<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 8, 1996
REGISTRATION NO. 333-6653
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
C-CUBE MICROSYSTEMS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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Delaware 3674 77-0192108
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION
ORGANIZATION) NO.)
</TABLE>
1778 McCarthy Boulevard
Milpitas, California 95035
Telephone: (408) 944-6300
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
Alexandre A. Balkanski Ph.D.
C-Cube Microsystems Inc.
1778 McCarthy Boulevard
Milpitas, California 95035
Telephone: (408) 944-6300
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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LARRY W. SONSINI, ESQ. JACQUELINE DAUNT, ESQ. JENNIFER BELLAH, ESQ.
AARON J. ALTER, ESQ. Fenwick & West LLP Gibson, Dunn & Crutcher LLP
Wilson Sonsini Goodrich & Rosati Two Palo Alto Square 333 South Grand Avenue
Professional Corporation Palo Alto, California 94306 Los Angeles, California 90071
650 Page Mill Road (415) 494-0600 (213) 229-7000
Palo Alto, California 94304-1050
(415) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
AS PROMPTLY AS PRACTICABLE AFER THIS REGISTRATION STATEMENT BECOMES
EFFECTIVE AND THE EFFECTIVE TIME OF THE MERGER DESCRIBED HEREIN.
------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding Company and there is compliance with
General Instruction G, check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS OF FORM S-4
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FORM S-4 REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
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(Information about the Transaction)
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Facing Page; Cross-Reference Sheet; Outside Front
Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front and Outside Back Cover Pages
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information................................... Summary; Risk Factors; Unaudited Selected Pro Forma
Combined Financial Data; Comparative Per Share Data;
Approval of the Merger and Related Transactions;
Information Concerning C-Cube; Information
Concerning DiviCom; DiviCom Consolidated Financial
Statements
4. Terms of the Transaction............................. Summary; Approval of the Merger and Related
Transactions; Comparison of Capital Stock
5. Pro Forma Financial Information...................... Summary; Unaudited Selected Pro Forma Combined
Financial Data
6. Material Contacts with the Company Being Acquired.... Approval of the Merger and Related Transactions
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to Be Underwriters....... *
8. Interests of Named Experts and Counsel............... Legal Matters; Experts
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... *
(Information about the Registrant)
10. Information with Respect to S-3 Registrants.......... Summary; Introduction; Risk Factors; Approval of the
Merger and Related Transactions; Information
Concerning C-Cube; Selected Consolidated Financial
Data of C-Cube; C-Cube Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Management of C-Cube; C-Cube
Stockholders; Comparison of Capital Stock; C-Cube
Consolidated Financial Statements
11. Incorporation of Certain Information by Reference.... *
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*Not Applicable.
<PAGE>
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FORM S-4 REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
12. Information with Respect to S-2 or S-3 Registrants... *
13. Incorporation of Certain Information by Reference.... *
14. Information with Respect to Registrants Other Than
S-3 or S-2 Registrants.............................. *
(Information about the Company being Acquired)
15. Information with Respect to S-3 Companies............ *
16. Information with Respect to S-2 or S-3 Companies..... *
17. Information with Respect to Companies Other Than S-3
or S-2 Companies.................................... Summary; Risk Factors; Approval of the Merger and
Related Transactions; Information Concerning
DiviCom; Selected Consolidated Financial Data of
DiviCom; DiviCom Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Management of DiviCom; DiviCom
Stockholders; Comparison of Capital Stock; DiviCom
Consolidated Financial Statements
(Voting and Management Information)
18. Information if Proxies, Consents or Authorizations
are to be Solicited................................. Summary; Introduction; DiviCom Meeting; Approval of
the Merger and Related Transactions; Management of
C-Cube; Management of DiviCom
19. Information if Proxies, Consents or Authorizations
are not to be Solicited or in an Exchange Offer..... *
</TABLE>
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*Not Applicable.
<PAGE>
[LETTERHEAD OF DIVICOM INC.]
August 8, 1996
Dear Stockholder:
A special meeting of stockholders of DiviCom Inc. ("DiviCom") will be held
on August 28, 1996 at 9:00 a.m., local time, at DiviCom's facility located at
1585 Barber Lane, Milpitas, California 95035.
At this special meeting, you will be asked to consider and vote upon the
approval and adoption of an Agreement and Plan of Reorganization, dated as of
May 28, 1996, as amended, (the "Reorganization Agreement"), among C-Cube
Microsystems Inc. ("C-Cube"), its wholly owned subsidiary, C-Cube Acquisition
Corp. ("Merger Sub"), DiviCom and certain principal stockholders of DiviCom,
providing for the merger of DiviCom with Merger Sub (the "Merger"), as described
in the Notice of Special Meeting of Stockholders following this letter (the
"Notice") and the accompanying Prospectus/Proxy Statement. In addition, as
described in the Notice and the Prospectus/Proxy Statement, you will be asked to
consider and vote upon three amendments to DiviCom's Certificate of
Incorporation (the "Certificate Amendments").
You are also requested to mark the enclosed proxy card to elect whether to
receive solely C-Cube Common Stock or a combination of cash and C-Cube Common
Stock in exchange for your DiviCom vested Common Stock as a result of the
Merger. In the event you make no election, you will receive cash and C-Cube
Common Stock in exchange for your DiviCom vested Common Stock. As described in
detail in the Prospectus/Proxy Statement, the exact amounts of cash and C-Cube
Common Stock received by a stockholder that has not made a "stock only" election
will vary depending on the total number of DiviCom stockholders that make a
"stock only" election.
As a result of the Merger, all outstanding vested shares of DiviCom Common
Stock that have not made a "stock only" election and all outstanding DiviCom
Preferred Stock will be converted into the right to receive an amount of cash
from C-Cube and a fraction of a share of C-Cube Common Stock, all outstanding
unvested shares of DiviCom Common Stock or vested shares as to which a "stock
only" election has been made will be converted into the right to receive a
fraction of a share of C-Cube Common Stock and all outstanding, unvested options
to acquire DiviCom Common Stock will be assumed by C-Cube and will become
exercisable for shares of C-Cube Common Stock. Upon completion of the Merger,
DiviCom will be a wholly owned subsidiary of C-Cube.
