------------------------------
North Carolina Negotiated agreement with respect
to past taxes with commitment to file
returns for 8-year future period.
- --------------------- ----------------------------------------
Pennsylvania Negotiated agreement with respect to past
taxes with indefinite commitment to file
future returns.
- --------------------- ----------------------------------------
Rhode Island
- --------------------- ----------------------------------------
Texas Negotiated agreement with respect to past
taxes with commitment to file returns for
8-year future period.
- --------------------- ----------------------------------------
Virginia
- --------------------- ----------------------------------------
Washington
- --------------------- ----------------------------------------
Wyoming Verbal commitment to file in the future.
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 1
EXHIBIT 10.3
FORM OF
GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT
AMONG
C-CUBE MICROSYSTEMS INC.,
C-CUBE SEMICONDUCTOR INC.
AND
C-CUBE SEMICONDUCTOR II INC.
__________ ____, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I CONTRIBUTION AND ASSUMPTION.................................................1
Section 1.1 Contribution of Assets and Assumption of Liabilities.............1
Section 1.2 Semiconductor Assets.............................................2
Section 1.3 Semiconductor Liabilities........................................5
Section 1.4 Methods of Transfer and Assumption...............................7
Section 1.5 Governmental Approvals and Consents..............................8
Section 1.6 Nonrecurring Costs and Expenses..................................9
Section 1.7 Novation of Assumed Semiconductor Liabilities....................9
ARTICLE II INTELLECTUAL PROPERTY LICENSES............................................10
Section 2.1 License to C-Cube...............................................10
Section 2.2 License to Semiconductor........................................11
Section 2.3 Transfers and Sublicense........................................11
ARTICLE III LITIGATION...............................................................12
Section 3.1 Allocation......................................................12
Section 3.2 Cooperation.....................................................12
ARTICLE IV MISCELLANEOUS.............................................................13
Section 4.1 Entire Agreement................................................13
Section 4.2 Governing Law...................................................13
Section 4.3 Notices.........................................................13
Section 4.4 Parties in Interest.............................................13
Section 4.5 Counterparts....................................................13
Section 4.6 Assignment......................................................13
Section 4.7 Severability....................................................13
Section 4.8 Failure or Indulgence Not Waiver; Remedies Cumulative...........14
Section 4.9 Amendment.......................................................14
Section 4.10 Authority.......................................................14
Section 4.11 Interpretation..................................................14
Section 4.12 Conflicting Agreements..........................................14
ARTICLE V DEFINITIONS................................................................15
Section 5.1 Action..........................................................15
Section 5.2 Affiliated Company..............................................15
Section 5.3 Ancillary Agreement.............................................15
Section 5.4 Assets..........................................................15
Section 5.5 C-Cube Group....................................................16
Section 5.6 Consents........................................................17
Section 5.7 Contracts.......................................................17
Section 5.8 Distribution....................................................17
</TABLE>
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<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 5.9 DiviCom Business................................................17
Section 5.10 Distribution Date...............................................17
Section 5.11 Environmental Actions...........................................17
Section 5.12 Excluded Assets.................................................17
Section 5.13 Excluded Liabilities............................................17
Section 5.14 Governmental Approvals..........................................17
Section 5.15 Governmental Authority..........................................17
Section 5.16 Indemnification and Insurance Matters Agreement.................17
Section 5.17 Insurance Policies..............................................17
Section 5.18 Insured Semiconductor Liability.................................17
Section 5.19 Intellectual Property...........................................18
Section 5.20 Liabilities.....................................................18
Section 5.21 Litigation Disclosure Letter....................................18
Section 5.22 Person..........................................................18
Section 5.23 Retained Cash...................................................18
Section 5.24 Retained Payables...............................................18
Section 5.25 Retained Receivables............................................18
Section 5.26 Security Interest...............................................19
Section 5.27 Semiconductor Assets............................................19
Section 5.28 Semiconductor Pro Forma Balance Sheet...........................19
Section 5.29 Semiconductor Business.........................................19
Section 5.30 Semiconductor Contingent Gain...................................19
Section 5.31 Semiconductor Contingent Liability..............................19
Section 5.32 Semiconductor Contracts.........................................19
Section 5.33 Semiconductor Group.............................................20
Section 5.34 Semiconductor Intellectual Property.............................20
Section 5.35 Semiconductor Liabilities.......................................20
Section 5.36 Separation......................................................20
Section 5.37 Separation Agreement............................................20
Section 5.38 Separation Date.................................................20
Section 5.39 Subsidiary......................................................20
Section 5.40 Taxes...........................................................20
</TABLE>
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<PAGE> 4
SCHEDULES
Schedule 1.1(a) Assets to be Transferred to Semiconductor I
Schedule 1.1(b) Liabilities to be Transferred to Semiconductor I
-iii-
<PAGE> 5
GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT
This General Assignment and Assumption Agreement (this "AGREEMENT") is
entered into on _______ ___, 2000 by and among C-Cube Microsystems Inc., a
Delaware corporation ("C-CUBE"), C-Cube Semiconductor Inc., a Delaware
corporation ("SEMICONDUCTOR I"), and C-Cube Semiconductor II Inc., a Delaware
corporation ("SEMICONDUCTOR II"). Capitalized terms used herein and not
otherwise defined herein shall have the meanings ascribed to such terms in
ARTICLE IV hereof.
RECITALS
WHEREAS, C-Cube hereby and by certain other instruments of even date
herewith transfers or will transfer to Semiconductor I and Semiconductor II
effective as of the Separation Date, substantially all of the business and
assets of the Semiconductor Business owned by C-Cube in accordance with the
Master Separation and Distribution Agreement dated as of _______ ___, 2000
between the parties (the "SEPARATION AGREEMENT"). It is the intent of the
parties hereto, by this Agreement and the other agreements and instruments
provided for in the Separation Agreement, that C-Cube and its Subsidiaries
convey to Semiconductor I and Semiconductor II and their Subsidiaries
substantially all of the business and assets of the Semiconductor Business;
WHEREAS, it is further intended between the parties that Semiconductor I
and Semiconductor II assume certain of the liabilities related to the
Semiconductor Business, as provided in this Agreement, the Separation Agreement
or the other agreements and instruments provided for in the Separation
Agreement;
WHEREAS, C-Cube has entered into the Agreement and Plan of Merger and
Reorganization, dated as of October 27, 1999 (the "MERGER AGREEMENT"), with
Harmonic Inc. ("HARMONIC") pursuant to which, subsequent to the sale or
distribution of C-Cube of Semiconductor, C-Cube will merge with and into
Harmonic (the "MERGER").
WHEREAS, C-Cube and Harmonic entered into an Amended and Restated
Agreement and Plan of Merger and Reorganization dated as of December 9, 1999
(the "RESTATED MERGER AGREEMENT");
NOW, THEREFORE, in consideration of the foregoing and the covenants and
agreements set forth below, the parties hereto agree as follows:
ARTICLE I
CONTRIBUTION AND ASSUMPTION
SECTION 1.1 CONTRIBUTION OF ASSETS AND ASSUMPTION OF LIABILITIES.
(a) Transfer of Assets. (i) Effective on the Separation Date, C-Cube
hereby assigns, transfers, conveys and delivers to Semiconductor II, and agrees
to cause its applicable Subsidiaries
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to assign, transfer, convey and deliver to Semiconductor II's applicable
Subsidiaries, and Semiconductor II hereby accepts from C-Cube, and agrees to
cause its applicable Subsidiaries to accept from C-Cube's applicable
Subsidiaries, all of C-Cube's and its applicable Subsidiaries' respective right,
title and interest in all Semiconductor Assets except for those Semiconductor
Assets set forth on Schedule 1.1(a) hereto; provided, however, that any
Semiconductor Assets that are specifically assigned or transferred pursuant to
another Ancillary Agreement shall not be assigned or transferred pursuant to
this Section 1.1(a).
(ii) Effective on the Separation Date, C-Cube hereby assigns,
transfers, conveys and delivers to Semiconductor I, and agrees to cause its
applicable Subsidiaries to assign, transfer, convey and deliver to Semiconductor
I's applicable Subsidiaries, and Semiconductor I hereby accepts from C-Cube, and
agrees to cause its applicable Subsidiaries to accept from C-Cube's applicable
Subsidiaries, all of C-Cube's and its applicable Subsidiaries' respective right,
title and interest in all Semiconductor Assets listed on Schedule 1.1(a) hereto.
(b) Assumption of Liabilities. (i) Effective on the Separation Date,
Semiconductor II hereby assumes and agrees faithfully to perform and fulfill,
all the Semiconductor Liabilities held by C-Cube in accordance with their
respective terms, and agrees to cause its applicable Subsidiaries to assume,
perform and fulfill all the Semiconductor Liabilities held by its Subsidiaries,
in accordance with their respective terms except for with respect to those
Semiconductor Liabilities set forth on Schedule 1.1(b) hereto.
(i) Effective on the Separation Date, Semiconductor I hereby
assumes and agrees faithfully to perform and fulfill, all the Semiconductor
Liabilities listed on Schedule 1.1(b) hereto held by C-Cube in accordance with
their respective terms, and agrees to cause its applicable Subsidiaries to
assume, perform and fulfill all the Semiconductor Liabilities listed on Schedule
1.1(b) held by its Subsidiaries, in accordance with their respective terms.
(c) Misallocated Assets and Liabilities. In the event that at any
time or from time to time (whether prior to, on or after the Separation Date),
any party hereto (or any member of such party's respective Group), shall receive
or otherwise possess any Asset or Liability that is misallocated to any other
Person pursuant to this Agreement or any Ancillary Agreement, such party shall
promptly transfer, or cause to be transferred, such Asset or Liability to the
Person so entitled thereto. Prior to any such transfer, the Person receiving or
possessing such Asset shall hold such Asset or Liability in trust for any such
other Person.
SECTION 1.2 SEMICONDUCTOR ASSETS.
(a) Included Assets. For purposes of this Agreement, "SEMICONDUCTOR
ASSETS" shall mean (without duplication) the following Assets, except as
otherwise provided for in any Ancillary Agreement or other express agreement of
the parties:
(i) all assets reflected in the unaudited consolidated balance
sheet (including notes thereto) of the Semiconductor Business as of September
30, 1999 attached hereto as
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Annex 1.2(a) (the "BALANCE SHEET"), subject to any dispositions of such Assets
subsequent to the date of such Balance Sheet;
(ii) all assets that have been written off, expensed or fully
depreciated that, had they not been written off, expensed or fully depreciated,
would have been reflected in the Balance Sheet in accordance with the principles
and accounting policies under which the Balance Sheet was prepared;
(iii) all assets acquired by C-Cube or its Subsidiaries after
the date of the Balance Sheet that would be reflected in the consolidated
balance sheet of the Semiconductor Business as of the Separation Date if such
consolidated balance sheet was prepared at the time of the Semi Disposition
using the same principles and accounting policies under which the Balance Sheet
was prepared;
(iv) all assets that are used primarily by the Semiconductor
Business at the Separation Date but are not reflected in the Balance Sheet due
to mistake or unintentional omission;
(v) all claims or other rights of C-Cube or the Semiconductor
Business that primarily relate to the Semiconductor Business, whenever arising,
against any Person or entity other than an officer, employee, director or
consultant of the Semiconductor Business, if and to the extent that (i) such
claim or right arises out of the events, acts or omissions occurring on or
before the Separation Date (based on then existing law) and (ii) the existence
or scope of the obligation of such other Person or entity as of the Separation
Date was not acknowledged, fixed or determined in any material respect, due to a
dispute or other uncertainty as of the Separation Date or as a result of the
failure of such claim or other right to have been discovered or asserted as of
the Separation Date. A claim or right meeting the foregoing definition shall be
considered an "SEMICONDUCTOR CONTINGENT GAIN" regardless of whether there was
any action pending, threatened or contemplated as of the Separation Date with
respect thereto. In the case of any claim or right, a portion of which arises
out of events, acts or omissions occurring prior to the Separation Date and a
portion of which arises out of events, acts or omissions occurring on or after
the Separation Date, only that portion that arises out of events, acts or
omissions occurring prior to the Separation Date, shall be considered a
Semiconductor Contingent Gain. For purposes of the foregoing a claim or right
shall be deemed to have accrued as of the Separation Date if all the elements of
the claim necessary for its assertion shall have occurred on or prior to the
Separation Date, would not be dismissed by a court on ripeness or similar
grounds. Notwithstanding the foregoing, none of (i) any insurance proceeds, (ii)
any Excluded Assets (as defined below), (iii) any reversal of any litigation or
other reserve, or (iv) any matters relating to Taxes which are governed by the
Tax Sharing Agreement shall be deemed to be a Semiconductor Contingent Gain;
(vi) all contracts in which C-Cube is a party or by which it
or any of its assets is bound whether or not in writing, except for any such
contract or agreement that is contemplated to be retained by C-Cube because it
relates primarily to the DiviCom Business including:
(1) all prepaid expenses, trade accounts and other
accounts and notes receivables;
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(2) all rights under contracts or agreement, all claims or
rights against any person or entity arising from the ownership of any Asset, all
rights in connection with any bids or offers and all claims, choices in action
or similar rights, whether accrued or contingent;
(3) all rights under insurance policies and rights in the
nature of insurance, indemnification or contribution;
(4) all licenses, permits, approvals and authorization
which have been issued by any governmental authority; and
(5) interest rate, currency, commodity or other swap,
collar, cap or other hedging or similar agreements or arrangements.
(vii) all computers, desks, equipment (including equipment
used for research and development) and other Assets used primarily by employees
of C-Cube that will become employees of the Semiconductor Business;
(viii) to the extent permitted by law and subject to any
agreement regarding indemnification and/or insurance matters, all rights of the
Semiconductor Business under any of C-Cube's insurance policies;
(ix) all (a) accounts receivable and other rights to payment
for goods or services sold, leased or otherwise provided in the conduct of the
Semiconductor Business that, as of the Separation Date, are payable by a third
party to C-Cube or any of C-Cube's subsidiaries, whether past due, due or to
become due, including any interest, sales or use taxes, finance charges, late or
returned check charges and other obligations of the accounts debtor with respect
thereto, and any proceeds of any of the foregoing and (b) other miscellaneous
Assets for which an adjustment is made in the Balance Sheet;
(x) C-Cube's rights in the trade and service marks and domain
names incorporating or based on the name C-CUBE and any goodwill associated
therewith;
(xi) All Intellectual Property owned or transferable by C-Cube
or the Semiconductor Business that arises out of the activities of, or that is
primarily related to, the Semiconductor Business, including all Intellectual
Property listed on Schedule 1.2(a)(xi) (all of the foregoing, "SEMICONDUCTOR
INTELLECTUAL PROPERTY"), and all rights to sue for, recover and retain any
damages from any third party's infringement of any such Intellectual Property
rights; and
(xii) cash or cash equivalents, bank accounts, lock boxes and
other deposit arrangements (other than the Retained Cash).
(xiii) all outstanding shares in subsidiaries conducting
Semiconductor Business owned directly by C-Cube Microsystems Inc. including
shares in:
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(1) C-Cube Microsystems International Ltd., a company
organized under the laws of Bermuda;
(2) C-Cube U.S. Inc., a company organized in Delaware;
(3) C-Cube Japan, Inc., a company organized in Japan and
assets owned by these subsidiaries;
(4) C-Cube Technology Limited, a company organized under
the laws of Bermuda; and
(5) Media Computer Technologies, Inc., a California
corporation.
(b) Excluded Assets. For the purposes of this Agreement, "EXCLUDED
ASSETS" shall mean:
C-Cube Registered Intellectual Property listed on the Company
Disclosure Schedule (as defined in the Merger Agreement.)
SECTION 1.3 SEMICONDUCTOR LIABILITIES.
(a) Included Liabilities. For the purposes of this Agreement,
"SEMICONDUCTOR LIABILITIES" shall mean (without duplication) the following
Liabilities, except as otherwise provided for in any Ancillary Agreement or
other express agreement of the parties:
(i) all Liabilities reflected in the Balance Sheet, subject to
any discharge of such Liabilities subsequent to the date of the Balance Sheet;
(ii) all Liabilities of C-Cube or its Subsidiaries that arise
after the date of the Balance Sheet that would be reflected in the consolidated
balance sheet of the Semiconductor Business as of the Separation Date if such
consolidated balance sheet was prepared using the same principles and accounting
policies under which the Balance Sheet was prepared;
(iii) all Liabilities that are related primarily to the
Semiconductor Business at the Separation Date but are not reflected in the
Balance Sheet due to mistake or unintentional omission;
(iv) any Liability of C-Cube or the Semiconductor Business
that primarily related to the Semiconductor Business, whenever arising, to any
Person or entity other than an officer, director, employee or consultant of the
Semiconductor Business, if and to the extent that (i) such Liability arises out
of the events, acts or omissions occurring on or before the Separation Date and
(ii) the existence or scope of the obligation to such Person or entity as of the
Separation Date with respect to such Liability was not acknowledged, fixed or
determined in any material respect, due to a dispute or other uncertainty as of
the Separation Date or as a result of the failure of such Liability to have been
discovered or asserted as of the Separation Date (it being understood that the
existence of a litigation or other reserve with respect to any Liability shall
not be sufficient for such Liability to be considered acknowledged, fixed or
determined) (each, a "SEMICONDUCTOR CONTINGENT
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LIABILITY"). In the case of any Liability, a portion of which arises out of
events, acts or omissions occurring prior to the Separation Date and a portion
of which arises out of events, acts or omissions occurring on or after the
Separation Date, only that portion that arises out of events, acts or omissions
occurring prior to the Separation Date shall be considered a Semiconductor
Contingent Liability. For purposes of the foregoing, a Liability shall be deemed
to have arisen out of events, acts or omissions occurring prior to the
Separation Date if all the elements necessary for the assertion of a claim with
respect to such Liability shall have occurred on or prior to the Separation
Date, such that the claim, were it asserted in an action on or prior to the
Separation Date, would not be dismissed by a court on ripeness or similar
grounds. For purposes of clarification of the foregoing, the parties agree that
no Liability relating to, arising out of or resulting from any obligation of any
person or entity to satisfy any obligation accrued under any employee stock
option plan, stock purchase plan or the like as of the Separation Date, shall be
deemed to be a Semiconductor Contingent Liability. For purposes of determining
whether a claim relating to the Year 2000 problem is a Semiconductor Contingent
Liability, claims relating to products shipped prior to the Separation Date
shall be deemed to have arisen prior to the Separation Date.
(v) all Liabilities (other than Liabilities for Taxes),
whether arising before on or after the Separation Date, primarily relating to,
arising out of or resulting from:
(1) the operation of the Semiconductor Business, as
conducted at any time prior to, on or after the Separation Date (including any
Liability relating to, arising out of or resulting from any act or failure to
act by any director, officer, employee, agent or representative (whether or not
such act or failure to act is or was within such Person or entity's authority));
(2) the operation of any business conducted by the
Semiconductor Business at any time after the Separation Date (including any
Liability relating to, arising out of or resulting from any act or failure to
act by any director, officer, employee, agent or representative (whether or not
such act or failure to act is or was within such person or entity's authority));
or
(3) any Semiconductor Assets;
(vi) all fees and expenses of C-Cube incurred in connection
with the Merger and the spin-off transaction;
(vii) all accounts payable and other obligations of payment
for goods or services purchased, leased or otherwise received in the conduct of
the Semiconductor Business that as of the Separation Date are payable to a third
party by C-Cube or any of C-Cube's subsidiaries, whether past due, due or to
become due, including any interest, sales or use taxes, finance charges, late or
returned check charges and other obligations of C-Cube or any of C-Cube's
Subsidiaries with respect thereto, and any obligations related to any of the
foregoing;
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(viii) all employee compensation Liabilities relating to
employees of the Semiconductor Business other than Continuing Employees; and
(ix) all severance payments and related Liabilities arising
out of any termination of non-Continuing Employees (as defined in the Merger
Agreement).
Notwithstanding anything in this Agreement, the Merger Agreement or the
Ancillary Agreements to the contrary, to the extent that the amount provided by
C-Cube to the Semiconductor Business has been reduced on account of certain
liabilities set forth in clauses (i) through (v) of the definition of "Retained
Cash," such liabilities shall not constitute Semiconductor Liabilities.
Notwithstanding the foregoing, the Semiconductor Liabilities shall not include
the Excluded Liabilities referred to in SECTION 1.3(b) below.
(b) Excluded Liabilities. For the purposes of this Agreement,
"EXCLUDED LIABILITIES" shall mean:
(i) all Liabilities to the extent that (i) it is covered under
the terms of C-Cube's insurance policies in effect prior to the Separation Date
and (ii) the Semiconductor Business is not a named, insured under, or otherwise
entitled to the benefits of, such insurance policies;
(ii) all Liabilities for Pre-Semi Disposition Taxes not
attributable to the Semiconductor Business; and
(iii) all agreements and obligations of C-Cube under the
agreements governing the Distribution.
SECTION 1.4 METHODS OF TRANSFER AND ASSUMPTION.
(a) Terms of Other Ancillary Agreements Govern. The parties shall
enter into the other Ancillary Agreements, on or about the date of this
Agreement. To the extent that the transfer of any Semiconductor Asset or the
assumption of any Semiconductor Liability is expressly provided for by the terms
of any other Ancillary Agreement, the terms of such other Ancillary Agreement
shall effect, and determine the manner of, the transfer or assumption. It is the
intent of the parties that pursuant to SECTIONS 1.1, 1.2 and 1.3, the transfer
and assumption of all other Semiconductor Assets and Semiconductor Liabilities
shall be made effective as of the Separation Date.
(b) Mistaken Assignments and Assumptions. In addition to those
transfers and assumptions accurately identified and designated by the parties to
take place but which the parties are not able to effect prior to the Separation
Date, there may exist (i) Assets that the parties discover were, contrary to the
agreements between the parties, by mistake or omission, transferred to
Semiconductor I or Semiconductor II or any of their Subsidiaries or retained by
C-Cube or (ii) Liabilities that the parties discover were, contrary to the
agreements between the parties, by mistake or omission, assumed by Semiconductor
I or Semiconductor II or any of their Subsidiaries or not assumed by
Semiconductor I or Semiconductor II or any of their Subsidiaries. The parties
shall
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cooperate in good faith to effect the transfer or re-transfer of such Assets,
and/or the assumption or re-assumption of such Liabilities, to or by the
appropriate party and shall not use the determination that remedial actions need
to be taken to alter the original intent of the parties hereto with respect to
the Assets to be transferred to or Liabilities to be assumed by Semiconductor I
or Semiconductor II or any of their Subsidiaries. Each party shall reimburse the
other or make other financial adjustments (e.g., without limitation, cash
reserves) or other adjustments to remedy any mistakes or omissions relating to
any of the Assets transferred hereby or any of the Liabilities assumed hereby.
(c) Transfer of Assets and Liabilities Not Included in Semiconductor
Assets and Semiconductor Liabilities. In the event the parties discover Assets
and Liabilities that relate primarily to the Semiconductor Business but do not
constitute Semiconductor Assets under SECTION 1.2 or Semiconductor Liabilities
under SECTION 1.3, the parties shall cooperate in good faith to effect the
transfer of such Assets at book value, or the assumption of such Liabilities, to
Semiconductor I or Semiconductor II or any of their Subsidiaries, as applicable,
and shall not use the determination of remedial actions contemplated in the
Separation Agreement to alter the original intent of the parties hereto with
respect to the Assets to be transferred to or Liabilities to be assumed by
Semiconductor I or Semiconductor II or any of their Subsidiaries, as applicable.
Each party shall reimburse the other or make other financial adjustments (e.g.,
without limitation, cash reserves) or other adjustments to remedy any mistakes
or omissions relating to any of the Assets transferred hereby or any of the
Liabilities assumed hereby.
(d) Documents Relating to Other Transfers of Assets and Assumption of
Liabilities. In furtherance of the assignment, transfer and conveyance of
Semiconductor Assets and the assumption of Semiconductor Liabilities set forth
in SECTIONS 1.4(a), (b) and (c) and certain Ancillary Agreements, simultaneously
with the execution and delivery hereof or as promptly as practicable thereafter,
(i) C-Cube shall execute and deliver such bills of sale, stock powers,
certificates of title, assignments of contracts and other instruments of
transfer, conveyance and assignment as and to the extent necessary to evidence
the transfer, conveyance and assignment of all of C-Cube's and its Subsidiaries'
right, title and interest in and to the Semiconductor Assets to Semiconductor I
or Semiconductor II or any of their Subsidiaries, as applicable, and (ii)
Semiconductor I or Semiconductor II or any of their Subsidiaries, as applicable,
shall execute and deliver, to C-Cube and its Subsidiaries such bills of sale,
stock powers, certificates of title, assumptions of contracts and other
instruments of assumption as and to the extent necessary to evidence the valid
and effective assumption of the Semiconductor Liabilities by Semiconductor I or
Semiconductor II or any of their Subsidiaries, as applicable.
SECTION 1.5 GOVERNMENTAL APPROVALS AND CONSENTS.
(a) Transfer In Violation of Laws. If and to the extent that the
valid, complete and perfected transfer assignment or novation to the
Semiconductor Group of any Semiconductor Assets and Semiconductor Liabilities
(or from the Semiconductor Group of any Non-Semiconductor Assets) would be a
violation of applicable laws or require any Consent or Governmental Approval in
connection with the Separation or the Distribution, then, unless C-Cube shall
otherwise determine, the transfer, assignment or novation to or from the
Semiconductor Group,
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as the case may be, of such Semiconductor Assets or Non-Semiconductor Assets,
respectively, shall be automatically deemed deferred and any such purported
transfer, assignment or novation shall be null and void until such time as all
legal impediments are removed and/or such Consents or Governmental Approvals
have been obtained. Notwithstanding the foregoing, such Asset shall still be
considered a Semiconductor Asset for purposes of determining whether any
Liability is a Semiconductor Liability; provided, however, that if such
covenants or Governmental Approvals have not been obtained within six months of
the Distribution Date, the parties will use their reasonable commercial efforts
to achieve an alternative solution in accordance with the parties' intentions.
(b) Transfers Not Consummated Prior to Separation Date. If the
transfer, assignment or novation of any Assets intended to be transferred or
assigned hereunder is not consummated prior to or on the Separation Date,
whether as a result of the provisions of SECTION 1.5(a) or for any other reason,
then the Person retaining such Asset shall thereafter hold such Asset for the
use and benefit, insofar as reasonably possible, of the Person entitled thereto
(at the expense of the Person entitled thereto). In addition, the Person
retaining such Asset shall take such other actions as may be reasonably
requested by the Person to whom such Asset is to be transferred in order to
place such Person, insofar as reasonably possible, in the same position as if
such Asset had been transferred as contemplated hereby and so that all the
benefits and burdens relating to such Semiconductor Assets (or such
Non-Semiconductor Assets, as the case may be), including possession, use, risk
of loss, potential for gain, and dominion, control and command over such Assets,
are to inure from and after the Separation Date to the Semiconductor Group (or
the C-Cube Group, as the case may be). If and when the Consents and/or
Governmental Approvals, the absence of which caused the deferral of transfer of
any Asset pursuant to SECTION 1.5(a), are obtained, the transfer of the
applicable Asset shall be effected in accordance with the terms of this
Agreement and/or the applicable Ancillary Agreement.
(c) Expenses. The Person retaining an Asset due to the deferral of
the transfer of such Asset shall not be obligated, in connection with the
foregoing, to expend any money unless the necessary funds are advanced by the
Person entitled to the Asset, other than reasonable out-of-pocket expenses,
attorneys' fees and recording or similar fees, all of which shall be promptly
reimbursed by the Person entitled to such Asset.
SECTION 1.6 NONRECURRING COSTS AND EXPENSES. Notwithstanding anything
herein to the contrary, any nonrecurring costs and expenses incurred by the
parties hereto to effect the transactions contemplated hereby which are not
allocated pursuant to the terms of the Separation Agreement, this Agreement or
any other Ancillary Agreement shall be the responsibility of the party which
incurs such costs and expenses.
SECTION 1.7 NOVATION OF ASSUMED SEMICONDUCTOR LIABILITIES.
(a) Reasonable Commercial Efforts. Each of C-Cube, and Semiconductor
I or Semiconductor II or any of their Subsidiaries, as applicable, at the
request of the other, shall use their reasonable commercial efforts to obtain,
or to cause to be obtained, any consent, substitution, approval or amendment
required to novate (including with respect to any federal government
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contract) or assign all rights and obligations under agreements, leases,
licenses and other obligations or Liabilities of any nature whatsoever that
constitute Semiconductor Liabilities or to obtain in writing the unconditional
release of all parties to such arrangements other than any member of the
Semiconductor Group, so that, in any such case, Semiconductor I or Semiconductor
II or any of their Subsidiaries, as applicable, will be solely responsible for
such Liabilities; provided, however, that none of C-Cube, Semiconductor I,
Semiconductor II or any of their Subsidiaries shall be obligated to pay any
consideration therefor to any third party from whom such consents, approvals,
substitutions and amendments are requested.
(b) Inability to Obtain Novation. If C-Cube, Semiconductor I or
Semiconductor II or any of their Subsidiaries, as applicable, is unable to
obtain, or to cause to be obtained, any such required consent, approval,
release, substitution or amendment, the applicable member of the C-Cube Group
shall continue to be bound by such agreements, leases, licenses and other
obligations and, unless not permitted by law or the terms thereof (except to the
extent expressly set forth in this Agreement, the Separation Agreement or any
other Ancillary Agreement), Semiconductor I or Semiconductor II or any of their
Subsidiaries, as applicable, shall, as agent or subcontractor for C-Cube or such
other Person, as the case may be, pay, perform and discharge fully, or cause to
be paid, transferred or discharged all the obligations or other Liabilities of
C-Cube or such other Person, as the case may be, thereunder from and after the
date hereof. C-Cube shall, without further consideration, pay and remit, or
cause to be paid or remitted, to Semiconductor I or Semiconductor II or any of
their Subsidiaries, as applicable, or its appropriate Subsidiary promptly all
money, rights and other consideration received by it or any member of its
respective Group in respect of such performance (unless any such consideration
is an Excluded Asset). If and when any such consent, approval, release,
substitution or amendment shall be obtained or such agreement, lease, license or
other rights or obligations shall otherwise become assignable or able to be
novated, C-Cube shall thereafter assign, or cause to be assigned, all its
rights, obligations and other Liabilities thereunder or any rights or
obligations of any member of its respective Group to Semiconductor I or
Semiconductor II or any of their Subsidiaries, as applicable, without payment of
further consideration and Semiconductor I or Semiconductor II or any of their
Subsidiaries, as applicable, shall, without the payment of any further
consideration, assume such rights and obligations.
ARTICLE II
INTELLECTUAL PROPERTY LICENSES
SECTION 2.1 LICENSE TO C-CUBE.
(a) Grant. To the extent any of the Semiconductor Intellectual
Property is necessary for, or would be infringed by, the operation of the
DiviCom Business as such business is operated as of or prior to the Separation
Date, subject to all limitations set forth herein Semiconductor I and
Semiconductor II or any of their Subsidiaries hereby grant to C-Cube, to the
extent of
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Semiconductor I and Semiconductor II's or any of their Subsidiaries'
rights in such Semiconductor Intellectual Property and without any
representation or warranty of any kind, a worldwide, perpetual, irrevocable,
non-exclusive, license to continue to operate the DiviCom Business in
substantially the same manner such business was conducted as of or prior to the
Separation Date.
(b) Limitations. All rights and licenses to the Semiconductor
Intellectual Property not expressly granted to C-Cube in Section 2.1(a) or in a
written agreement between the parties are reserved to Semiconductor I or
Semiconductor II or any of their Subsidiaries, as applicable. Without limiting
the foregoing, C-Cube shall not have any right or license under the foregoing
and is not granted any license hereunder to (i) make or have made any
semiconductor device, and (ii) [___________].
(c) No Technology Transfer. Nothing set forth in Section 2.1(a) shall
obligate Semiconductor I or Semiconductor II or any of their Subsidiaries, as
applicable, to transfer or disclose to C-Cube any Intellectual Property
including any know how, software, or other materials.
SECTION 2.2 LICENSE TO SEMICONDUCTOR.
(a) Grant. To the extent any of the Excluded Assets or any other
assets retained by C-Cube include any Intellectual Property that is necessary
for or would be infringed by the operation of the Semiconductor Business as such
business was conducted as of or prior to the Separation Date, subject to all
limitations set forth herein C-Cube hereby grants to Semiconductor I or
Semiconductor II or any of their Subsidiaries, as applicable, to the extent of
C-Cube's rights in such Intellectual Property and without any representation or
warranty of any kind, a worldwide, perpetual, irrevocable, non-exclusive license
to continue to operate the Semiconductor Business in substantially the same
manner such business was conducted as of or prior to the Separation Date.
(b) Limitations. All rights and licenses to the Intellectual Property of
C-Cube not expressly granted to Semiconductor I or Semiconductor II or any of
their Subsidiaries, as applicable, in Section 2.2(a) or in a written agreement
between the parties are reserved to C-Cube.