DiviCom's Board of Directors has unanimously approved the Certificate
Amendments, the Reorganization Agreement and the transactions contemplated
thereby. On the day before signing the Reorganization Agreement, C-Cube's stock
closed at $46.75. Since that date, C-Cube's stock has traded down to $23.375 and
closed at $31.125 on the day before the printing of this proxy statement.
Pursuant to the Reorganization Agreement, the DiviCom stockholders will receive,
in the aggregate, consideration valued at at least $127,272,720, consisting of
$70,000,000 in cash and at least $57,272,720 of C-Cube Common Stock, or at least
$3.56 per share. Although this is a marked decline from the $195 million value
at the time DiviCom signed the Reorganization Agreement, the Board has
determined that the Merger is in the best interests of DiviCom and its
stockholders. After careful consideration, the Board of Directors unanimously
recommends a vote in favor of approval and adoption of the Certificate
Amendments and the Reorganization Agreement because of its continued belief in
the long-term value of the C-Cube stock and the potential synergies presented by
the combination of the two companies. DiviCom will resolicit your approval of
the Merger if C-Cube's Common Stock price is $18 or less immediately prior to
the Closing. If the Merger is approved and consummated, you will receive
detailed information on how to transmit your DiviCom share certificates to
obtain your cash (if applicable) and shares of C-Cube Common Stock representing
the Merger consideration. Please note that certain major stockholders of DiviCom
beneficially owning a total of 96% of the Series A Preferred Stock, 100% of the
Series B Preferred Stock and 47% of Common Stock of DiviCom outstanding as of
the Record Date, have agreed to vote in favor of the Reorganization Agreement,
the Merger and the Certificate Amendments. As a result of their agreement,
DiviCom believes it is assured of its ability to obtain the necessary votes for
the Reorganization Agreement, the Merger and the Certificate Amendments. Please
read the Prospectus/Proxy Statement carefully prior to voting.
TO ENSURE YOUR REPRESENTATION AT THE MEETING, PLEASE COMPLETE, SIGN AND DATE
THE ACCOMPANYING PROXY CARD AND RETURN IT IN THE ENCLOSED PREPAID ENVELOPE. You
may revoke your proxy at any time before it has been voted, and if you attend
the meeting you may vote in person even if you have previously returned your
proxy card. Your prompt cooperation will be greatly appreciated.
Sincerely,
Nolan Daines
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
DIVICOM INC.
1708 McCarthy Blvd.
Milpitas, California 95035
NOTICE OF SPECIAL MEETING
OF STOCKHOLDERS
To be held on August 28, 1996
TO THE STOCKHOLDERS:
A Special Meeting of Stockholders of DiviCom Inc., a Delaware corporation
("DiviCom"), will be held on August 28, 1996, at 9:00 a.m., local time, at
DiviCom's facility located at 1585 Barber Lane, Milpitas, California 95035 (the
"DiviCom Meeting").
At the DiviCom Meeting, DiviCom stockholders will be asked to consider and
vote upon the following proposals:
(1) to approve and adopt the Agreement and Plan of Reorganization and
Merger dated as of May 28, 1996, as amended (the "Reorganization
Agreement"), entered into among C-Cube Microsystems Inc., a Delaware
corporation ("C-Cube"), C-Cube Acquisition Corp., a Delaware corporation and
a wholly owned subsidiary of C-Cube ("Merger Sub"), DiviCom and certain
principal stockholders of DiviCom in which C-Cube is to pay an aggregate of
at least $127,272,720, consisting of $70,000,000 in cash and at least
$57,272,720 of C-Cube Common Stock. The Reorganization Agreement provides
that (i) DiviCom will be merged with and into Merger Sub, with Merger Sub
remaining as the surviving corporation and a wholly owned subsidiary of
C-Cube (the "Merger"); (ii) each outstanding vested share (I.E., those
shares not subject to a right of repurchase) of DiviCom Preferred Stock and
Common Stock (other than shares dissenting from the Merger or Vested Common
Stock that has elected to receive "stock only" consideration) will be
converted into the right to receive consideration valued at at least $3.56
per share. Each such share shall receive an amount of cash equal to at least
$2.16 and a fraction of a share of C-Cube Common Stock having a value of at
least $1.40 per share and (iii) each outstanding unvested share of DiviCom
Common Stock, or Vested Common Stock as to which a "stock only" election has
been made, will be converted into the right to receive a fraction of a share
of C-Cube Common Stock valued at at least $3.56 per share. If holders of
vested shares elect to receive "stock only" consideration, the cash per
share paid to the holders of vested shares who do not make such an election
will increase and the portion of the consideration paid in C-Cube Common
Stock will decline. The Merger is more fully described in the Reorganization
Agreement attached as Annex A to the accompanying Prospectus/Proxy
Statement.
(2) to amend Article V(A)(i)(c) of Divicom's Certificate of
Incorporation to (i) ensure that the Merger is not treated as a liquidation
for which the holders of Preferred Stock will receive a liquidation
preference.
(3) to delete Article IV(A)(i)(c) of DiviCom's Certificate of
Incorporation to remove the right of the holders of DiviCom Series A
Preferred Stock upon dissolution to buy certain DiviCom technology for $1.00
and other DiviCom assets at fair market value, and
(4) to delete Article V of DiviCom's Certificate of Incorporation to
delete the preemptive rights provision contained therein (such amendments
collectively constitute the "Certificate Amendments").