(c) No Technology Transfer. Nothing set forth in Section 2.2(a) shall
obligate C-Cube to transfer to or disclose to Semiconductor I or Semiconductor
II or any of their Subsidiaries, as applicable, any Intellectual Property
including any know how, software, or other materials.
SECTION 2.3 TRANSFERS AND SUBLICENSE. The licenses granted to each party
in this ARTICLE II may neither: (i) be assigned or transferred by the licensed
party except in connection with the sale or merger of such party or the sale of
substantially all of the assets of such party, nor (ii) licensed by such
licensed party except in connection with the granting by such party of a license
of substantial other Intellectual Property of such party.]
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<PAGE> 16
ARTICLE III
LITIGATION
SECTION 3.1 ALLOCATION.
(a) Litigation to Be Transferred to Semiconductor II. Notwithstanding
any contrary provisions in the provisions of the Indemnification and Insurance
Matters Agreement, on the Separation Date, the responsibilities for management
of the litigation identified in SECTION 3.1(a) of a litigation disclosure letter
(the "LITIGATION DISCLOSURE LETTER"), which will be delivered by C-Cube to
Semiconductor II or any of its Subsidiaries on the Separation Date, shall be
transferred in their entirety from C-Cube and its Subsidiaries to Semiconductor
II or any of its Subsidiaries and its Subsidiaries. As of the Separation Date
and thereafter, Semiconductor II or any of its Subsidiaries shall manage the
defense of this litigation and shall cause its applicable Subsidiaries to do the
same. C-Cube and its Subsidiaries must first obtain the prior consent of
Semiconductor II or any of its Subsidiaries or its applicable Subsidiary for any
action taken subsequent to the Separation Date in connection with the litigation
identified in the Litigation Disclosure Letter, which consent cannot be
unreasonably withheld or delayed. All other matters relating to such litigation,
including but not limited to indemnification for such claims, shall be governed
by the provisions of the Indemnification and Insurance Matters Agreement.
(b) LITIGATION to be Defended by C-Cube at Semiconductor II's
Expense. Notwithstanding any contrary provisions in the Indemnification and
Insurance Matters Agreement, C-Cube shall defend, and shall cause its applicable
Subsidiaries to defend, the litigation identified in SECTION 3.1(b) of the
Litigation Disclosure Letter. All other matters relating to such litigation,
including but not limited to indemnification for such claims, shall be governed
by the provisions of the Indemnification and Insurance Matters Agreement.
(c) All Other Litigation. All other litigation outstanding at the
Separation Date not included in the Litigation Disclosure Letter shall remain
with C-Cube, and Semiconductor II, or any of its Subsidiaries shall have no
liability in connection with, or responsibility for defending, such litigation.
SECTION 3.2 COOPERATION. C-Cube and Semiconductor I and their respective
Subsidiaries shall cooperate with each other in the defense of any litigation
covered under this ARTICLE III and afford to each other reasonable access upon
reasonable advance notice to witnesses and information (other than information
protected from disclosure by applicable privileges) that is reasonably required
to defend this litigation as set forth in SECTION 4.4 of the Separation
Agreement. The foregoing agreement to cooperate includes, but is not limited to,
an obligation to provide access to qualified assistance to provide information,
witnesses and documents to respond to discovery requests in specific lawsuits.
In such cases, cooperation shall be timely so that the party responding to
discovery may meet all court-imposed deadlines. The party requesting information
shall reimburse the party providing information consistent with the terms of
SECTION 4.4 of the Separation Agreement. The obligations set forth in this
paragraph are more clearly defined in SECTION 4.4 of the Separation Agreement,
to which reference is hereby made.
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<PAGE> 17
ARTICLE IV
MISCELLANEOUS
SECTION 4.1 ENTIRE AGREEMENT. This Agreement, the Restated Merger
Agreement, the Master Separation Agreement, the other Ancillary Agreements and
the Exhibits and Schedules referenced or attached hereto and thereto,
constitutes the entire agreement between the parties with respect to the subject
matter hereof and shall supersede all prior written and oral and all
contemporaneous oral agreements and understandings with respect to the subject
matter hereof. In the event any provision of any agreement conflicts with a
provision of the Restated Merger Agreement, the Restated Merger Agreement will
govern.
SECTION 4.2 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware as to all matters
regardless of the laws that might otherwise govern under principles of conflicts
of laws applicable thereto.
SECTION 4.3 NOTICES. Any notice, demand, offer, request or other
communication required or permitted to be given by either party pursuant to the
terms of this Agreement shall be in writing and shall be deemed effectively
given the earlier of (i) when received, (ii) when delivered personally, (iii)
one (1) business day after being delivered by facsimile (with receipt of
appropriate confirmation), (iv) one (1) business day after being deposited with
an overnight courier service or (v) four (4) days after being deposited in the
US mail, First Class with postage prepaid, and addressed to the attention of the
party's General Counsel at the address of its principal executive office or such
other address as a party may request by notifying the other in writing.
SECTION 4.4 PARTIES IN INTEREST. This Agreement, including the Schedules
and Exhibits hereto, and the other documents referred to herein, shall be
binding upon and inure solely to the benefit of each party hereto and their
legal representatives and successors, and nothing in this Agreement, express or
implied, is intended to confer upon any other Person any rights or remedies of
any nature whatsoever under or by reason of this Agreement.
SECTION 4.5 COUNTERPARTS. This Agreement, including the Schedules and
Exhibits hereto, and the other documents referred to herein, may be executed in
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
SECTION 4.6 ASSIGNMENT. This Agreement shall inure to the benefit of and
be binding upon the parties hereto and their respective legal representatives
and successors. This Agreement may not be assigned by any party hereto.
Notwithstanding the foregoing, each party (or its permitted successive assignees
or transferees hereunder) may assign or transfer this Agreement as a whole
without consent to a Person that succeeds to all or substantially all of the
business or assets of such party. Without limiting the foregoing, this Agreement
will be binding upon and inure to the benefit of the parties and their permitted
successors and assigns.
SECTION 4.7 SEVERABILITY. If any term or other provision of this
Agreement or the Schedules or Exhibits attached hereto is determined by a
nonappealable decision by a court,
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<PAGE> 18
administrative agency or arbitrator to be invalid, illegal or incapable of being
enforced by any rule of law or public policy, all other conditions and
provisions of this Agreement shall nevertheless remain in full force and effect
so long as the economic or legal substance of the transactions contemplated
hereby is not affected in any manner materially adverse to any party. Upon such
determination that any term or other provision is invalid, illegal or incapable
of being enforced, the parties hereto shall negotiate in good faith to modify
this Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner to the end that transactions contemplated
hereby are fulfilled to the fullest extent possible.
SECTION 4.8 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No
failure or delay on the part of any party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement herein,
nor shall any single or partial exercise of any such right preclude other or
further exercise thereof or of any other right. All rights and remedies existing
under this Agreement or the Schedules or Exhibits attached hereto are cumulative
to, and not exclusive of, any rights or remedies otherwise available.
SECTION 4.9 AMENDMENT. No change or amendment will be made to this
Agreement except by an instrument in writing signed on behalf of each of the
parties to such agreement.
SECTION 4.10 AUTHORITY. Each of the parties hereto represents to the
other that (a) it has the corporate or other requisite power and authority to
execute, deliver and perform this Agreement, (b) the execution, delivery and
performance of this Agreement by it have been duly authorized by all necessary
corporate or other action, (c) it has duly and validly executed and delivered
this Agreement, and (d) this Agreement is a legal, valid and binding obligation,
enforceable against it in accordance with its terms subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and general equity principles.
SECTION 4.11 INTERPRETATION. The headings contained in this Agreement,
in any Exhibit or Schedule hereto and in the table of contents to this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Any capitalized term used in any Schedule or
Exhibit but not otherwise defined therein, shall have the meaning assigned to
such term in this Agreement. When a reference is made in this Agreement to an
Article or a Section, Exhibit or Schedule, such reference shall be to an Article
or Section of, or an Exhibit or Schedule to, this Agreement unless otherwise
indicated.
SECTION 4.12 CONFLICTING AGREEMENTS. In the event of conflict between
this Agreement and any other Ancillary Agreement or other agreement executed in
connection herewith, the provisions of Ancillary Agreement and such other
agreement shall prevail.
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<PAGE> 19
ARTICLE V
DEFINITIONS
SECTION 5.1 ACTION. "ACTION" means any demand, action, suit,
countersuit, arbitration, inquiry, proceeding or investigation by or before any
federal, state, local, foreign or international governmental authority or any
arbitration or mediation tribunal.
SECTION 5.2 AFFILIATED COMPANY. "AFFILIATED COMPANY" means, with respect
to C-Cube, any entity in which C-Cube holds a 50% or less ownership interest and
that is listed on SCHEDULE 6.1(a) to the Separation Agreement and, with respect
to Semiconductor I or Semiconductor II, any entity in which Semiconductor I or
Semiconductor II holds a 50% or less ownership interest and that is listed on
SCHEDULE 6.1(b) to the Separation Agreement. SCHEDULES 6.1(a) and 6.1(b) may be
amended from time to time after the date hereof upon mutual written consent of
the parties.
SECTION 5.3 ANCILLARY AGREEMENT. "ANCILLARY AGREEMENT" has the meaning
set forth in SECTION 2.1 of the Separation Agreement.
SECTION 5.4 ASSETS. "ASSETS" means assets, properties and rights
(including goodwill), wherever located (including in the possession of vendors
or other third parties or elsewhere), whether real, personal or mixed, tangible,
intangible or contingent, in each case whether or not recorded or reflected or
required to be recorded or reflected on the books and records or financial
statements of any Person, including the following:
(i) all accounting and other books, records and files whether
in paper, microfilm, microfiche, computer tape or disc, magnetic tape or any
other form;
(ii) all apparatus, computers and other electronic data
processing equipment, fixtures, machinery, equipment, furniture, office
equipment, automobiles, trucks, aircraft, rolling stock, vessels, motor vehicles
and other transportation equipment, special and general tools, test devices,
prototypes and models and other tangible personal property;
(iii) all inventories of materials, parts, raw materials,
supplies, work-in-process and finished goods and products;
(iv) all interests in real property of whatever nature,
including easements, whether as owner, mortgagee or holder of a Security
Interest, lessor, sublessor, lessee, sublessee or otherwise;
(v) all interests in any capital stock or other equity
interests of any Subsidiary or any other Person; all bonds, notes, debentures or
other securities issued by any Subsidiary or any other Person; all loans,
advances or other extensions of credit or capital contributions to any
Subsidiary or any other Person; and all other investments in securities of any
Person;
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<PAGE> 20
(vi) all license agreements, leases of personal property, open
purchase orders for raw materials, supplies, parts or services, unfilled orders
for the manufacture and sale of products and other contracts, agreements or
commitments;
(vii) all deposits, letters of credit and performance and
surety bonds;
(viii) all written technical information, data,
specifications, research and development information, engineering drawings,
operating and maintenance manuals, and materials and analyses prepared by
consultants and other third parties;
(ix) all Intellectual Property and licenses from third Persons
granting the right to use any Intellectual Property;
(x) all computer applications, programs and other software,
including operating software, network software, firmware, middleware, design
software, design tools, systems documentation and instructions;
(xi) all cost information, sales and pricing data, customer
prospect lists, supplier records, customer and supplier lists, customer and
vendor data, correspondence and lists, product literature, artwork, design,
development and manufacturing files, vendor and customer drawings, formulations
and specifications, quality records and reports and other books, records,
studies, surveys, reports, plans and documents;
(xii) all prepaid expenses, trade accounts and other accounts
and notes receivables;
(xiii) all rights under contracts or agreements, all claims or
rights against any Person arising from the ownership of any Asset, all rights in
connection with any bids or offers and all claims, choses in action or similar
rights, whether accrued or contingent;
(xiv) all rights under insurance policies and all rights in
the nature of insurance, indemnification or contribution;
(xv) all licenses (including radio and similar licenses),
permits, approvals and authorizations which have been issued by any Governmental
Authority;
(xvi) cash or cash equivalents, bank accounts, lock boxes and
other deposit arrangements; and
(xvii) interest rate, currency, commodity or other swap,
collar, cap or other hedging or similar agreements or arrangements.
SECTION 5.5 C-CUBE GROUP. "C-CUBE GROUP" means C-Cube, each Subsidiary
and Affiliated Company of C-Cube (other than any member of the Semiconductor
Group) immediately after the Separation Date and each Person that becomes a
Subsidiary or Affiliate Company of C-Cube after the Separation Date.
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<PAGE> 21
SECTION 5.6 CONSENTS. "CONSENTS" means any consents, waivers or
approvals from, or notification requirements to, any third parties.
SECTION 5.7 CONTRACTS. "CONTRACTS" means any contract, agreement, lease,
license, sales order, purchase order, instrument or other commitment that is
binding on any Person or any part of its property under applicable law.
SECTION 5.8 DISTRIBUTION. "DISTRIBUTION" means C-Cube's pro rata
distribution to the holders of its common stock, $0.001 par value of all of the
shares of Semiconductor I common stock owned by C-Cube.
SECTION 5.9 DIVICOM BUSINESS. "DIVICOM BUSINESS" means any business of
C-Cube other than the Semiconductor Business.
SECTION 5.10 DISTRIBUTION DATE. "DISTRIBUTION DATE" has the meaning set
forth in SECTION 3.1 of the Separation Agreement.
SECTION 5.11 ENVIRONMENTAL ACTIONS. "ENVIRONMENTAL ACTIONS" has the
meaning set forth in SECTION 4.11 of the Indemnification and Insurance Matters
Agreement.
SECTION 5.12 EXCLUDED ASSETS. "EXCLUDED ASSETS" has the meaning set
forth in SECTION 1.2(b) of this Agreement.
SECTION 5.13 EXCLUDED LIABILITIES. "EXCLUDED LIABILITIES" has the
meaning set forth in SECTION 1.3(b) of this Agreement.
SECTION 5.14 GOVERNMENTAL APPROVALS. "GOVERNMENTAL APPROVALS" means any
notices, reports or other filings to be made, or any consents, registrations,
approvals, permits or authorizations to be obtained from, any Governmental
Authority.
SECTION 5.15 GOVERNMENTAL AUTHORITY. "GOVERNMENTAL AUTHORITY" means any
federal, state, local, foreign or international court, government, department,
commission, board, bureau, agency, official or other regulatory, administrative
or governmental authority.
SECTION 5.16 INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT.
"INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT" means the Indemnification and
Insurance Matters Agreement attached as Exhibit I to the Separation Agreement.
SECTION 5.17 INSURANCE POLICIES. "INSURANCE POLICIES" means insurance
policies pursuant to which a Person makes a true risk transfer to an insurer.
SECTION 5.18 INSURED SEMICONDUCTOR LIABILITY. "INSURED SEMICONDUCTOR
LIABILITY" means any Semiconductor Liability to the extent that (i) it is
covered under the terms of C-Cube's Insurance Policies in effect prior to the
Distribution Date and (ii) Semiconductor is not a named insured under, or
otherwise entitled to the benefits of, such Insurance Policies.
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<PAGE> 22
SECTION 5.19 INTELLECTUAL PROPERTY. "INTELLECTUAL PROPERTY" means all
domestic and foreign patents and patent applications, together with any
continuations, continuations-in-part or divisional applications thereof, and all
patents issuing thereon (including reissues, renewals and re-examinations of the
foregoing); design patents, invention disclosures; mask works; copyrights, and
copyright applications and registrations; Web addresses, trademarks, service
marks, trade names, and trade dress, in each case together with any applications
and registrations therefor and all appurtenant goodwill relating thereto; trade
secrets, commercial and technical information, know-how, proprietary or
confidential information, including engineering, production and other designs,
notebooks, processes, drawings, specifications, formulae, and technology;
computer and electronic data processing programs and software (object and source
code), data bases and documentation thereof; inventions (whether patented or
not); utility models; registered designs, certificates of invention and all
other intellectual property under the laws of any country throughout the world.
SECTION 5.20 LIABILITIES. "LIABILITIES" means all debts, liabilities,
guarantees, assurances, commitments and obligations, whether fixed, contingent
or absolute, asserted or unasserted, matured or unmatured, liquidated or
unliquidated, accrued or not accrued, known or unknown, due or to become due,
whenever or however arising (including, without limitation, whether arising out
of any Contract or tort based on negligence or strict liability) and whether or
not the same would be required by generally accepted principles and accounting
policies to be reflected in financial statements or disclosed in the notes
thereto.
SECTION 5.21 LITIGATION DISCLOSURE LETTER. "LITIGATION DISCLOSURE
LETTER" has the meaning set forth in SECTION 3.1(a) of this Agreement.