<PAGE>
Only stockholders of record at the close of business on July 31, 1996 are
entitled to notice of, and to vote at, the DiviCom Meeting, or at any
continuance(s) or adjournment(s) thereof. APPROVAL AND ADOPTION OF THE
REORGANIZATION AGREEMENT AND THE CERTIFICATE AMENDMENTS REQUIRES THE AFFIRMATIVE
VOTE OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF DIVICOM COMMON
STOCK AND PREFERRED STOCK, VOTING TOGETHER, AND A TWO-THIRDS MAJORITY OF THE
PREFERRED STOCK, VOTING SEPARATELY.
By Order of the Board of Directors,
/s/ Nolan Daines
Nolan Daines
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
Milpitas, California
August 8, 1996
IMPORTANT: EVEN IF YOU PLAN TO BE PRESENT AT THE MEETING, PLEASE COMPLETE,
DATE, SIGN AND PROMPTLY MAIL THE ENCLOSED PROXY IN THE POSTAGE PAID ENVELOPE
PROVIDED TO ENSURE THAT YOUR SHARES ARE REPRESENTED AT THE MEETING. IF YOU
ATTEND THE MEETING, YOU MAY VOTE IN PERSON IF YOU WISH TO DO SO EVEN IF YOU HAVE
PREVIOUSLY SENT IN YOUR PROXY.
<PAGE>
[C-CUBE LOGO] [DIVICOM LOGO]
PROSPECTUS/PROXY STATEMENT
3,180,412 SHARES
C-CUBE MICROSYSTEMS INC. COMMON STOCK
This Prospectus/Proxy Statement constitutes the Prospectus of C-Cube
Microsystems Inc., a Delaware corporation ("C-Cube"), with respect to up to
3,180,412 shares of its Common Stock, $0.001 par value ("C-Cube Common Stock"),
to be issued in connection with the proposed merger (the "Merger") of DiviCom
Inc., a Delaware corporation ("DiviCom"), with and into C-Cube Acquisition
Corp., a Delaware corporation and a wholly owned subsidiary of C-Cube ("Merger
Sub"), pursuant to the terms set forth in the Agreement and Plan of
Reorganization, dated as of May 28, 1996, as amended (the "Reorganization
Agreement"), among C-Cube, Merger Sub, DiviCom and certain principal
stockholders of DiviCom. The Common Stock of DiviCom is herein referred to as
"DiviCom Common Stock," and the Series A Preferred Stock and Series B Preferred
Stock of DiviCom are collectively herein referred to as "DiviCom Preferred
Stock." DiviCom Common Stock and DiviCom Preferred Stock are collectively herein
referred to as "DiviCom Capital Stock." The DiviCom Preferred Stock will be
converted directly into the right to receive C-Cube Common Stock as a result of
the Merger. As a result of the Merger, (i) all of the outstanding vested shares
of DiviCom Common Stock that have not elected to receive "stock only"
consideration will be converted into the right to receive an amount of cash and
a number of shares of C-Cube Common Stock, (ii) each outstanding unvested share
of DiviCom Common Stock (I.E., subject to repurchase by DiviCom) and vested
share as to which a "stock only" election has been made will be converted into a
right to receive a fraction of a share of C-Cube Common Stock (subject to a
right of repurchase by C-Cube), (iii) all outstanding unvested options to
acquire shares of DiviCom Common Stock will be assumed by C-Cube and thereafter
be exercisable for shares of C-Cube Common Stock, and (iv) all outstanding
vested options to acquire shares of DiviCom Common Stock will be canceled. Each
share of vested DiviCom Capital Stock that has not elected to receive "stock
only" consideration exchanged in the Merger will be converted into the right to
receive at least $3.56 in consideration, consisting of at least $2.16 in cash
and the right to receive C-Cube Common Stock valued at at least $1.40. Each
unvested share of DiviCom Common Stock and vested shares of Common Stock as to
which a "stock only" election has been made exchanged in the Merger will be
converted into the right to receive C-Cube Common Stock valued at at least
$3.56. See "Approval of the Merger and Related Transactions -- Manner and Basis
of Converting Shares." In connection with the Merger, 10% of the shares of
C-Cube Common Stock otherwise issuable to Significant Stockholders (as defined
herein) of DiviCom Capital Stock by virtue of the Merger (the "Escrow Shares")
will be placed into escrow and held as security for losses incurred by C-Cube in
the event of certain breaches by DiviCom of the representations or warranties
contained in the Reorganization Agreement. See "Approval of the Merger and
Related Transactions -- Escrow Fund." Holders of DiviCom Capital Stock who do
not vote in favor of the Merger may, under certain circumstances and by
following prescribed statutory procedures, receive solely cash for their shares.
See "Terms of the Merger -- Appraisal and Dissenters' Rights."
This Prospectus/Proxy Statement also constitutes the Proxy Statement of
DiviCom with respect to the Special Meeting of Stockholders of DiviCom scheduled
to be held at 9:00 a.m. on August 28, 1996 (the "DiviCom Meeting"), and at any
adjournment or postponement made thereof. At the DiviCom Meeting, the DiviCom
stockholders will be asked to vote on (1) approval of the Reorganization
Agreement and the Merger and (2) approval of certain amendments of DiviCom's
Certificate of Incorporation. This Prospectus/Proxy Statement and the
accompanying form of proxy are first being mailed to the stockholders of DiviCom
on or about August 8, 1996.
Certain major stockholders of DiviCom have agreed to vote in favor of the
Reorganization Agreement, Merger and the Certificate Amendments pursuant to the
terms of the Voting Agreement. As a result of such stockholders' concurrence,
DiviCom has a sufficient number of stockholder votes to approve the
Reorganization Agreement, Merger and the Certificate Amendments.
SEE "RISK FACTORS" COMMENCING ON PAGE 13 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY DIVICOM STOCKHOLDERS IN EVALUATING THE PROPOSALS TO BE VOTED ON
AT THE DIVICOM MEETING AND THE ACQUISITION OF THE SECURITIES OFFERED HEREBY.
NEITHER THIS TRANSACTION NOR THE SECURITIES OF C-CUBE OFFERED HEREBY HAVE BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE DATE OF THIS PROSPECTUS/PROXY STATEMENT IS AUGUST 8, 1996.
<PAGE>
TABLE OF CONTENTS
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AVAILABLE INFORMATION..................................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 1
TRADEMARKS................................................................ 2
FORWARD-LOOKING STATEMENTS................................................ 2
SUMMARY................................................................... 3
The Companies........................................................... 3
Special Meeting of DiviCom Stockholders................................. 3
The Merger.............................................................. 4
The Certificate Amendments.............................................. 10
Unaudited Selected Pro Forma Combined Financial Data.................... 11
Comparative Per Share Data.............................................. 12
RISK FACTORS.............................................................. 13
Uncertainties Relating to Integration of Operations..................... 13
Potential Dilutive Effect to Stockholders............................... 13
Volatility of C-Cube Stock Price........................................ 14
Limited Effect on Exchange Ratio of C-Cube Common Stock................. 14
Attraction and Retention of Key Employees; Dependence on Key
Employees.............................................................. 14
Dependence on Emerging Markets.......................................... 15
Fluctuations in Operating Results....................................... 15
Changing Product Mix; Increasing Dependence on Decoder Products......... 16
Dependence on New Product Development; Rapid Technological Change....... 17
Potential for Product Recall............................................ 18
Dependence on Wafer Suppliers and Subcontractors........................ 18
Dependence on Certain Customers......................................... 19
Possible Transactions to Obtain Additional Manufacturing Capacity;
Future Capital Needs................................................... 19
Competition............................................................. 19
Intellectual Property Protection and Disputes........................... 20
Management of Growth.................................................... 21
Risks Associated with International Business Activities................. 21
Tax Treatment........................................................... 22
Limited History of C-Cube Profitability................................. 22
Anti-Takeover Effect of Certain Charter Provisions...................... 22
INTRODUCTION.............................................................. 23
DIVICOM MEETING........................................................... 23
Date, Time and Place.................................................... 23
Record Date and Outstanding Shares; Quorum.............................. 23
Voting of Proxies....................................................... 23
Vote Required........................................................... 24
Abstentions............................................................. 24
Expenses; Solicitation of Proxies....................................... 24
Appraisal and Dissenters' Rights........................................ 24
Certificate Amendments.................................................. 24
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS........................... 26
Joint Reasons For the Merger............................................ 26
C-Cube's Reasons For the Merger......................................... 27
DiviCom's Reasons For the Merger........................................ 27
</TABLE>
i
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DiviCom Board Recommendation of Approval of the Merger.................. 28
Material Contacts....................................................... 29
TERMS OF THE MERGER....................................................... 32
Effective Time.......................................................... 32
Overview of Merger Consideration and Exchange Ratios.................... 32
Manner and Basis of Converting Shares................................... 34
Stock Ownership Following the Merger.................................... 36
Employee Benefit Plans.................................................. 37
Escrow Fund............................................................. 37
Legal Structure of the Merger........................................... 38
Conduct of DiviCom's Business Prior to the Merger....................... 38
No Solicitation......................................................... 40
Expenses................................................................ 40
Conditions to the Merger................................................ 40
Termination of Reorganization Agreement................................. 42
Transition Agreement.................................................... 43
Registration Rights Agreement........................................... 44
Voting Agreement........................................................ 44
Noncompetition Agreements............................................... 45
Affiliate Agreements.................................................... 45
Certain Benefits to DiviCom Management and Employees.................... 45
Certain Federal Income Tax Considerations............................... 46
Governmental and Regulatory Approvals................................... 48
Accounting Treatment.................................................... 48
Appraisal and Dissenters' Rights........................................ 49
C-CUBE AND DIVICOM UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS............................................................... 51
INFORMATION CONCERNING C-CUBE............................................. 56
The Company............................................................. 56
Background.............................................................. 56
Markets and Applications................................................ 57
Dependence on Emerging Markets.......................................... 60
Products................................................................ 61
Customers............................................................... 65
Research and Development................................................ 65
Sales and Marketing..................................................... 66
International Business Activities....................................... 66
Manufacturing........................................................... 67
Competition............................................................. 69
Intellectual Property and Licenses...................................... 70
Employees............................................................... 71
Facilities.............................................................. 71
Legal Proceedings....................................................... 71
Acquisitions............................................................ 71
C-Cube Stock Price and Dividend Information............................. 72
Dividend Policy......................................................... 72
SELECTED CONSOLIDATED FINANCIAL DATA OF C-CUBE............................ 73
C-CUBE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 74
Overview................................................................ 74
</TABLE>
ii
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Results of Operations................................................... 74
Factors that May Affect Future Results.................................. 80
Liquidity and Capital Resources......................................... 81
MANAGEMENT OF C-CUBE...................................................... 83
Executive Officers and Directors........................................ 83
Executive Compensation.................................................. 86
Summary Compensation Table.............................................. 86
Option Grants in Last Fiscal Year....................................... 87
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values.......................................................... 87
Certain Relationships and Transactions of C-Cube........................ 88
C-CUBE STOCKHOLDERS....................................................... 89