SECTION 5.22 PERSON. "PERSON" means an individual, a partnership, a
corporation, a limited liability company, an association, a joint stock company,
a trust, a joint venture, an unincorporated organization and a governmental
entity or any department, agency or political subdivision thereof.
SECTION 5.23 RETAINED CASH. "RETAINED CASH" has the meaning set forth in
the Separation Agreement.
SECTION 5.24 RETAINED PAYABLES. "RETAINED PAYABLES" means (i) all
accounts payable and other obligations of payment for goods or services
purchased, leased or otherwise received in the conduct of the Semiconductor
Business that as of the Separation Date are payable to a third Person by C-Cube
or any of C-Cube's Subsidiaries, whether past due, due or to become due,
including any interest, sales or use taxes, finance charges, late or returned
check charges and other obligations of C-Cube or any of C-Cube's Subsidiaries
with respect thereto, and any obligations related to any of the foregoing and
(ii) all employee compensation Liabilities and other miscellaneous Liabilities
for which an adjustment is made in the Semiconductor Pro Forma Balance Sheet.
SECTION 5.25 RETAINED RECEIVABLES. "RETAINED RECEIVABLES" means (i) all
accounts receivable and other rights to payment for goods or services sold,
leased or otherwise provided in the conduct of the Semiconductor Business that
as of the Separation Date are payable by a third Person to C-Cube or any of
C-Cube's Subsidiaries, whether past due, due or to become due, including any
interest, sales or use taxes, finance charges, late or returned check charges
and other obligations of
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<PAGE> 23
the account debtor with respect thereto, and any proceeds of any of the
foregoing and (ii) all other miscellaneous Assets for which an adjustment is
made in the Semiconductor Pro Forma Balance Sheet.
SECTION 5.26 SECURITY INTEREST. "SECURITY INTEREST" means any mortgage,
security interest, pledge, lien, charge, claim, option, right to acquire, voting
or other restriction, right-of-way, covenant, condition, easement, encroachment,
restriction on transfer, or other encumbrance of any nature whatsoever.
SECTION 5.27 SEMICONDUCTOR ASSETS. "SEMICONDUCTOR ASSETS" has the
meaning set forth in SECTION 1.2 of this Agreement.
SECTION 5.28 SEMICONDUCTOR PRO FORMA BALANCE SHEET. "SEMICONDUCTOR PRO
FORMA BALANCE SHEET" means the unaudited condensed consolidated balance sheet as
set forth in C-Cube Semiconductor's Registration Statement on Form 10, filed on
December 29, 1999, as amended.
SECTION 5.29 SEMICONDUCTOR BUSINESS. "SEMICONDUCTOR BUSINESS" means the
business and operations of C-Cube defined as the Semiconductor Business in the
Restated Merger Agreement.
SECTION 5.30 SEMICONDUCTOR CONTINGENT GAIN. "SEMICONDUCTOR CONTINGENT
GAIN" has the meaning set forth in SECTION 1.2 of this Agreement.
SECTION 5.31 SEMICONDUCTOR CONTINGENT LIABILITY. "SEMICONDUCTOR
CONTINGENT LIABILITY" has the meaning set forth in SECTION 1.3 of this
Agreement.
SECTION 5.32 SEMICONDUCTOR CONTRACTS. "SEMICONDUCTOR CONTRACTS" means
the following contracts and agreements to which C-Cube is a party or by which it
or any of its Assets is bound, whether or not in writing, except for any such
contract or agreement that is contemplated to be retained by C-Cube or any
member of the C-Cube Group pursuant to any provision of this Agreement or any
other Ancillary Agreement:
(i) any contract or agreement entered into in the name of, or
expressly on behalf of, any division or business unit of Semiconductor I or
Semiconductor II or any of their Subsidiaries;
(ii) any contract or agreement that relates primarily to the
Semiconductor Business;
(iii) any contracts or agreements related to the computers,
desks, equipment and other Assets used or managed primarily by employees of
C-Cube that will become employees of Semiconductor I or Semiconductor II or any
of their Subsidiaries in connection with the Separation;
(iv) any contract or agreement that is otherwise expressly
contemplated pursuant to this Agreement, the Separation Agreement or any of the
other Ancillary Agreements to be assigned to Semiconductor I or Semiconductor II
or any of their Subsidiaries; and
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<PAGE> 24
(v) any guarantee, indemnity, representation, warranty or
other Liability of any member of the Semiconductor Group or the C-Cube Group in
respect of any other Semiconductor Contract, any Semiconductor Liability or the
Semiconductor Business (including guarantees of financing incurred by customers
or other third parties in connection with purchases of products or services from
the Semiconductor Business).
SECTION 5.33 SEMICONDUCTOR GROUP. "SEMICONDUCTOR GROUP" means
Semiconductor I, Semiconductor II, each Subsidiary and Affiliated Company of
Semiconductor immediately after the Separation Date and each Person that becomes
a Subsidiary or Affiliate Company of Semiconductor after the Separation Date.
SECTION 5.34 SEMICONDUCTOR INTELLECTUAL PROPERTY. "SEMICONDUCTOR
INTELLECTUAL PROPERTY" has the meaning set forth in SECTION 1.2 of this
Agreement.
SECTION 5.35 SEMICONDUCTOR LIABILITIES. "SEMICONDUCTOR LIABILITIES" has
the meaning set forth in SECTION 1.3 of this Agreement.
SECTION 5.36 SEPARATION. "SEPARATION" means the transfer and
contribution from C-Cube to Semiconductor, and Semiconductor's receipt and
assumption of, directly or indirectly, substantially all of the Assets and
Liabilities currently associated with the Semiconductor Business and the stock,
investments or similar interests currently held by C-Cube in subsidiaries and
other entities that conduct such business.
SECTION 5.37 SEPARATION AGREEMENT. "SEPARATION AGREEMENT" means the
Master Separation and Distribution Agreement dated as of _______ ___, 2000, of
which this is an Exhibit thereto.
SECTION 5.38 SEPARATION DATE. "SEPARATION DATE" means the effective date
and time of each transfer of property, assumption of liability, license,
undertaking, or agreement in connection with the Separation, which shall be
12:01 a.m., Pacific Time, _______ ___, 2000, or such date as may be fixed by the
Board of Directors of C-Cube.
SECTION 5.39 SUBSIDIARY. "SUBSIDIARY" means with respect to any
specified Person, any corporation, any limited liability company, any
partnership or other legal entity of which such Person or its Subsidiaries owns,
directly or indirectly, more than 50% of the stock or other equity interest
entitled to vote on the election of the members of the board of directors or
similar governing body. Unless context otherwise requires, reference to C-Cube
and its Subsidiaries shall not include the subsidiaries of C-Cube that will be
transferred to Semiconductor after giving effect to the Separation and those
Subsidiaries will be treated as Subsidiaries of Semiconductor I or Semiconductor
II, as applicable.
SECTION 5.40 TAXES. "TAXES" has the meaning set forth in the Tax Sharing
Agreement.
[SIGNATURES ON FOLLOWING PAGE]
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<PAGE> 25
IN WITNESS WHEREOF, each of the parties has caused the General
Assignment and Assumption Agreement to be executed on its behalf by its officers
thereunto duly authorized on the day and year first above written.
C-CUBE MICROSYSTEMS INC.
By:
-------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
C-CUBE SEMICONDUCTOR INC.
By:
-------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
C-CUBE SEMICONDUCTOR II INC.
By:
-------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
[SIGNATURE PAGE TO GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT]
<PAGE> 26
SCHEDULE 1.1(a)
ASSETS TO BE TRANSFERRED TO SEMICONDUCTOR I
(ASSETS RELATED TO THE SEMICONDUCTOR BUSINESS SALE AND MARKETING DIVISION)
AND THE STOCK OF C-CUBE U.S. INC.
<PAGE> 27
SCHEDULE 1.1(b)
LIABILITIES TO BE TRANSFERRED TO SEMICONDUCTOR I
(LIABILITIES RELATED TO THE SEMICONDUCTOR BUSINESS SALES AND MARKETING DIVISION)
<PAGE> 1
EXHIBIT 10.4
FORM OF
INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT
AMONG
C-CUBE MICROSYSTEMS INC.,
C-CUBE SEMICONDUCTOR INC.
AND
C-CUBE SEMICONDUCTOR II INC.
_____________, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C>
ARTICLE I. MUTUAL RELEASES; INDEMNIFICATION...........................................1
Section 1.1. Release of Pre-Closing Claims....................................1
Section 1.2. Indemnification by Semiconductor I...............................2
Section 1.3. Indemnification by C-Cube........................................2
Section 1.4. Indemnification With Respect to Environmental Actions and
Conditions ......................................................3
Section 1.5. Procedures for Defense, Settlement and Indemnification
of Third Party Claims ...........................................4
Section 1.6. Additional Matters...............................................5
Section 1.7. Survival of Indemnities..........................................5
ARTICLE II. INSURANCE MATTERS.........................................................6
Section 2.1. Cooperation and Agreement Not to Release Carriers................6
Section 2.2. Semiconductor I and Semiconductor II Insurance Coverage..........6
Section 2.3. Responsibilities for Self-insured Obligations....................6
Section 2.4. Procedures With Respect to Insured Semiconductor
Liabilities .....................................................6
Section 2.5. Cooperation......................................................7
Section 2.6. No Assignment or Waiver..........................................7
Section 2.7. No Restrictions..................................................7
Section 2.9. Matters Governed by Employee Matters Agreement...................7
ARTICLE III. MISCELLANEOUS............................................................7
Section 3.1. Entire Agreement.................................................7
Section 3.2. Governing Law....................................................7
Section 3.3. Notices..........................................................8
Section 3.4. Parties in Interest..............................................8
Section 3.5. Other Agreements Evidencing Indemnification Obligations..........8
Section 3.6. Counterparts.....................................................8
Section 3.7. Assignment.......................................................8
Section 3.8. Severability.....................................................8
Section 3.9. Failure or Indulgence Not Waiver.................................9
Section 3.10. Amendment........................................................9
Section 3.11. Authority........................................................9
Section 3.12. Interpretation...................................................9
ARTICLE IV. DEFINITIONS...............................................................9
Section 4.1. Action...........................................................9
Section 4.2. Affiliated Company...............................................9
Section 4.3. Assignment Agreement.............................................9
Section 4.4. C-Cube Facilities................................................9
Section 4.5. C-Cube Group....................................................10
Section 4.6. C-Cube Indemnitees..............................................10
</TABLE>
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Section 4.7. Employee Matters Agreement......................................10
Section 4.8. Environmental Actions...........................................10
Section 4.9. Environmental Conditions........................................10
Section 4.10. Environmental Laws..............................................10
Section 4.11. Governmental Authority..........................................10
Section 4.12. Hazardous Materials.............................................10
Section 4.13. Indemnitee......................................................11
Section 4.14. Insurance Policies..............................................11
Section 4.15. Insurance Proceeds..............................................11
Section 4.16. Insured Semiconductor Liability.................................11
Section 4.17. Liabilities.....................................................11
Section 4.18. Person..........................................................11
Section 4.19. Prime Rate......................................................11
Section 4.20. Related Semiconductor Contingent Liabilities....................11
Section 4.21. Release.........................................................11
Section 4.22. "Retained Liabilities"..........................................11
Section 4.23. Semiconductor Assets............................................11
Section 4.24. Semiconductor Business..........................................12
Section 4.25. Semiconductor Contingent Liability..............................12
Section 4.26. Semiconductor Contracts.........................................12
Section 4.27. Semiconductor Group.............................................12
Section 4.28. Semiconductor Indemnitees.......................................12
Section 4.29. Semiconductor Liabilities.......................................12
Section 4.30. Separation......................................................12
Section 4.31. Separation Agreement............................................12
Section 4.32. Separation Date.................................................12
Section 4.33. Subsidiary......................................................12
Section 4.34. Tax Sharing Agreement...........................................12
Section 4.35. Taxes...........................................................13
Section 4.36. Third Party Claim...............................................13
</TABLE>
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<PAGE> 4
INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT
This Indemnification and Insurance Matters Agreement (this "AGREEMENT")
is entered into on __________, 2000 among C-Cube Microsystems Inc., a Delaware
corporation ("C-CUBE"), and C-Cube Semiconductor Inc., a Delaware corporation
("SEMICONDUCTOR I "), and C-Cube Semiconductor II Inc., a Delaware corporation
("SEMICONDUCTOR II"). Capitalized terms used herein and not otherwise defined
herein shall have the meanings ascribed to such terms in the ARTICLE IV below.
RECITALS
[INSERT RECITALS]
NOW, THEREFORE, in consideration of the foregoing and the covenants and
agreements set forth below, the parties hereto agree as follows:
ARTICLE I.
MUTUAL RELEASES; INDEMNIFICATION
SECTION 1.1. RELEASE OF PRE-CLOSING CLAIMS.
(a) Semiconductor Release. Except as provided in SECTION 1.1(c),
effective as of the Separation Date, Semiconductor I does hereby, for itself and
as agent for each member of the Semiconductor Group (which includes
Semiconductor II), remise, release and forever discharge the C-Cube Indemnitees
from any and all Liabilities whatsoever, whether at law or in equity (including
any right of contribution), whether arising under any contract or agreement, by
operation of law or otherwise, existing or arising from any acts or events
occurring or failing to occur or alleged to have occurred or to have failed to
occur or any conditions existing or alleged to have existed on or before the
Separation Date, including in connection with the transactions and all other
activities to implement any of the Separation, the Merger and the Distribution.
(b) C-Cube Release. Except as provided in SECTION 1.1(c), effective
as of the Separation Date, C-Cube does hereby, for itself and as agent for each
member of the C-Cube Group, remise, release and forever discharge the
Semiconductor Indemnitees from any and all Liabilities whatsoever, whether at
law or in equity (including any right of contribution), whether arising under
any contract or agreement, by operation of law or otherwise, existing or arising
from any acts or events occurring or failing to occur or alleged to have
occurred or to have failed to occur or any conditions existing or alleged to
have existed on or before the Separation Date, including in connection with the
transactions and all other activities to implement any of the Separation, the
Merger and the Distribution.
(c) No Impairment. Nothing contained in SECTION 1.1(a) or (b) shall
impair any right of any Person to enforce the Separation Agreement or any
Ancillary Agreement (including this Agreement), in each case in accordance with
its terms.
<PAGE> 5
(d) No Actions as to Released Claims. Semiconductor I agrees, for
itself and as agent for each member of the Semiconductor Group, not to make any
claim or demand, or commence any Action asserting any claim or demand, including
any claim of contribution or any indemnification, against C-Cube or any member
of the C-Cube Group, or any other Person released pursuant to SECTION 1.1(a),
with respect to any Liabilities released pursuant to SECTION 1.1(a). C-Cube
agrees, for itself and as agent for each member of the C-Cube Group, not to make
any claim or demand, or commence any Action asserting any claim or demand,
including any claim of contribution or any indemnification, against
Semiconductor I or any member of the Semiconductor Group, or any other Person
released pursuant to SECTION 1.1(b), with respect to any Liabilities released
pursuant to SECTION 1.1(b).
(e) Further Instruments. At any time, at the request of any other
party, each party shall cause each member of its respective Group to execute and
deliver releases reflecting the provisions hereof.
SECTION 1.2. INDEMNIFICATION BY SEMICONDUCTOR I. Except as otherwise
provided in this Agreement, Semiconductor I shall, for itself and as agent for
each member of the Semiconductor Group, indemnify, defend (or, where applicable,
pay the defense costs for) and hold harmless the C-Cube Indemnitees from and
against any and all Liabilities that any third party seeks to impose upon the
C-Cube Indemnitees, or which are imposed upon the C-Cube Indemnitees, and that
relate to, arise out of or result from any of the following items (without
duplication):
(i) the Semiconductor Business, any Semiconductor Liability or
any Semiconductor Contract; and
(ii) any breach by Semiconductor I or any member of the
Semiconductor Group of the Separation Agreement or any of the Ancillary
Agreements (including this Agreement).
In the event that any member of the Semiconductor Group makes a payment to the
C-Cube Indemnitees hereunder, and any of the C-Cube Indemnitees subsequently
diminishes the Liability on account of which such payment was made, either
directly or through a third-party recovery, C-Cube will promptly repay (or will
procure a C-Cube Indemnitee to promptly repay) such member of the Semiconductor
Group the amount by which the payment made by such member of the Semiconductor
Group exceeds the actual cost of the associated indemnified Liability.