INFORMATION CONCERNING DIVICOM............................................ 91
Background.............................................................. 91
Business Model.......................................................... 92
Markets and Applications................................................ 92
Relevant Standards...................................................... 92
Products................................................................ 93
Customers............................................................... 95
Marketing and Sales..................................................... 95
Manufacturing........................................................... 96
Research and Development................................................ 97
Competition............................................................. 97
Proprietary Rights...................................................... 98
Employees............................................................... 98
Facilities.............................................................. 99
SELECTED CONSOLIDATED FINANCIAL DATA OF DIVICOM........................... 100
DIVICOM MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 101
Overview................................................................ 101
Results of Operations................................................... 101
Year to Year Comparisons................................................ 101
Comparison of Six Months Ended June 30, 1995 and June 30, 1996.......... 102
Liquidity and Capital Resources......................................... 103
MANAGEMENT OF DIVICOM..................................................... 104
Executive Officers and Senior Management................................ 104
Executive Compensation.................................................. 105
Summary Compensation Table.............................................. 105
Option Grants in Last Fiscal Year....................................... 106
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values.......................................................... 106
Certain Transactions of DiviCom......................................... 107
DIVICOM STOCKHOLDERS...................................................... 108
COMPARISON OF CAPITAL STOCK............................................... 109
Description of C-Cube Capital Stock..................................... 109
Description of DiviCom Capital Stock.................................... 109
COMPARISON OF RIGHTS OF HOLDERS OF C-CUBE COMMON STOCK AND HOLDERS OF
DIVICOM CAPITAL STOCK.................................................... 111
EXPERTS................................................................... 111
LEGAL MATTERS............................................................. 111
</TABLE>
iii
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-1
ANNEX A -- Amended and Restated Agreement and Plan of Reorganization dated
as of May 28, 1996, among C-Cube Microsystems Inc., C-Cube
Acquisition Corp., DiviCom Inc., SAGEM S.A., SAGEM
International, Tregor Electronique S.A. and Iena International
S.A............................................................. A-1
ANNEX B -- Section 262 of the Delaware General Corporation Law --
Appraisal Rights................................................ B-1
ANNEX C -- Amended and Restated Certificate of Incorporation of DiviCom... C-1
</TABLE>
iv
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AVAILABLE INFORMATION
C-Cube is subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at Seven World Trade Center, New York, New York 10048, and at
500 West Madison Street, Suite 1400, Chicago, Illinois 60601-2511. Copies of
such material may be obtained by mail from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The Commission maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
C-Cube has filed with the Commission a registration statement on Form S-4
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus/Proxy Statement does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement.
Copies of the Registration Statement and the exhibits and schedules thereto may
be inspected, without charge, at the offices of the Commission, or obtained at
prescribed rates from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
------------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by C-Cube with the Commission (File No. 0-23596)
pursuant to the Exchange Act following the date of this Prospectus/Proxy
Statement and prior to the date of the DiviCom Meeting, as defined below,
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act are
incorporated herein by reference.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for the purpose of this Prospectus/Proxy Statement to the extent that a
statement contained herein or in any subsequently filed document which also is
or is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed to
constitute a part of this Prospectus/Proxy Statement, except as so modified or
superseded.
To the extent that this Prospectus/Proxy Statement incorporates documents by
reference which are not presented herein or delivered herewith, C-Cube will
provide without charge to each person to whom this Prospectus/Proxy Statement is
delivered, including any beneficial owner, upon written or oral request of such
person, a copy of any or all of the documents incorporated by reference into
this Prospectus/Proxy Statement (other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference into such documents).
Requests for such copies should be directed to Mr. James G. Burke, Chief
Financial Officer, C-Cube Microsystems Inc., 1778 McCarthy Boulevard, Milpitas,
California 95035, telephone number (408) 944-6300. In order to ensure timely
delivery of the documents, such requests should be made by August 21, 1996.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED HEREIN IN CONNECTION WITH THESE MATTERS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY C-CUBE OR DIVICOM. NEITHER THE DELIVERY HEREOF
NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION
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THAT THERE HAS BEEN NO CHANGE IN THE FACTS HEREIN SET FORTH SINCE THE DATE
HEREOF. THIS PROSPECTUS/PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED BY THIS
PROSPECTUS/PROXY STATEMENT WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH AN OFFER OR SOLICITATION.
------------------------
TRADEMARKS
This Prospectus/Proxy Statement contains trademarks of C-Cube and DiviCom
and may contain certain other trademarks.
------------------------
FORWARD-LOOKING STATEMENTS
This Prospectus/Proxy Statement contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth herein. In
connection with forward-looking statements which appear in this discussion,
stockholders of DiviCom should carefully review the factors set forth in this
Prospectus/Proxy Statement under "Risk Factors."
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SUMMARY
THE FOLLOWING CONTAINS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS PROSPECTUS/ PROXY STATEMENT. THIS SUMMARY DOES NOT CONTAIN A COMPLETE
STATEMENT OF ALL MATERIAL ELEMENTS OF THE PROPOSALS TO BE VOTED ON AND IS
QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION APPEARING ELSEWHERE
IN THIS PROSPECTUS/PROXY STATEMENT AND IN THE INFORMATION AND DOCUMENTS ANNEXED
HERETO AND TO THE EXTENT INCORPORATED HEREIN BY REFERENCE.
THE COMPANIES
C-CUBE MICROSYSTEMS INC. C-Cube Microsystems Inc., a Delaware corporation
("C-Cube"), designs and markets integrated circuits and software that implement
international standards for digital video and audio compression. Compression
allows digital video to be used in fast-growing applications such as CD-based
consumer electronics, digital video networks and multimedia computing. Unless
the context requires otherwise, the term "C-Cube" refers to C-Cube Microsystems
Inc. and its subsidiaries.
C-Cube was incorporated in California in 1988 and was reincorporated in
Delaware in 1994. C-Cube's executive offices are located at 1778 McCarthy
Boulevard, Milpitas, California 95035, and its telephone number at that address
is (408) 944-6300.
C-CUBE ACQUISITION CORP. C-Cube Acquisition Corp., a Delaware corporation
("Merger Sub") is a corporation recently organized by C-Cube for the purpose of
effecting the Merger. It has no material assets and has not engaged in any
activities except in connection with the Merger. Merger Sub's executive offices
are located at 1778 McCarthy Boulevard, Milpitas, California 95035, and its
telephone number at that address is (408) 944-6300.
DIVICOM INC. DiviCom Inc., a Delaware corporation ("DiviCom"), develops and
integrates products and systems for digital video networking. DiviCom's products
include audio, video and data encoding and decoding systems and integration
services. Based on the MPEG 2 international standard for the representation of
compressed digital video and the DVB international standard for interoperability
of digital video systems, DiviCom's products enable digital video broadcasting
over a variety of networks, including satellite, wireless, fiber, cable and
twisted-pair wiring.
DiviCom was incorporated in Delaware in 1993. DiviCom's executive offices
are located at 1708 McCarthy Boulevard, Milpitas, California 95035, and its
telephone number at that address is (408) 944-6700.
SPECIAL MEETING OF DIVICOM STOCKHOLDERS
TIME, DATE, PLACE AND PURPOSE. A special meeting of DiviCom stockholders
will be held on August 28, 1996, at 9:00 a.m., local time at DiviCom's facility
located at 1585 Barber Lane, Milpitas, California (the "DiviCom Meeting"). The
purpose of the DiviCom Meeting is (i) to consider and vote upon a proposal to
approve and adopt the Reorganization Agreement and approve the Merger, and (ii)
to consider and vote upon a proposal approving amendments to DiviCom's
Certificate of Incorporation (collectively, the "Certificate Amendments") (x) to
ensure that the Merger is not treated as a liquidation for which holders of
DiviCom Preferred Stock will receive a liquidation preference, and (y) to delete
the right of the holders of Series A Preferred Stock to buy certain DiviCom
technology for $1.00 upon a dissolution of DiviCom, and (z) to delete the
preemptive rights provision contained in DiviCom's Certificate of Incorporation.
A copy of DiviCom's Restated Certificate of Incorporation reflecting the
Certificate Amendments is attached as Annex C.
RECORD DATE AND VOTE REQUIRED. Only DiviCom stockholders of record at the
close of business on July 31, 1996 (the "DiviCom Record Date") are entitled to
notice of and to vote at the DiviCom Meeting. Under Delaware law and the charter
documents of DiviCom, approval and adoption of the Reorganization Agreement,
approval of the Merger and approval of the Certificate Amendments require the
affirmative vote of (i) holders of a majority of the outstanding shares of
DiviCom Common Stock and DiviCom Preferred Stock, voting together as a single
class, and (ii) holders of a two-thirds
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majority of the outstanding shares of DiviCom Preferred Stock, voting separately
as a single class. SAGEM S.A., SAGEM International and Tregor Electronique S.A.,
each of which is organized under the laws of France, and Iena International
S.A., which is organized under the laws of Luxembourg (collectively, the "SAGEM
Entities"), are affiliated companies that own collectively as of the DiviCom
Record Date 96% of the Series A Preferred Stock, 100% of the Series B Preferred
Stock and 21.60% of the outstanding Common Stock of DiviCom. SAGEM S.A. is the
parent or a majority shareholder of each of the other SAGEM Entities. The SAGEM
Entities have agreed to vote their shares in favor of approval of the Merger and
the Certificate Amendments, as has the Chief Executive Officer of DiviCom (who
beneficially owns a total of 1,877,895 shares of DiviCom Common Stock
representing 17.07% of the Common Stock of DiviCom as of July 31, 1996). In
addition, C-Cube and its affiliates hold 3.6% of the Series A Preferred Stock
and 12.5% of the Common Stock of DiviCom and intend to vote in favor of the
Merger and the Certificate Amendments. Therefore, assuming that such
stockholders vote as described above, the Merger and the Certificate Amendments
will be approved at the DiviCom Meeting.
As of the DiviCom Record Date, there were 131 stockholders of record of
DiviCom Common Stock and five stockholders of record of DiviCom Preferred Stock.
On August 8, 1996, a notice meeting the requirements of Delaware law was
mailed to all DiviCom stockholders of record as of the DiviCom Record Date.
THE MERGER
TERMS OF THE MERGER. As a result of the Merger, the maximum number of
shares of C-Cube Common Stock to be issued (including C-Cube Common Stock to be
reserved for issuance upon exercise of any of DiviCom's options assumed by
C-Cube) in exchange for the acquisition by C-Cube of all outstanding DiviCom
Capital Stock and all then-outstanding unvested options to acquire DiviCom
Capital Stock will be 2,680,412, unless the Closing Price on the day before the
closing of the Merger (the "Closing Price") of C-Cube Common Stock is greater
than $18.00 and less than or equal to $21.37, in which event the maximum number
of shares of C-Cube Common Stock to be issued in the Merger could be up to
3,180,412, and the minimum number of shares of C-Cube Common Stock to be issued
in the Merger will be 2,412,321. No adjustment will be made in the number of
shares of C-Cube Common Stock issued in the Merger as a result of any cash
proceeds received by DiviCom from the date of execution of the Reorganization
Agreement to the closing date of the Merger pursuant to the exercise of options
to acquire DiviCom Capital Stock. The aggregate cash consideration to be paid in
such exchange will be $70 million and the aggregate C-Cube Common Stock issued
in the Merger will have a value of at least $57,272,720.