SECTION 1.3. INDEMNIFICATION BY C-CUBE. Except as otherwise provided in
this Agreement, C-Cube shall, for itself and as agent for each member of the
C-Cube Group, indemnify, defend (or, where applicable, pay the defense costs
for) and hold harmless the Semiconductor Indemnitees from and against any and
all Liabilities that any third party seeks to impose upon the Semiconductor
Indemnitees, or which are imposed upon the Semiconductor Indemnitees, and that
relate to, arise out of or result from any of the following items (without
duplication):
(i) the DiviCom Business or any Liability of the C-Cube Group
other than the Semiconductor Liabilities including, without limitation, the
Excluded Liabilities; and
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<PAGE> 6
(ii) any breach by C-Cube or any member of the C-Cube Group of
the Separation Agreement or any of the Ancillary Agreements (including this
Agreement).
In the event that any member of the C-Cube Group makes a payment to the
Semiconductor Indemnitees hereunder, and any of the Semiconductor Indemnitees
subsequently diminishes the Liability on account of which such payment was made,
either directly or through a third-party recovery, Semiconductor I will promptly
repay (or will procure a Semiconductor Indemnitee to promptly repay) such member
of the C-Cube Group the amount by which the payment made by such member of the
C-Cube Group exceeds the actual cost of the indemnified Liability. This SECTION
1.3 shall not apply to any Liability indemnified under SECTION 1.4.
SECTION 1.4. INDEMNIFICATION WITH RESPECT TO ENVIRONMENTAL ACTIONS AND
CONDITIONS.
(a) Indemnification by Semiconductor I. Semiconductor I shall, for
itself and as agent for each member of the Semiconductor Group, indemnify,
defend and hold harmless the C-Cube Indemnitees from and against any and all
Environmental Actions relating to, arising out of or resulting from
Environmental Conditions (i) arising out of operations occurring on and after
the Separation Date at any of the Semiconductor Facilities, or (ii) on any of
the Semiconductor Facilities arising from an event causing contamination that
first occurs on or after the Separation Date (including any Release of Hazardous
Materials occurring after the Separation Date that migrates to any of the
Semiconductor Facilities), except to the extent that such Environmental
Conditions arise out of the operations of the C-Cube Group on and after the
Separation Date.
(b) Indemnification by C-Cube. C-Cube shall, for itself and as agent
for each member of the C-Cube Group, indemnify, defend and hold harmless the
Semiconductor Indemnitees from and against any and all Environmental Actions
relating to, arising out of or resulting from any of the following items:
(i) Environmental Conditions (x) existing on, under, about or
in the vicinity of any of the Semiconductor Facilities prior to the Separation
Date, or (y) arising out of operations occurring on or before the Separation
Date at any of the Semiconductor Facilities;
(ii) Except as arising out of the operations of the
Semiconductor Group on and after the Separation Date, Environmental Conditions
on, under, about or arising out of operations occurring at any time, whether
before or after the Separation Date, at any of the C-Cube Facilities; and
(iii) Pre-Separation Third Party Site Liabilities.
(c) Agreement Regarding Payments to Indemnitee. In the event an
Indemnifying Party makes any payment to or on behalf of an Indemnitee with
respect to an Environmental Action for which the Indemnifying Party is obligated
to indemnify under this SECTION 1.4, and the Indemnitee subsequently receives
any payment from a third party on account of the same financial obligation
covered by the payment made by the Indemnifying Party for that Environmental
Action or otherwise diminishes the financial obligation, the Indemnitee will
promptly pay the Indemnifying Party the
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<PAGE> 7
amount by which the payment made by the Indemnifying Party, exceeds the actual
cost of the financial obligation.
SECTION 1.5. PROCEDURES FOR DEFENSE, SETTLEMENT AND INDEMNIFICATION OF
THIRD PARTY CLAIMS.
(a) Notice of Claims. If a C-Cube Indemnitee or a Semiconductor
Indemnitee (as applicable) (an "INDEMNITEE") shall receive notice or otherwise
learn of the assertion by a Person (including any Governmental Authority) who is
not a member of the C-Cube Group or the Semiconductor Group of any claim or of
the commencement by any such Person of any Action (collectively, a "THIRD PARTY
CLAIM") with respect to which a party (an "INDEMNIFYING PARTY") may be obligated
to provide indemnification to such Indemnitee pursuant to SECTION 1.2 or 1.3, or
any other section of the Separation Agreement or any Ancillary Agreement
(including this Agreement), C-Cube and Semiconductor I (as applicable) will
ensure that such Indemnitee shall give such Indemnifying Party written notice
thereof within 30 days after becoming aware of such Third Party Claim. Any such
notice shall describe the Third Party Claim in reasonable detail.
Notwithstanding the foregoing, the delay or failure of any Indemnitee or other
Person to give notice as provided in this SECTION 1.4(a) shall not relieve the
related Indemnifying Party of its obligations under this ARTICLE I, except to
the extent that such Indemnifying Party is actually and substantially prejudiced
by such delay or failure to give notice.
(b) Defense By Indemnifying Party. An Indemnifying Party will manage
the defense of and (unless the Indemnifying Party has specified any reservations
or exceptions to the obligation to manage the defense or to indemnify that have
been referred to, but not resolved by, the Claims Committee) may settle or
compromise any Third Party Claim. Within 30 days after the receipt of notice
from an Indemnitee in accordance with SECTION 1.4(a) (or sooner, if the nature
of such Third Party Claim so requires), the Indemnifying Party shall notify the
Indemnitee that the Indemnifying Party will assume responsibility for managing
the defense of such Third Party Claim, which notice shall specify any
reservations or exceptions.
(c) Defense By Indemnitee. If an Indemnifying Party fails to assume
responsibility for managing the defense of a Third Party Claim, or fails to
notify an Indemnitee that it will assume responsibility as provided in SECTION
1.4(b), such Indemnitee may manage the defense of such Third Party Claim;
provided, however, that the Indemnifying Party shall reimburse all such costs
and expenses in the event it is ultimately determined that the Indemnifying
Party is obligated to indemnify the Indemnitee with respect to such Third Party
Claim.
(d) No Settlement By Indemnitee Without Consent. Unless the
Indemnifying Party has failed to manage the defense of the Third Party Claim in
accordance with the terms of this Agreement, no Indemnitee may settle or
compromise any Third Party Claim without the consent of the Indemnifying Party.
(e) No Consent to Certain Judgments or Settlements Without Consent.
Notwithstanding SECTION 1.4(b) above, no party shall consent to entry of any
judgment or enter into any settlement of a Third Party Claim without the consent
of the other party (such consent not to be unreasonably
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<PAGE> 8
withheld) if the effect of such judgment or settlement is to (A) permit any
injunction, declaratory judgment, other order or other nonmonetary relief to be
entered, directly or indirectly, against the other party or (B) affect the other
party in a material fashion due to the allocation of Liabilities and related
indemnities set forth in the Separation Agreement, this Agreement or any other
Ancillary Agreement.
SECTION 1.6. ADDITIONAL MATTERS.
(a) Cooperation in Defense and Settlement. With respect to any Third
Party Claim that implicates both Semiconductor I and C-Cube in a material
fashion due to the allocation of Liabilities, responsibilities for management of
defense and related indemnities set forth in the Separation Agreement, this
Agreement or any of the Ancillary Agreements, the parties agree to cooperate
fully and maintain a joint defense (in a manner that will preserve the
attorney-client privilege with respect thereto) so as to minimize such
Liabilities and defense costs associated therewith. The party that is not
responsible for managing the defense of such Third Party Claims shall, upon
reasonable request, be consulted with respect to significant matters relating
thereto and may, if necessary or helpful, associate counsel to assist in the
defense of such claims.
(b) Substitution. In the event of an Action in which the Indemnifying
Party is not a named defendant, if either the Indemnitee or the Indemnifying
Party shall so request, the parties shall endeavor to substitute the
Indemnifying Party for the named defendant. If such substitution or addition
cannot be achieved for any reason or is not requested, the rights and
obligations of the parties regarding indemnification and the management of the
defense of claims as set forth in this ARTICLE I shall not be altered.
(c) Subrogation. In the event of payment by or on behalf of any
Indemnifying Party to or on behalf of any Indemnitee in connection with any
Third Party Claim, such Indemnifying Party shall be subrogated to and shall
stand in the place of such Indemnitee, in whole or in part based upon whether
the Indemnifying Party has paid all or only part of the Indemnitee's Liability,
as to any events or circumstances in respect of which such Indemnitee may have
any right, defense or claim relating to such Third Party Claim against any
claimant or plaintiff asserting such Third Party Claim or against any other
person. Such Indemnitee shall cooperate with such Indemnifying Party in a
reasonable manner, and at the cost and expense of such Indemnifying Party, in
prosecuting any subrogated right, defense or claim.
(d) Not Applicable to Taxes. This Agreement shall not apply to Taxes
(which are covered by the Tax Sharing Agreement).
SECTION 1.7. SURVIVAL OF INDEMNITIES. Subject to SECTION 3.7, the rights
and obligations of the members of the C-Cube Group and the Semiconductor Group
under this ARTICLE I shall survive the sale or other transfer by any party of
any Semiconductor Assets or businesses or the assignment by it of any
Liabilities or the sale by any member of the C-Cube Group or the Semiconductor
Group of the capital stock or other equity interests of any Subsidiary to any
Person.
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<PAGE> 9
ARTICLE II.
INSURANCE MATTERS
SECTION 2.1. COOPERATION AND AGREEMENT NOT TO RELEASE CARRIERS. Each of
C-Cube and Semiconductor I will share such information as is reasonably
necessary in order to permit the other to manage and conduct its insurance
matters in an orderly fashion. Each of C-Cube and Semiconductor I, at the
request of the other, shall cooperate with and use commercially reasonable
efforts to assist the other in recoveries for claims made under any insurance
policy for the benefit of any insured party, and neither C-Cube nor
Semiconductor I, nor any of their Subsidiaries, shall take any action which
would intentionally jeopardize or otherwise interfere with either party's
ability to collect any proceeds payable pursuant to any insurance policy. Except
as otherwise contemplated by the Separation Agreement, this Agreement or any
Ancillary Agreement, after the Separation Date, neither C-Cube nor Semiconductor
I shall (and shall ensure that no member of their respective Groups shall),
without the consent of the other, provide any insurance carrier with a release,
or amend, modify or waive any rights under any such policy or agreement, if such
release, amendment, modification or waiver would adversely affect any rights or
potential rights of any member of the other Group thereunder. However, nothing
in this SECTION 2.1 shall (A) preclude any member of any Group from presenting
any claim or from exhausting any policy limit, (B) require any member of any
Group to pay any premium or other amount or to incur any Liability or (C)
require any member of any Group to renew, extend or continue any policy in
force.
SECTION 2.2. SEMICONDUCTOR I AND SEMICONDUCTOR II INSURANCE COVERAGE.
From and after the Distribution Date, Semiconductor I and Semiconductor II, and
Semiconductor I and Semiconductor II alone, shall be responsible for obtaining
and maintaining insurance programs for their risk of loss and such insurance
arrangements shall be separate and apart from C-Cube's insurance programs.
Notwithstanding the foregoing, C-Cube, upon the request of Semiconductor I or
Semiconductor II, shall use all commercially reasonable efforts to assist
Semiconductor I or Semiconductor II in the transition to their own separate
insurance programs from and after the Distribution Date, and shall provide
Semiconductor I or Semiconductor II with any information that is in the
possession of C-Cube and is reasonably available and necessary to either obtain
insurance coverages for Semiconductor I or Semiconductor II or to assist
Semiconductor I or Semiconductor II in preventing unintended self-insurance, in
whatever form.
SECTION 2.3. RESPONSIBILITIES FOR SELF-INSURED OBLIGATIONS.
Semiconductor I or Semiconductor II will reimburse C-Cube for all amounts
necessary to exhaust or otherwise satisfy all applicable self-insured
retentions, amounts for fronted policies, deductibles and retrospective premium
adjustments and similar amounts not covered by Insurance Policies in connection
with Semiconductor Liabilities and Insured Semiconductor Liabilities.
SECTION 2.4. PROCEDURES WITH RESPECT TO INSURED SEMICONDUCTOR
LIABILITIES.
(a) Reimbursement. Semiconductor I or Semiconductor II, as
applicable, will reimburse C-Cube for all amounts incurred to pursue insurance
recoveries from Insurance Policies for Insured Semiconductor Liabilities.
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<PAGE> 10
(b) Management of Claims. The defense of claims, suits or actions
giving rise to potential or actual Insured Semiconductor Liabilities will be
managed (in conjunction with C-Cube's insurers, as appropriate) by the party
that would have had responsibility for managing such claims, suits or actions
had such Insured Semiconductor Liabilities been Semiconductor Liabilities.
SECTION 2.5. COOPERATION. C-Cube and Semiconductor I and Semiconductor
II will cooperate with each other in all respects, and they shall execute any
additional documents which are reasonably necessary, to effectuate the
provisions of this ARTICLE II.
SECTION 2.6. NO ASSIGNMENT OR WAIVER. This Agreement shall not be
considered as an attempted assignment of any policy of insurance or as a
contract of insurance and shall not be construed to waive any right or remedy of
any member of the C-Cube Group in respect of any Insurance Policy or any other
contract or policy of insurance.
SECTION 2.7. NO RESTRICTIONS. Nothing in this Agreement shall be deemed
to restrict any member of the Semiconductor Group from acquiring at its own
expense any other insurance policy in respect of any Liabilities or covering any
period.
SECTION 2.8. FURTHER AGREEMENTS. The Parties acknowledge that they
intend to allocate financial obligations without violating any laws regarding
insurance, self-insurance or other financial responsibility. If it is determined
that any action undertake pursuant to the Separation Agreement, this Agreement
or any Ancillary Agreement is violative of any insurance, self-insurance or
related financial responsibility law or regulation, the parties agree to work
together to do whatever is necessary to comply with such law or regulation while
trying to accomplish, as much as possible, the allocation of financial
obligations as intended in the Separation Agreement, this Agreement and any
Ancillary Agreement.
SECTION 2.9. MATTERS GOVERNED BY EMPLOYEE MATTERS AGREEMENT. This
ARTICLE II shall not apply to any insurance policies that are the subject of the
Employee Matters Agreement.
ARTICLE III.
MISCELLANEOUS
SECTION 3.1. ENTIRE AGREEMENT. This Agreement, the Master Separation
Agreement, the other Ancillary Agreements and the Exhibits and Schedules
attached hereto and thereto, constitutes the entire agreement between the
parties with respect to the subject matter hereof and shall supersede all prior
written and oral and all contemporaneous oral agreements and understandings with
respect to the subject matter hereof.
SECTION 3.2. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware as to all matters
regardless of the laws that might otherwise govern under principles of conflicts
of laws applicable thereto.
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<PAGE> 11
SECTION 3.3. NOTICES. Any notice, demand, offer, request or other
communication required or permitted to be given by either party pursuant to the
terms of this Agreement shall be in writing and shall be deemed effectively
given the earlier of (i) when received, (ii) when delivered personally, (iii)
one (1) business day after being delivered by facsimile (with receipt of
appropriate confirmation), (iv) one (1) business day after being deposited with
an overnight courier service or (v) four (4) days after being deposited in the
U.S. mail, First Class with postage prepaid, and addressed to the attention of
the party's General Counsel at the address of its principal executive office or
such other address as a party may request by notifying the other in writing.
SECTION 3.4. PARTIES IN INTEREST. This Agreement, including the
Schedules and Exhibits hereto, and the other documents referred to herein, shall
be binding upon C-Cube, C-Cube's Subsidiaries, Semiconductor I and Semiconductor
II and their Subsidiaries and inure solely to the benefit of the Semiconductor
Indemnitees and the C-Cube Indemnitees and their respective permitted assigns,
and nothing in this Agreement, express or implied, is intended to confer upon
any other Person any rights or remedies of any nature whatsoever under or by
reason of this Agreement.
SECTION 3.5. OTHER AGREEMENTS EVIDENCING INDEMNIFICATION OBLIGATIONS.
C-Cube hereby agrees to execute, for the benefit of any Semiconductor
Indemnitee, such documents as may be reasonably requested by such Semiconductor
Indemnitee, evidencing C-Cube's agreement that the indemnification obligations
of C-Cube set forth in this Agreement inure to the benefit of and are
enforceable by such Semiconductor Indemnitee. Semiconductor I hereby agrees to
execute, for the benefit of any C-Cube Indemnitee, such documents as may be
reasonably requested by such C-Cube Indemnitee, evidencing Semiconductor I's
agreement that the indemnification obligations of Semiconductor I's set forth in
this Agreement inure to the benefit of and are enforceable by such C-Cube
Indemnitee.
SECTION 3.6. COUNTERPARTS. This Agreement, including the Schedules and
Exhibits hereto, and the other documents referred to herein, may be executed in
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
SECTION 3.7. ASSIGNMENT. The rights and obligations in this Agreement
may not be assigned or delegated by any party hereto, in whole or in part,
without the express prior written consent of the other party hereto.
SECTION 3.8. SEVERABILITY. If any term or other provision of this
Agreement or the Schedules or Exhibits attached hereto is determined by a
nonappealable decision by a court, administrative agency or arbitrator to be
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the fullest extent
possible.
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<PAGE> 12
SECTION 3.9. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on
the part of either party hereto in the exercise of any right hereunder shall
impair such right or be construed to be a waiver of, or acquiescence in, any
breach of any representation, warranty or agreement herein, nor shall any single
or partial exercise of any such right preclude other or further exercise thereof
or of any other right.
SECTION 3.10. AMENDMENT. No change or amendment will be made to this
Agreement except by an instrument in writing signed on behalf of each of the
parties to this Agreement.
SECTION 3.11. AUTHORITY. Each of the parties hereto represents to the
other that (a) it has the corporate or other requisite power and authority to
execute, deliver and perform this Agreement, (b) the execution, delivery and
performance of this Agreement by it have been duly authorized by all necessary
corporate or other action, (c) it has duly and validly executed and delivered
this Agreement, and (d) this Agreement is a legal, valid and binding obligation,
enforceable against it in accordance with its terms subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and general equity principles.
SECTION 3.12. INTERPRETATION. The headings contained in this Agreement,
in any Exhibit or Schedule hereto and in the table or contents to this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Any capitalized term used in any Schedule or
Exhibit but not otherwise defined therein, shall have the meaning assigned to
such term in this Agreement. When a reference is made in this Agreement to an
Article or a Section, Exhibit or Schedule, such reference shall be to an Article
or Section of, or an Exhibit or Schedule to, this Agreement unless otherwise
indicated.
ARTICLE IV.
DEFINITIONS
SECTION 4.1. ACTION. "ACTION" means any demand, action, suit,
countersuit, arbitration, inquiry, proceeding or investigation by or before any
federal, state, local, foreign or international governmental authority or any
arbitration or mediation tribunal.
SECTION 4.2. AFFILIATED COMPANY. "AFFILIATED COMPANY" means, with
respect to C-Cube, any entity in which C-Cube holds a 50% or less ownership
interest that is listed on SCHEDULE 6.1(a) to the Separation Agreement and, with
respect to Semiconductor I and Semiconductor II, any entity in which
Semiconductor I or Semiconductor II holds a 50% or less ownership interest and
that is listed on SCHEDULE 6.1(b) to the Separation Agreement. SCHEDULES 6.1(a)
and 6.1(b) may be amended from time to time after the date hereof upon mutual
written consent of the parties.
SECTION 4.3. ASSIGNMENT AGREEMENT. "ASSIGNMENT AGREEMENT" means the
General Assignment and Assumption Agreement attached as EXHIBIT C to the
Separation Agreement.
SECTION 4.4. C-CUBE FACILITIES. "C-CUBE FACILITIES" means all of the
real property and improvements thereon owned or occupied at any time on or
before the Separation Date by C-Cube,
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<PAGE> 13
whether for the DiviCom Business or the Semiconductor Business, excluding the
Semiconductor I or Semiconductor II Facilities.
SECTION 4.5. C-CUBE GROUP. "C-CUBE GROUP" means C-Cube, each Subsidiary
and Affiliated Company of C-Cube (other than any member of the Semiconductor
Group) immediately after the Separation Date and each Person that becomes a
Subsidiary or Affiliate Company of C-Cube after the Separation Date.
SECTION 4.6. C-CUBE INDEMNITEES. "C-CUBE INDEMNITEES" means C-Cube, each
member of the C-Cube Group and each of their respective directors, officers and
employees.
SECTION 4.7. EMPLOYEE MATTERS AGREEMENT. "EMPLOYEE MATTERS AGREEMENT"
means the Employee Matters Agreement attached as EXHIBIT E to the Separation
Agreement.
SECTION 4.8. ENVIRONMENTAL ACTIONS. "ENVIRONMENTAL ACTIONS" means any
notice, claim, act, cause of action, order, decree or investigation by any third
party (including, without limitation, any Governmental Authority) alleging
potential liability (including potential liability for investigatory costs,
cleanup costs, governmental response costs, natural resources damages, damage to
flora or fauna caused by Environmental Conditions, real property damages,
personal injuries or penalties) arising out of, based on or resulting from the
Release of any Hazardous Materials. "Environmental Actions" shall not include
any personal injury claim made by any employee of the Semiconductor Group or the
C-Cube Group arising during the course or scope of the employment of such
employee for the C-Cube Group or for the Semiconductor Group.
SECTION 4.9. ENVIRONMENTAL CONDITIONS. "ENVIRONMENTAL CONDITIONS" means
the presence in the environment, including the soil, groundwater, surface water
or ambient air, of any Hazardous Material at a level which requires
investigation or remediation (including, without limitation, investigation,
study, health or risk assessment, monitoring, removal, treatment or transport)
under any Environmental Laws.
SECTION 4.10. ENVIRONMENTAL LAWS. "ENVIRONMENTAL LAWS" means all laws
and regulations of any Governmental Authority with jurisdiction that relate to
the protection of the environment (including ambient air, surface water, ground
water, land surface or subsurface strata) including laws and regulations
relating to the Release of Hazardous Materials, or otherwise relating to the
treatment, storage, disposal, transport or handling of Hazardous Materials, or
to the exposure of any individual to a Release of Hazardous Materials.
SECTION 4.11. GOVERNMENTAL AUTHORITY. "GOVERNMENTAL AUTHORITY" means any
federal, state, local, foreign or international court, government, department,
commission, board, bureau, agency, official or other regulatory, administrative
or governmental authority.
SECTION 4.12. HAZARDOUS MATERIALS. "HAZARDOUS MATERIALS" means
chemicals, pollutants, contaminants, wastes, toxic substances, radioactive and
biological materials, hazardous substances, petroleum and petroleum products or
any fraction thereof.
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<PAGE> 14
SECTION 4.13. INDEMNITEE. "INDEMNITEE" has the meaning set forth in
SECTION 1.5(a) hereof.
SECTION 4.14. INSURANCE POLICIES. "INSURANCE POLICIES" means insurance
policies pursuant to which a Person makes a true risk transfer to an insurer.
SECTION 4.15. INSURANCE PROCEEDS. "INSURANCE PROCEEDS" means those
monies:
(a) received by an insured from an insurance carrier; or
(b) paid by an insurance carrier on behalf of the insured;
from Insurance Policies.
SECTION 4.16. INSURED SEMICONDUCTOR LIABILITY. "INSURED SEMICONDUCTOR
LIABILITY" means any Semiconductor Liability to the extent that (i) it is
covered under the terms of C-Cube's Insurance Policies in effect prior to the
Distribution Date and (ii) Semiconductor is not a named insured under, or
otherwise entitled to the benefits of, such Insurance Policies.
SECTION 4.17. LIABILITIES. "LIABILITIES" has the meaning set forth in
the Assignment Agreement.
SECTION 4.18. PERSON. "PERSON" means an individual, a partnership, a
corporation, a limited liability company, an association, a joint stock company,
a trust, a joint venture, an unincorporated organization and a governmental
entity or any department, agency or political subdivision thereof.
SECTION 4.19. PRIME RATE. "PRIME RATE" means the prime rate as published
in the Wall Street Journal on the date of determination.
SECTION 4.20. RELATED SEMICONDUCTOR CONTINGENT LIABILITIES. "RELATED
SEMICONDUCTOR CONTINGENT LIABILITIES" means any set or group of Semiconductor
Contingent Liabilities arising from any single Action (including any group of
Actions that are consolidated as a single Action and any Action or Actions
certified as a class action) or any Action that is brought or threatened to be
brought as a class action and that is settled.
SECTION 4.21. RELEASE. "RELEASE" means any release, spill, emission,
leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching
or migration into the indoor or outdoor environment, including, without
limitation, the movement of Hazardous Materials through ambient air, soil,
surface water, groundwater, wetlands, land or subsurface strata.
SECTION 4.22. "RETAINED LIABILITIES". "Retained Liabilities" has the
meaning set forth in the Assignment Agreement.
SECTION 4.23. SEMICONDUCTOR ASSETS. "SEMICONDUCTOR ASSETS" has the
meaning set forth in SECTION 1.2 of the Assignment Agreement.
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<PAGE> 15
SECTION 4.24. SEMICONDUCTOR BUSINESS. "SEMICONDUCTOR BUSINESS" means the
business and operations of C-Cube defined as the Semiconductor Business in the
Restated Merger Agreement.
SECTION 4.25. SEMICONDUCTOR CONTINGENT LIABILITY. "SEMICONDUCTOR
CONTINGENT LIABILITY" has the meaning set forth in the Assignment Agreement.
SECTION 4.26. SEMICONDUCTOR CONTRACTS. "SEMICONDUCTOR CONTRACTS" has the
meaning set forth in SECTION [4.8] of the Assignment Agreement.
SECTION 4.27. SEMICONDUCTOR GROUP. "SEMICONDUCTOR GROUP" means
Semiconductor I, Semiconductor II, each Subsidiary and Affiliated Company of
Semiconductor I or Semiconductor II immediately after the Separation Date and
each Person that becomes a Subsidiary or Affiliate Company of Semiconductor I or
Semiconductor II after the Separation Date.
SECTION 4.28. SEMICONDUCTOR INDEMNITEES. "SEMICONDUCTOR INDEMNITEES"
means Semiconductor I, Semiconductor II, each member of the Semiconductor Group
and each of their respective directors, officers and employees.
SECTION 4.29. SEMICONDUCTOR LIABILITIES. "SEMICONDUCTOR LIABILITIES" has
the meaning set forth in the Assignment Agreement.
SECTION 4.30. SEPARATION. "SEPARATION" means the transfer and
contribution from C-Cube to Semiconductor I and Semiconductor II, and
Semiconductor I and Semiconductor II's receipt and assumption of, directly or
indirectly, substantially all of the Assets and Liabilities currently associated
with the Semiconductor Business and the stock, investments or similar interests
currently held by C-Cube in subsidiaries and other entities that conduct such
business.
SECTION 4.31. SEPARATION AGREEMENT. "SEPARATION AGREEMENT" means the
Master Separation and Distribution Agreement dated as of ____________, 2000, of
which this is an Exhibit thereto.
SECTION 4.32. SEPARATION DATE. "SEPARATION DATE" means 12:01 a.m.,
Pacific Time, __________, 2000, or such date as may be fixed by the Board of
Directors of C-Cube.
SECTION 4.33. SUBSIDIARY. "SUBSIDIARY" means with respect to any
specified Person, any corporation, any limited liability company, any
partnership or other legal entity of which such Person or its Subsidiaries owns,
directly or indirectly, more than 50% of the stock or other equity interest
entitled to vote on the election of the members of the board of directors or
similar governing body. Unless context otherwise requires, reference to C-Cube
and its Subsidiaries shall not include the subsidiaries of C-Cube that will be
transferred to Semiconductor I or Semiconductor II after giving effect to the
Separation.
SECTION 4.34. TAX SHARING AGREEMENT. "TAX SHARING AGREEMENT" means the
Tax Sharing Agreement, attached as EXHIBIT F to the Separation Agreement.
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SECTION 4.35. TAXES. "TAXES" has the meaning set forth in the Tax
Sharing Agreement.
SECTION 4.36. THIRD PARTY CLAIM. "THIRD PARTY CLAIM" has the meaning set
forth in SECTION 1.5(a) of this Agreement.
[SIGNATURES ON FOLLOWING PAGE]
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<PAGE> 17
IN WITNESS WHEREOF, each of the parties has caused this Indemnification
and Insurance Matters Agreement to be executed on its behalf by its officers
thereunto duly authorized on the day and year first above written.
C-CUBE MICROSYSTEMS INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
---------------------------------
C-CUBE SEMICONDUCTOR INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
---------------------------------
C-CUBE SEMICONDUCTOR II INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
---------------------------------
<PAGE> 1
EXHIBIT 10.5
FORM OF
MASTER TRANSITIONAL SERVICES AGREEMENT
BETWEEN
C-CUBE MICROSYSTEMS INC.
AND
C-CUBE SEMICONDUCTOR INC.
__________ ____, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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<S> <C>
ARTICLE 1 DEFINITIONS.................................................................1
ARTICLE 2 TRANSITION SERVICE SCHEDULES................................................2
2.1 Services...............................................................2
2.2 Schedules..............................................................2
ARTICLE 3 SERVICES....................................................................3
3.1 Services Generally.....................................................3
3.2 Service Limitations....................................................3
3.3 Impracticability.......................................................3
3.4 Additional Resources...................................................3
3.5 Additional Services....................................................4
3.6 Obligations As To Additional Services..................................4
ARTICLE 4 TERM........................................................................4
ARTICLE 5 COMPENSATION................................................................4
5.1 Charges for Services...................................................5
5.2 Payment Terms..........................................................5
5.3 Performance Under Ancillary Agreements.................................5
5.4 Error Correction; True-Ups; Accounting.................................5
5.5 Pricing Adjustments....................................................5
ARTICLE 6 GENERAL OBLIGATIONS; STANDARD OF CARE.......................................6
6.1 Performance Metrics....................................................6
6.2 Disclaimer Of Warranties...............................................6
6.3 Transitional Nature Of Services; Changes...............................6
6.4 Responsibility For Errors; Delays......................................6
6.5 Good Faith Cooperation; Consents.......................................7
6.6 Alternatives...........................................................7
ARTICLE 7 TERMINATION.................................................................7
7.1 Termination............................................................7
7.2 Survival...............................................................7
7.3 User IDs, Passwords....................................................8
ARTICLE 8 RELATIONSHIP BETWEEN THE PARTIES............................................8
ARTICLE 9 SUBCONTRACTORS..............................................................8
ARTICLE 10 INTELLECTUAL PROPERTY......................................................8
10.1 Allocation Of Rights By Ancillary Agreements...........................8
</TABLE>
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<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
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<S> <C>
10.2 Existing Ownership Rights Unaffected...................................8
ARTICLE 11 SOFTWARE LICENSE...........................................................9
11.1 Software Deliverable/License...........................................9
11.2 License To Software....................................................9
11.3 Restrictions...........................................................9
11.4 Copyright Notices......................................................9
11.5 As-Is Warranty.........................................................9
11.6 Implied Warranty Disclaimer............................................9
11.7 No Other Obligations..................................................10
ARTICLE 12 CONFIDENTIALITY...........................................................10
ARTICLE 13 LIMITATION OF LIABILITY...................................................10
ARTICLE 14 FORCE MAJEURE.............................................................10
ARTICLE 15 DISPUTE RESOLUTION........................................................10
15.1 Use Of Dispute Resolution.............................................10
15.2 Negotiation...........................................................11
15.3 Non-Binding Mediation.................................................11
15.4 Proceedings...........................................................11
15.5 Pay And Dispute.......................................................11
15.6 Continuity Of Service And Performance.................................11
ARTICLE 16 MISCELLANEOUS.............................................................12
16.1 Entire Agreement......................................................12
16.2 Governing Law.........................................................12
16.3 Termination...........................................................12
16.4 Notices...............................................................12
16.5 Binding Effect; Assignment............................................12
16.6 Severability..........................................................12
16.7 Failure Or Indulgence Not Waiver; Remedies Cumulative.................13
16.8 Amendment.............................................................13
16.9 Authority.............................................................13
16.10 Interpretation........................................................13
16.11 Conflicting Agreements................................................13
16.12 Counterparts..........................................................13
</TABLE>
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<PAGE> 4
MASTER TRANSITIONAL SERVICES AGREEMENT
This Master Transitional Services Agreement (this "Agreement") is
effective as of ________, 2000 (the "Effective Date"), by and between C-Cube
Microsystems Inc., a Delaware corporation ("C-Cube"), and C-Cube Semiconductor
Inc., a Delaware corporation ("Semiconductor").
RECITALS
WHEREAS, C-Cube by certain other instruments of even date herewith
transfers or will transfer to Semiconductor effective as of the Separation Date,
substantially all of the business and assets of the Semiconductor Business owned
by C-Cube in accordance with the Master Separation and Distribution Agreement
dated as of _______ ___, 2000 between the C-Cube and Semiconductor (the
"Separation and Distribution Agreement").
WHEREAS, C-Cube has entered into an Amended and Restated Agreement and
Plan of Merger and Reorganization, dated as of December 9, 1999 (the "Merger
Agreement"), with Harmonic Inc. ("Harmonic") pursuant to which, subsequent to
the sale or distribution by C-Cube of Semiconductor, C-Cube will merge with and
into Harmonic (the "Merger").