Subject to the terms and conditions of the Reorganization Agreement, as of
the Effective Time, by virtue of the Merger and without any action on the part
of Merger Sub, DiviCom or the holder of any shares of DiviCom Capital Stock, the
following will occur:
CONVERSION OF DIVICOM CAPITAL STOCK. Each share of DiviCom Capital Stock,
whether Preferred or Common, issued and outstanding immediately prior to the
Effective Time that is not subject to a right of repurchase at original purchase
price (a "vested share") (other than shares held by a holder who has elected to
receive "stock only" consideration in the Merger or who has exercised and
perfected dissenters' rights for such shares in accordance with the applicable
provisions of the Delaware General Corporation Law (the "DGCL") and who has not
withdrawn or lost such rights ("Dissenting Shares")) will be canceled and
extinguished and be converted automatically into the right to receive that
fraction of a share of C-Cube Common Stock equal to the Vested Exchange Ratio
(as defined below), and the Per-Share Cash Amount (as defined below) upon
surrender of the certificate representing such share of DiviCom Capital Stock in
the manner provided in a letter of transmittal to be sent to each record holder
of DiviCom Capital Stock prior to the Effective Time (a "Letter of
Transmittal"). Each share of DiviCom Capital Stock issued and outstanding
immediately prior to the Effective Time that is subject to a right of repurchase
at original purchase price (an "unvested share") or each vested share as to
which a "stock only" election has been made (other than any Dissenting
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Shares) will be canceled and extinguished and be converted automatically into
the right to receive that fraction of a share of C-Cube Common Stock equal to
the Unvested Exchange Ratio (as defined below), upon surrender of the
certificate representing such share of DiviCom Capital Stock in the manner
provided in the Letter of Transmittal. Rights to receive C-Cube Common Stock in
respect of DiviCom Capital Stock pursuant to the Reorganization Agreement will
be subject to the escrow provisions of the Reorganization Agreement described
under the section entitled "Terms of the Merger -- Escrow Fund" below.
Each share of vested DiviCom Capital Stock on the Closing Date that has not
elected to receive "stock only" in the Merger will be converted into a right to
receive a Per-Share Cash Amount of at least $2.16 per share and C-Cube Common
Stock with a value of at least $1.40 for each share of DiviCom Capital Stock
(meaning that each holder would receive at least one share of C-Cube stock for
every approximately 15.7 shares of such vested DiviCom Capital Stock). The
actual exchange ratio will depend on the number of vested shares of DiviCom
Capital Stock outstanding immediately prior to the Effective Time, the number of
vested shares that elect to receive "stock only" consideration and the Average
Price of the C-Cube stock.
If holders of DiviCom vested shares elect to receive "stock only"
consideration, the Per-Share Cash Amount received by those holders receiving
both cash and C-Cube stock will increase and the exchange ratio for such vested
shares will decline, resulting in such holders receiving a larger proportion of
their consideration in cash and a smaller proportion in C-Cube stock. Assuming a
C-Cube Average Price of $25.75 (which assumption is not assured), if only
certain affiliates holding in the aggregate 28,042,336 shares were to elect to
receive both stock and cash in the Merger, it could result in them receiving a
Per-Share Cash Amount of approximately $2.50 in cash and C-Cube Common Stock
valued at $1.39. See "Terms of the Merger -- Overview of Merger Consideration --
Exchange Ratios."
Each share of unvested DiviCom Capital Stock and each share of vested
DiviCom Common Stock as to which a "stock only" election has been made will be
converted into C-Cube Common Stock valued at at least $3.56. In other words,
each holder would receive at least one share of C-Cube stock for every 9.6
shares of unvested DiviCom Capital Stock and vested DiviCom Common Stock that
has elected to receive "stock only" consideration. Vesting will continue
pursuant to the original DiviCom vesting schedule and C-Cube will continue to
have the right to repurchase unvested shares at the original purchase price upon
termination of employment.
For a more detailed discussion of the calculation of the Vested Exchange
Ratio, the Per-Share Cash Amount and the Unvested Exchange Ratio, see "Approval
of the Merger and Related Transaction -- Overview of Merger -- Consideration and
Exchange Ratios -- Manner and Basis of Converting Shares" below. The Vested
Exchange Ratio and the Unvested Exchange Ratio will be adjusted to reflect fully
the effect of any stock split, reverse split, stock dividend, reorganization,
recapitalization or other like change with respect to C-Cube Common Stock or
DiviCom Capital Stock occurring after the date of execution of the
Reorganization Agreement and prior to the Effective Time.
No fraction of a share of C-Cube Common Stock will be issued, but in lieu
thereof, each holder of shares of DiviCom Common Stock who would otherwise be
entitled to a fraction of a share of C-Cube Common Stock (after aggregating all
fractional shares of C-Cube Common Stock to be received by such holder) shall be
entitled to receive from C-Cube an amount of cash (rounded to the nearest whole
cent) equal to the product of such fraction, multiplied by the Average Price.
CONVERSION OF OPTION RIGHTS. Upon consummation of the Merger, each then
outstanding option to purchase DiviCom Common Stock (each, a "DiviCom Option")
granted under DiviCom's 1993 Stock Option Plan or its 1996 Stock Option Plan, to
the extent such DiviCom Option is unvested, will be assumed by C-Cube and will
automatically be converted into an option to purchase a number of shares of
C-Cube Common Stock determined by multiplying the number of shares of DiviCom
Common Stock subject to the unvested portion of the DiviCom Option by the
Unvested Exchange Ratio, at an exercise price equal to the exercise price of the
DiviCom Option at the time of the Merger
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divided by the Unvested Exchange Ratio, rounded down to the nearest whole cent.
To avoid fractional shares, the number of shares of C-Cube Common Stock subject
to an assumed DiviCom Option will be rounded down to the nearest whole share.
Subject to the treatment of vested DiviCom Options described below, the other
terms of the DiviCom Options, including vesting schedules, will remain
unchanged.
TERMINATION OF UNEXERCISED VESTED OPTIONS. The vested portion of DiviCom
Options will not be assumed by C-Cube, nor is C-Cube substituting its options
for such vested DiviCom Options. As a result, each DiviCom Option, to the extent
it is vested and not exercised by the holder thereof prior to the consummation
of the Merger, shall terminate and cease to be outstanding as of the
consummation of the Merger.
EFFECTIVE TIME OF THE MERGER. The Merger will become effective upon the
filing of a Certificate of Merger with the Secretary of State of Delaware (the
"Effective Time"). Assuming that the Reorganization Agreement is not terminated
and that all conditions to the Merger are met or waived prior thereto, it is
anticipated that the Effective Time will be on or about August 28, 1996.