WHEREAS, for a limited period of time following the Separation Date and
for the sole purpose of ensuring the orderly and effective separation of C-Cube
and Semiconductor, (i) Semiconductor desires to receive from C-Cube certain
services of the type performed by the business constituting C-Cube prior to the
Separation Date or which service require assets or employees of C-Cube, and (ii)
C-Cube desires to receive from Semiconductor certain services that were
performed by the business constituting Semiconductor prior to the Separation
Date or which service require assets or employees of Semiconductor.
NOW, THEREFORE, in consideration of the foregoing and the covenants and
agreements set forth below, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
For the purpose of this Agreement, the following capitalized terms shall
have the following meanings:
1.1 "Additional Services" shall have the meaning set forth in Section
3.5.
1.2 "Ancillary Agreements" shall have the meaning set forth in the
Separation and Distribution Agreement.
1.3 "Distribution Date" shall have the meaning set forth in the
Separation and Distribution Agreement.
<PAGE> 5
1.4 "Documentation" shall mean the manuals and other documentation
provided by the Providing Party to the Receiving Party in connection with the
Services, including any items listed and described in the relevant Transition
Service Schedule hereto.
1.5 "Expiration Date" shall have the meaning set forth in Article 4.
1.6 "Impracticable" shall have the meaning set forth in Section 3.3.
1.7 "Master Confidential Disclosure Agreement" shall mean that certain
Master Confidential Disclosure Agreement by and between Semiconductor and C-Cube
dated of even date hereof.
1.8 "Party" means either: (i) Semiconductor or (ii) C-Cube and,
following the Merger, Harmonic Inc., as the case may be.
1.9 "Providing Party" shall mean the Party providing a Service hereunder
as identified in the relevant Transition Service Schedule.
1.10 "Receiving Party" shall mean the Party receiving a Service
hereunder as identified in the relevant Transition Service Schedule.
1.11 "Separation and Distribution Agreement" shall mean that certain
Master Separation and Distribution Agreement by and between Semiconductor and
C-Cube dated of even date hereof.
1.12 "Separation Date" shall have the meaning set forth in the
Separation and Distribution Agreement.
1.13 "Service(s)" shall have the meaning set forth in Section 3.1.
1.14 "Software Deliverable" shall mean a software program(s) and other
materials as defined in Section 11.1 provided by a Providing Party to the
Receiving Party and listed and described in the relevant Transition Service
Schedule.
1.15 "Subsidiary" shall have the meaning set forth in the Separation and
Distribution Agreement.
1.16 "Transition Service Schedule" shall have the meaning set forth in
Section 2.2.
ARTICLE 2
TRANSITION SERVICE SCHEDULES
2.1 Services. This Agreement will govern the transitional services as
requested by either Party and provided to such Party by the other Party, the
details of which are set forth in the Transition Service Schedules attached to
this Agreement, or otherwise agreed to in writing by the Parties.
2.2 Schedules. Each Service shall be covered by this Agreement upon
execution of a Transition Service Schedule in the form attached hereto as
Exhibit A (each transition service
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<PAGE> 6
schedule, a "Transition Service Schedule"). For each Service, the Parties shall
set forth in the Transition Service Schedule, among other things, the time
period during which the Service will be provided if different from the term of
this Agreement determined pursuant to ARTICLE 4 hereof, a summary of the Service
to be provided; a description of the Service; and the estimated charge, if any,
for the Service and any other terms applicable thereto. Notwithstanding the
foregoing the Parties acknowledge and agree that it may not be practicable to
describe each Service in detail and that, therefore, a Service, when generally
agreed upon by the Parties will be provided and paid for in accordance with the
applicable terms of this Agreement even where such Service is not described in
detail in a Schedule.
ARTICLE 3
SERVICES
3.1 Services Generally. Except as otherwise provided herein, for the
term determined pursuant to ARTICLE 4 hereof, each Party shall provide or cause
to be provided to the other the service(s) described in the Transition Service
Schedule(s) attached hereto. Executed Transition Service Schedules are attached
hereto as Exhibits B-1, B-2, etc. The service(s) described on a single
Transition Service Schedule shall be referred to herein as a "Service."
Collectively, the services described on all the Transition Service Schedules
(including Additional Services) shall be referred to herein as "Services."
3.2 Service Limitations. Except as provided in a Transition Service
Schedule for a specific Service: (i) neither Party shall be required to provide
the Services except to the extent and only at the locations such Services are
being provided by the business constituting the Party prior to the Separation
Date or the performance of such service requires assets that will be owned by
such Party following the Separation Date; and (ii) the Services will be
available only for purposes of conducting the business of the Receiving Party
substantially in the manner it was conducted, or proposed to be conducted by the
business constituting such Party prior to the Separation Date.
3.3 Impracticability. Neither Party shall be required to provide any
Service to the extent the performance of such Service becomes "Impracticable" as
a result of a cause or causes outside the reasonable control of such Party
including unfeasible technological requirements, or to the extent the
performance of such Services would require such Party to violate any applicable
laws, rules or regulations or would result in the breach of any confidentiality
or non-disclosure obligations, software license or other applicable contract.
3.4 Additional Resources. Except as provided in a Transition Service
Schedule for a specific Service, in providing the Services, neither Party shall
be obligated to: (i) hire any additional employees; (ii) maintain the employment
of any specific employee; (iii) purchase, lease or license any additional
equipment or software; (iv) pay any costs related to the transfer or conversion
of the other Party's data; or (v) engage any alternate supplier of Services.
Unless otherwise specified in the relevant Transition Services Schedule,
Providing Party shall not be required to
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purchase or deliver to the Receiving Party additional equipment or materials
required to perform the relevant Service, unless the Receiving Party shall
reimburse the Providing Party for such equipment or materials in accordance
with ARTICLE 5.
3.5 Additional Services. From time to time after the Effective Date, the
Parties may identify and mutually agree upon additional services that one party
will provide to the other Party in accordance with the terms of this Agreement
(the "Additional Services"). Accordingly, the Parties may execute additional
Transition Service Schedules for such Additional Services pursuant to ARTICLE 2.
Except as set forth in Section 3.6, the Parties may agree in writing on
Additional Services during the term of this Agreement.
3.6 Obligations As To Additional Services. Except as set forth in the
next sentence, a Party shall perform, at a charge determined using the
principles for determining fees under Section 5.1, any Additional Service that:
(a) was provided by the business constituting such Party immediately prior to
the Separation Date and that was inadvertently or unintentionally omitted from
the list of Services and is based on the use of assets owned by a Party as a
result of the Separation Date, or (b) is essential to effectuate an orderly
transition under the Separation and Distribution Agreement, unless such
performance would significantly disrupt the Providing Party's operations or
materially increase the scope of its responsibility under this Agreement. If
Providing Party reasonably believes the performance of Additional Services
required under subparagraphs (a) or (b) would significantly disrupt its
operations or materially increase the scope of its responsibility under this
Agreement, the Parties shall negotiate in good faith to establish terms under
which such Additional Services may be provided, provided, however, a Providing
Party shall not be obligated to provide such Additional Services if, following
good faith negotiation, the Parties are unable to reach agreement on such terms.
ARTICLE 4
TERM
The term of this Agreement shall commence on the Effective Date and
shall remain in effect until two (2) years after the Effective Date (the
"Expiration Date"), unless earlier terminated under ARTICLE 7. This Agreement
may be extended by the Parties in writing, either in whole or with respect to
one or more of the Services; provided, however, that such extension shall only
apply to the specific Services for which the Agreement was extended. The Parties
shall be deemed to have extended this Agreement with respect to a specific
Service if the Transition Service Schedule for such Service specifies a
completion date beyond the aforementioned Expiration Date. The Parties may agree
on an earlier expiration date respecting a specific Service by specifying such
date on the Transition Service Schedule for that Service. Services shall be
provided up to and including the date set forth in the applicable Transition
Service Schedule, subject to earlier termination as provided herein.
ARTICLE 5
COMPENSATION
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5.1 Charges for Services. A Party shall pay to the other Party the
charges, if any, set forth on the Transition Service Schedules for each of the
Services listed therein as adjusted, from time to time, in accordance with the
process and procedures established under Section 5.4 and Section 5.5 hereof.
Such fees shall include the direct costs of providing the Services, as
determined using the process described in such Transition Service Schedule, and
indirect costs of providing the Services plus ten percent (10%), unless
specifically indicated otherwise on a Transition Service Schedule. However, if
the term of this Agreement is extended beyond the Expiration Date as defined in
ARTICLE 4, a Party receiving Services will reimburse the Party proving such
Service such costs plus fifteen percent (15%) for the Services unless the
Transition Service Schedule for such Service indicates it is to extend beyond
the Expiration Date. The Parties also intend for charges to be easy to
administer and justify and, therefore, they hereby acknowledge it may be
counterproductive to try to recover de minimus cost, charge or expense. The
Parties shall use good faith efforts to discuss any situation in which the
actual charge for a Service is reasonably expected to exceed the estimated
charge, if any, set forth on a Transition Service Schedule for a particular
Service; provided, however, that the incurrence of charges in excess of any such
estimate on such Transition Service Schedule shall not justify stopping the
provision of, or payment for, Services under this Agreement.
5.2 Payment Terms. A Providing Party shall invoice the Receiving Party
monthly for all charges pursuant to this Agreement. Such invoices shall be
accompanied by reasonable documentation or other reasonable explanation
supporting such charges. Invoices shall be due and payable within thirty (30)
days after receipt. Late payments shall bear interest at the lesser of 12% or
the maximum rate allowed by law. A Party owing the greater amount in any payment
period may pay to the other the net amount by which its payment exceeds the
payment due to it for such period.
5.3 Performance Under Ancillary Agreements. Notwithstanding anything to
the contrary contained herein, neither Party shall be charged under this
Agreement for any obligations that are specifically required to be performed
under the Separation and Distribution Agreement or any other Ancillary Agreement
and any such other obligations shall be performed and charged for (if
applicable) in accordance with the terms of the Separation and Distribution
Agreement or such other Ancillary Agreement.
5.4 Error Correction; True-Ups; Accounting. The Parties shall reasonably
agree on a process and procedure for conducting internal audits and making
adjustments to charges as a result of the movement of employees and functions
between Parties, the discovery of errors or omissions in charges, as well as a
true-up of amounts owed. In no event shall such processes and procedures extend
beyond 180 days after completion of a Service.
5.5 Pricing Adjustments. In the event of a tax audit adjustment relating
to the pricing of any or all Services provided pursuant to this Agreement in
which it is determined by a taxing authority that any of the charges,
individually or in combination, did not result in an arm's-length payment, as
determined under internationally accepted arm's-length standards, then the
Parties, including any subcontractor providing Services hereunder, may agree to
make corresponding adjustments to the charges in question for such period to the
extent necessary to achieve arm's-
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<PAGE> 9
length pricing. Any adjustment made pursuant to this Section 5.5 shall be
reflected in the Parties' legal books and records, and the resulting
underpayment or overpayment shall create, respectively, an obligation to be paid
in the manner specified in Section 5.2, or shall create a credit against amounts
owed under this Agreement.
ARTICLE 6
GENERAL OBLIGATIONS; STANDARD OF CARE
6.1 Performance Metrics. Subject to Sections 3.3 and 3.4 and any other
terms and conditions of this Agreement, each Party shall maintain sufficient
resources to perform its obligations hereunder. Specific performance metrics for
a specific Service may be set forth in the corresponding Transition Service
Schedule. Where none is set forth, a Providing Party shall use reasonable
efforts to provide Services in accordance with the policies, procedures and
practices in effect before the Separation Date and shall exercise the same care
and skill as it exercises in performing similar services for itself. The
Receiving Party shall provide sufficient resources and timely decisions,
approvals and acceptances in order that the Providing Party may accomplish its
obligations hereunder in a timely manner.
6.2 Disclaimer Of Warranties. NEITHER PARTY MAKES ANY WARRANTIES,
EXPRESS, IMPLIED OR STATUTORY, INCLUDING BUT NOT LIMITED TO THE IMPLIED
WARRANTIES OF MERCHANTABILITY, BUSINESS CONTINUITY OR FITNESS FOR A PARTICULAR
PURPOSE, WITH RESPECT TO THE SERVICES, SOFTWARE OR OTHER DELIVERABLES WHICH MAY
BE PROVIDED BY IT HEREUNDER.
6.3 Transitional Nature Of Services; Changes. The Parties acknowledge
the transitional nature of the Services and that the Providing Party may make
changes from time to time in the manner of performing such Services if such
Party is making similar changes in performing similar services for itself
provided that the Providing Party furnishes to the Receiving Party reasonable
advanced written notice regarding such changes.
6.4 Responsibility For Errors; Delays. The Providing Party's sole
responsibility to the Receiving Party with respect to Services are as follows:
(a) for errors or omissions in Services, shall be to furnish correct
information, payment and/or adjustment in the Services, at no
additional cost or expense; provided, the Receiving Party must
promptly advise the Providing Party of any such error or omission
of which it becomes aware after having used reasonable efforts to
detect any such errors or omissions in accordance with the
standard of care set forth in Section 6.1; and
(b) for failure to deliver any Service because of Impracticability,
shall be to use reasonable efforts, subject to Section 3.3, to
make the Services available and/or to resume performing the
Services as promptly as reasonably practicable.
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6.5 Good Faith Cooperation; Consents. The Parties will use good faith
efforts to cooperate with each other in all matters relating to the provision
and receipt of Services. Such cooperation shall include exchanging information,
performing true-ups and adjustments, and obtaining all third party consents,
licenses, sublicenses or approvals necessary to permit each Party to perform its
obligations hereunder (including, rights to use third party software needed for
the performance of Services). Unless otherwise provided in the relevant
Transition Services Schedule, the costs of obtaining such third party consents,
licenses, sublicenses or approvals shall be borne by the Receiving Party for the
relevant Services. The Parties will maintain in accordance with their standard
document retention procedures, documentation supporting the information relevant
to cost calculations contained in the Transition Service Schedules and cooperate
with each other in making such information available as needed in the event of a
tax audit, whether in the United States or any other country.
6.6 Alternatives. If a Party reasonably believes it is unable to provide
a Service because of a failure to obtain necessary consents, licenses,
sublicenses or approvals pursuant to Section 6.5 or because of Impracticability,
the Parties shall cooperate to determine the best alternative approach. Until
such alternative approach is found or the problem otherwise resolved to the
satisfaction of the Parties, the Providing Party shall use reasonable efforts,
subject to Section 3.3 and Section 3.4, to continue providing the Service. To
the extent an agreed upon alternative approach requires payment above and beyond
that which is included in the Providing Party's charge for the Service in
question, the Parties shall share equally in making any such payment unless they
otherwise agree in writing.
ARTICLE 7
TERMINATION
7.1 Termination. A Receiving Party may terminate this Agreement, either
with respect to all or with respect to any one or more of the Services provided
to it hereunder, for any reason or for no reason, at any time upon sixty (60)
days prior written notice to the Providing Party. In addition, subject to the
provisions of ARTICLE 15, either Party may terminate this Agreement with respect
to a specific Service if the other Party materially breaches a material
provision with regard to that particular Service and does not cure such breach
(or does not take reasonable steps required under the circumstances to cure such
breach going forward) within sixty (60) days after being given written notice of
such breach; provided, however, that the Party against whom the breach is
alleged may request that the Parties engage in a dispute resolution negotiation
as specified in ARTICLE 15 below prior to termination for breach.
7.2 Survival. Those Sections of this Agreement that, by their nature,
are intended to survive termination will survive in accordance with their terms.
Notwithstanding the foregoing, in the event of any termination with respect to
one or more, but less than all Services, this Agreement shall continue in full
force and effect with respect to any Services not terminated hereby.
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7.3 User IDs, Passwords. The Parties shall use good faith efforts at the
termination or expiration of this Agreement or any specific Service hereto to
ensure that all applicable user IDs and passwords are canceled.
ARTICLE 8
RELATIONSHIP BETWEEN THE PARTIES
The relationship between the Parties established under this Agreement is
that of independent contractors and neither Party is an employee, agent,
partner, or joint venturer of or with the other. Each Providing Party will be
solely responsible for any employment-related taxes, insurance premiums or other
employment benefits respecting the performance of Services under this Agreement
by its own personnel. Each Receiving Party agrees to grant to the Providing
Party's personnel reasonable access to sites, systems and information (subject
to the provisions of confidentiality stated below) as necessary for the
Providing Party to perform its obligations hereunder. Each Party's personnel
shall agree to obey any and all security regulations and other published
policies of the other Party relevant to the provision or receipt of the
Services.
ARTICLE 9
SUBCONTRACTORS
Except for food services or related services, a Providing Party may not
engage a subcontractor to perform all or any portion of its duties under this
Agreement without the consent of the Receiving Party; provided further, that any
such subcontractor agrees in writing to be bound by confidentiality obligations
at least as protective as the terms of this Agreement regarding confidentiality,
and provided further that the Providing Party remains responsible for the
performance of such subcontractor. As used in this Agreement, "subcontractor"
will mean any individual, partnership, corporation, firm, association,
unincorporated organization, joint venture, trust or other entity engaged to
perform hereunder.
ARTICLE 10
INTELLECTUAL PROPERTY
10.1 Allocation Of Rights By Ancillary Agreements. This Agreement and
the performance of this Agreement will not affect the ownership of any
intellectual property rights allocated in the Ancillary Agreements.
10.2 Existing Ownership Rights Unaffected. Neither Party will gain, by
virtue of this Agreement, any rights of ownership of copyrights, patents, trade
secrets, trademarks or any other intellectual property rights owned by the
other.
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<PAGE> 12
ARTICLE 11
SOFTWARE LICENSE
11.1 Software Deliverable/License. Unless otherwise agreed by the
Parties under the Ancillary Agreements or any separate license or technology
agreement, if a Providing Party supplies or makes available to the Receiving
Party a deliverable that in whole or in part consists of software, firmware, or
other computer code (a "Software Deliverable") as indicated in a Transition
Service Schedule, such Software Deliverables will be supplied in object code
form only and will be subject to the terms of this ARTICLE 11. In the event that
such Software Deliverables are licensed to the Providing Party by third parties,
the Receiving Party agrees to be bound by any different or additional conditions
that are required by such third parties and are communicated in writing to it.
11.2 License To Software. Subject to the terms and conditions of this
Agreement, the Providing Party hereby grants to the Receiving Party, under the
Providing Party's intellectual property rights in and to a Software Deliverable,
a non-exclusive, nontransferable worldwide license to (a) use and display the
Software Deliverable in object code only for its own internal information
processing services and computing needs, and to make sufficient copies as
necessary for such use, and (b) use the Documentation in connection with the
permitted use of the Software Deliverable and make sufficient copies as
necessary for such use; provided, however, that the foregoing license shall (i)
be limited solely to the use by the Receiving Party of the Software Deliverable
to the extent necessary for the Receiving Party to obtain the benefit of the
relevant Service, and (ii) expire and terminate upon the termination of the
relevant Service term.
11.3 Restrictions. Neither Receiving Party shall itself, or through any
Subsidiary, affiliate, agent or third party: (a) sell, lease, license or
sublicense the Software Deliverable; (b) decompile, disassemble, or reverse
engineer the Software Deliverable, in whole or in part, except to the extent
such restriction is prohibited by applicable law; (c) allow access to the
Software any user other than its employees; (d) use the Software Deliverable to
provide processing services to third parties; (e) otherwise use the Software
Deliverable on a "service bureau" basis; or (f) provide, disclose, divulge or
make available to, or permit use of the Software Deliverable by any third party
without the Providing Party's prior written consent.
11.4 Copyright Notices. Neither Party shall remove any copyright
notices, proprietary markings, trademarks or trade names from the other Party's
software or documentation.
11.5 As-Is Warranty. THE SOFTWARE DELIVERABLE AND ANY OTHER MATERIALS
PROVIDED HEREUNDER ARE LICENSED OR PROVIDED ON AN "AS-IS" BASIS ONLY, WITHOUT
ANY EXPRESS WARRANTIES OF ANY KIND.
11.6 Implied Warranty Disclaimer. NEITHER PARTY MAKES ANY WARRANTIES
WHATSOEVER, EITHER EXPRESS OR IMPLIED, REGARDING THE SOFTWARE DELIVERABLE OR ANY
OTHER MATERIAL PROVIDED BY IT HEREUNDER INCLUDING
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<PAGE> 13
AS TO THE MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE WITH RESPECT OT
SUCH SOFTWARE DELIVERABLE OR OTHER MATERIALS.
11.7 No Other Obligations. NEITHER PARTY ASSUMES ANY RESPONSIBILITY OR
OBLIGATIONS WHATEVER, OTHER THAN THE RESPONSIBILITIES AND OBLIGATIONS EXPRESSLY
SET FORTH IN THIS AGREEMENT OR A SEPARATE WRITTEN AGREEMENT BETWEEN THE PARTIES.
ARTICLE 12
CONFIDENTIALITY
The terms of the Master Confidential Disclosure Agreement between the
Parties shall apply to any Confidential Information (as defined therein) which
is the subject matter of this Agreement.
ARTICLE 13
LIMITATION OF LIABILITY
NEITHER PARTY WILL BE LIABLE TO THE OTHER FOR ANY LOST PROFITS, LOSS OF
DATA, LOSS OF USE, COST OF COVER, BUSINESS INTERRUPTION OR OTHER SPECIAL,
INCIDENTAL, INDIRECT, PUNITIVE OR CONSEQUENTIAL DAMAGES, HOWEVER CAUSED, UNDER
ANY THEORY OF LIABILITY, ARISING FROM THE PERFORMANCE OR NON PERFORMANCE OF, OR
OTHERWISE RELATING TO, THIS AGREEMENT.
ARTICLE 14
FORCE MAJEURE
Each party will be excused for any failure or delay in performing any of
its obligations under this Agreement, other than the obligations to make
payments pursuant to ARTICLE 5 hereof for services rendered, if such failure or
delay is caused by any act of God or the public enemy, any accident, explosion,
fire, storm, earthquake, flood, or any other circumstance or event beyond the
reasonable control of such party.
ARTICLE 15
DISPUTE RESOLUTION
15.1 Use Of Dispute Resolution. Except as otherwise set forth in the
Ancillary Agreements, resolution of any and all disputes arising from or in
connection with this Agreement, whether based on contract, tort, or otherwise
(collectively, "Disputes"), shall be exclusively governed by and settled in
accordance with the provisions of this Article 15.
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<PAGE> 14
15.2 Negotiation. The Parties shall make a good faith attempt to resolve
any Dispute arising out of or relating to this Agreement through negotiation.
Within thirty (30) days after notice of a Dispute is given by either Party to
the other Party, each Party shall select a negotiating team comprised of vice
president level employees of such party and shall meet within thirty (30) days
after the end of the first thirty (30) day negotiating period to attempt to
resolve the matter. During the course of negotiations under this Section 15.2,
all reasonable requests made by one Party to the other for information,
including requests for copies of relevant documents, will be honored. The
specific format for such negotiations will be left to the discretion of the
designated negotiating teams but may include the preparation of agreed upon
statements of fact or written statements of position furnished to the other
Party.
15.3 Non-Binding Mediation. In the event that any Dispute arising out of
or related to this Agreement is not settled by the Parties within fifteen (15)
days after the first meeting of the negotiating teams under Section 15.2, the
Parties will attempt in good faith to resolve such Dispute by non-binding
mediation in accordance with the American Arbitration Association Commercial
Mediation Rules. The mediation shall be held within thirty (30) days of the end
of such fifteen (15) day negotiation period of the negotiating teams. Except as
provided below in Section 15.4, no litigation for the resolution of such dispute
may be commenced until the parties try in good faith to settle the dispute by
such mediation in accordance with such rules and either Party has concluded in
good faith that amicable resolution through continued mediation of the matter
does not appear likely. The costs of mediation shall be shared equally by the
Parties to the mediation. Any settlement reached by mediation shall be recorded
in writing, signed by the Parties, and shall be binding on them.
15.4 Proceedings. Nothing herein, however, shall prohibit either Party
from initiating litigation or other judicial or administrative proceedings if
such Party would be substantially harmed by a failure to act during the time
that such good faith efforts are being made to resolve the Dispute through
negotiation or mediation. In the event that litigation is commenced under this
Section 15.4, the Parties agree to continue to attempt to resolve any Dispute
according to the terms of Sections 15.2 and 15.3 during the course of such
litigation proceedings under this Section 15.4.
15.5 Pay And Dispute. Except as provided herein or in any Ancillary
Agreement, in the event of any dispute regarding payment of a third-party
invoice (subject to standard verification of receipt of products or services),
the party named in a third party's invoice must make timely payment to such
third party, even if the party named in the invoice desires to pursue the
dispute resolution procedures outlined in this Section 15.1. If the Party that
paid the invoice is found pursuant to this Section 15.1 to not be responsible
for such payment, such paying party shall be entitled to reimbursement, with
interest accrued in accordance with Section 5.2.
15.6 Continuity Of Service And Performance. Unless otherwise agreed in
writing, the parties will continue to provide service and honor all other
commitments under this Agreement and each Ancillary Agreement during the course
of dispute resolution pursuant to the provisions of this ARTICLE 15 with respect
to all matters not subject to such dispute, controversy or claim.
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<PAGE> 15
ARTICLE 16
MISCELLANEOUS
16.1 Entire Agreement. This Agreement, the Merger Agreement, the other
Ancillary Agreements and the Exhibits and Schedules referenced or attached
hereto and thereto, constitute the entire agreement between the Parties with
respect to the subject matter hereof and shall supersede all prior written and
oral and all contemporaneous oral agreements and understandings with respect to
the subject matter hereof.
16.2 Governing Law. This Agreement shall be governed and construed and
enforced in accordance with the laws of the State of Delaware as to all matters
regardless of the laws that might otherwise govern under the principles of
conflicts of laws applicable thereto.
16.3 Termination. This Agreement may be terminated at any time before
the Distribution Date by mutual consent of C-Cube and Semiconductor. In the
event of termination pursuant to this Section, neither Party shall have any
liability of any kind to the other Party.
16.4 Notices. Any notice, demand, offer, request or other communication
required or permitted to be given by either Party pursuant to the terms of this
Agreement shall be in writing and shall be deemed effectively given the earlier
of (i) when received, (ii) when delivered personally, (iii) one (1) business day
after being delivered by facsimile (with receipt of appropriate confirmation),
(iv) one (1) business day after being deposited with an overnight courier
service or (v) four (4) days after being deposited in the U.S. mail, First Class
with postage prepaid, and addressed to the attention of the Party's General
Counsel at the address of its principal executive office or such other address
as a Party may request by notifying the other in writing.
16.5 Binding Effect; Assignment. This Agreement shall inure to the
benefit of and be binding upon the Parties hereto and their respective legal
representatives and successors, and nothing in this Agreement, express or
implied, is intended to confer upon any other Person any rights or remedies of
any nature whatsoever under or by reason of this Agreement. This Agreement may
not be assigned by any Party hereto without written consent of the other party,
which consent shall not be unreasonably withheld. Notwithstanding the foregoing,
the Parties acknowledge and agree that in connection with the Merger, this
Agreement shall be assigned to and assumed by Harmonic.
16.6 Severability. If any term or other provision of this Agreement or
the Schedules or Exhibits attached hereto is determined by a non-appealable
decision by a court, administrative agency or arbitrator to be invalid, illegal
or incapable of being enforced by any rule of law or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to either
Party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the Parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
Parties as closely as possible in an acceptable manner to the end that
transactions contemplated hereby are fulfilled to the fullest extent possible.
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<PAGE> 16
16.7 Failure Or Indulgence Not Waiver; Remedies Cumulative. No failure
or delay on the part of either Party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement herein,
nor shall any single or partial exercise of any such right preclude other or
further exercise thereof or of any other right. All rights and remedies existing
under this Agreement or the Schedules or Exhibits attached hereto are cumulative
to, and not exclusive of, any rights or remedies otherwise available.
16.8 Amendment. No change or amendment will be made to this Agreement
except by an instrument in writing signed on behalf of each of the Parties to
such agreement.
16.9 Authority. Each of the Parties hereto represents to the other that
(a) it has the corporate or other requisite power and authority to execute,
deliver and perform this Agreement, (b) the execution, delivery and performance
of this Agreement by it have been duly authorized by all necessary corporate or
other actions, (c) it has duly and validly executed and delivered this
Agreement, and (d) this Agreement is a legal, valid and binding obligation,
enforceable against it in accordance with its terms subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and general equity principles.
16.10 Interpretation. The headings contained in this Agreement, in any
Exhibit or Schedule hereto and in the table of contents to this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Any capitalized term used in any Schedule or
Exhibit but not otherwise defined therein, shall have the meaning assigned to
such term in this Agreement. When a reference is made in this Agreement to an
Article or a Section, Exhibit or Schedule, such reference shall be to an Article
or Section of, or an Exhibit or Schedule to, this Agreement unless otherwise
indicated.
16.11 Conflicting Agreements. In the event of conflict between this
Agreement and any Ancillary Agreement or other agreement executed in connection
herewith, the provisions of such other agreement shall prevail.
16.12 Counterparts. This Agreement, including the Schedules and Exhibits
hereto and the other documents referred to herein, may be executed in
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
C-CUBE SEMICONDUCTOR INC. C-CUBE MICROSYSTEMS INC.
By: By:
----------------------------- -------------------------------------
Title: Title: .
---------------------------- ---------------------------------
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<PAGE> 17
EXHIBIT A
FORM TRANSITION SERVICE SCHEDULE TO MASTER TRANSITIONAL SERVICES AGREEMENT
SERVICE PROVIDER:
-----------------------
SERVICE RECIPIENT:
----------------------
1. TRANSITION SERVICE SCHEDULE #:_________________ (To be inserted by
responsible individual or department.)
2. FUNCTIONAL AREA:___________________
3. START/END DATE: The Services start on the Effective Date of the Master
Transitional Services Agreement and end on _____________ unless
otherwise indicated below.
Indicate below if other start/end date:
START DATE:____________
END DATE:______________
If Start and End dates vary by service and/or country, please indicate
in Section 5 below.
4. SUMMARY OF SERVICES (Describe the service to be provided in appropriate
detail.
<TABLE>
<CAPTION>
SERVICE NAME DESCRIPTION
<S> <C>
</TABLE>
5. LIST OF SERVICES TO BE PROVIDED PER COUNTRY AND SITE: (List all the
services to be provided at each site. Enter Start Date and End Date if
different than Section 3 above.)
<TABLE>
<CAPTION>
COUNTRY SITE SERVICE(S) START DATE END DATE
<S> <C> <C> <C> <C>
</TABLE>
A-1
<PAGE> 18
6. PERFORMANCE PARAMETERS/SERVICE LEVEL: (State minimum performance
expected from each service, if applicable.):
7. ESTIMATED TOTAL COMPENSATION:__________________
8. DESCRIBE COST METHODOLOGY AND COST DRIVERS AFFECTING ESTIMATED TOTAL
COMPENSATION (Describe on an individual service basis if necessary):
9. DESCRIBE THE PROCESS BY WHICH THE COST OF SERVICES WILL BE ADJUSTED IN
THE INSTANCE OF AN INCREASE/REDUCTION IN THE SERVICES PROVIDED:
(Describe on an individual service basis if necessary.)
10. SOFTWARE: Will software be used or included with the Services to be
provided under this Transition Service Schedule:
____ Yes ____ No
If yes, will source code be provided: ____ Yes ____ No
List software to be provided:
<TABLE>
<CAPTION>
Software Application Number of Licenses to be Provided
-------------------- ---------------------------------
<S> <C>
</TABLE>
Upon execution of this Transition Service Schedule by both parties, this
Transition Service Schedule is hereby deemed incorporated into and made part of
that certain Master Transitional Services Agreement.
C-CUBE SEMICONDUCTOR INC. C-CUBE MICROSYSTEMS INC.
By: By:
----------------------------- -------------------------------------
Title: Title: .
---------------------------- ---------------------------------
A-2
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
C-Cube Semiconductor II Inc., a Delaware corporation
C-Cube Microsystems International Ltd., a company organized under the laws of
Bermuda
C-Cube U.S. Inc., a Delaware corporation
C-Cube Japan Inc., a company organized under the laws of Japan
C-Cube Technology Limited, a company organized under the laws of Bermuda
Media Computer Technologies, Inc., a California corporation
C-Cube (Asia Pacific) Limited, an entity organized under the laws of Hong Kong
C-Cube International Limited, an entity organized under the laws of Hong Kong
C-Cube Microsystems (Canada) Ltd., an Ontario corporation
C-Cube France EURL, an entity organized under the laws of France
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Amendment No. 2 to Registration Statement No. 333-31896
of C-Cube Semiconductor Inc. on Form S-1 of our report dated January 20, 2000
(February 10, 2000 as to Note 17) on the financial statements of C-Cube
Microsystems Inc. appearing in the Prospectus, which is part of this
Registration Statement, and of our report dated January 20, 2000 relating to the
financial statement schedule appearing elsewhere in this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE
San Jose, California
March 20, 2000