FORM S-8 REGISTRATION STATEMENT. C-Cube has agreed to file a Registration
Statement on Form S-8 with the Commission, with respect to the issuance of
shares of C-Cube Common Stock upon exercise of the assumed DiviCom Options, as
soon as practicable after the Merger. See "Approval of the Merger and Related
Transactions -- Manner and Basis of Converting Shares -- Stock Options."
STOCK OWNERSHIP FOLLOWING THE MERGER. Based upon (i) the capitalization of
DiviCom as of the close of business on July 31, 1996, (ii) the assumption that
no holder of DiviCom Capital Stock elects to receive "stock only" consideration
or exercises appraisal or dissenters' rights, (iii) a closing date of August 22,
1996, and (iv) an Average Price of $25.75 (the Closing Price of C-Cube Common
Stock on July 22, 1996), an aggregate of approximately 2,386,443 shares of
C-Cube Common Stock will be issued to DiviCom stockholders in the Merger. Based
upon the number of shares of C-Cube Common Stock issued and outstanding as of
May 31, 1996, and after giving effect to the issuance of C-Cube Common Stock as
described in the previous sentence, the former holders of DiviCom Capital Stock
would hold, and have voting power with respect to, approximately 6.7% of
C-Cube's total issued and outstanding shares, and holders of former DiviCom
Options would hold options exercisable for approximately 0.87% of C-Cube's total
issued and outstanding shares (assuming the exercise of only such options). The
foregoing numbers of shares and percentages will change subsequent to July 31,
1996 and prior to the Effective Time, based on changes in the capitalization of
DiviCom, and there can be no assurance as to the actual capitalization of C-Cube
or DiviCom at the Effective Time.
ESCROW FUND. In connection with the Merger, at the Effective Time, 10% of
the shares of C-Cube Common Stock issuable by virtue of the Merger to each
holder of at least 1% of the outstanding shares of DiviCom capital stock prior
to the Merger on a fully diluted, as if converted to Common Stock, basis with
respect to all options to acquire such stock (each a "Significant Stockholder")
will be registered in the name of and deposited with Boston Equiserve, L.P.
("Boston Equiserve"), as escrow agent (the "Escrow Agent"), such deposit to
constitute the escrow fund (the "Escrow Fund"). Such shares (the "Escrow
Shares") shall be contributed to the Escrow Fund on behalf of each Significant
Stockholder at the Effective Time in proportion to the aggregate number of
shares of C-Cube Common Stock such holder would otherwise receive by virtue of
the Merger (10% of the shares otherwise deliverable to each Significant
Stockholder). No portion of the Escrow Fund will be contributed in respect of
any options to acquire shares of DiviCom Capital Stock. The Escrow Shares will
be held in escrow as security for any losses that C-Cube incurs or reasonably
anticipates incurring by reason of willful breaches by DiviCom of
representations or warranties contained in the Reorganization Agreement
("Losses"). Significant Stockholders will have voting rights with respect to the
Escrow Shares while in escrow. C-Cube may not receive any shares from the Escrow
Fund unless and until Losses in excess of $2,000,000 have been suffered, in
which case C-Cube may recover from the Escrow Fund an amount of Escrow Shares
with a value equal to such Losses. For the purpose of compensating C-Cube for
its losses, the Escrow Shares shall be valued at the average of the Closing
Prices of C-Cube Common
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Stock for the five consecutive trading days ending two days prior to the date
such shares are delivered to C-Cube out of the Escrow Fund. Subject to
resolution of unsatisfied claims of C-Cube, the Escrow Fund shall terminate 270
days following the closing date of the Merger. The rights of Significant
Stockholders to receive Escrow Shares upon the termination of the Escrow Fund
will not be evidenced other than by the Reorganization Agreement. The shares of
C-Cube Common Stock subject to the escrow may be voted by the Significant
Stockholders and, subject to the effect of the escrow and other applicable
transfer restrictions (including the Affiliate Agreements), may be transferred
by the Significant Stockholders.
BY APPROVING THE REORGANIZATION AGREEMENT, DIVICOM STOCKHOLDERS WILL BE
DEEMED TO HAVE CONSENTED TO THE APPOINTMENT OF NOLAN DAINES, PRESIDENT AND CHIEF
EXECUTIVE OFFICER OF DIVICOM, AND CAROLINE DE PUYSEGUR, A REPRESENTATIVE OF THE
SAGEM ENTITIES, TO ACT AS SECURITYHOLDER AGENTS ON BEHALF OF DIVICOM'S
SIGNIFICANT STOCKHOLDERS TO AUTHORIZE DELIVERY OF SHARES HELD IN ESCROW TO
C-CUBE IN SATISFACTION OF CLAIMS BROUGHT BY C-CUBE FOR LOSSES, TO OBJECT TO SUCH
DELIVERIES, AGREE TO, NEGOTIATE AND ENTER INTO SETTLEMENTS AND COMPROMISES WITH
RESPECT TO SUCH CLAIMS, AND TAKE CERTAIN OTHER ACTIONS ON BEHALF OF DIVICOM'S
SIGNIFICANT STOCKHOLDERS. SEE ARTICLE VII OF THE REORGANIZATION AGREEMENT FOR A
MORE DETAILED EXPLANATION OF THE ESCROW FUND AND RIGHTS WITH RESPECT THERETO.
MARKET PRICE DATA. C-Cube Common Stock has been traded on Nasdaq under the
symbol "CUBE" since C-Cube's initial public offering in April 1994. On May 28,
1996, the last trading day before the announcement by C-Cube and DiviCom that
they had signed the Reorganization Agreement, the closing price of C-Cube Common
Stock as reported on Nasdaq was $46.75 per share. Immediately following the
Merger, C-Cube Common Stock will continue to be traded on Nasdaq under the
symbol "CUBE." On August 6, 1996, the closing price of C-Cube Common Stock as
reported on Nasdaq was $31.125 per share. There can be no assurance as to the
actual price of C-Cube Common Stock prior to, at or at any time following the
Effective Time. See "Risk Factors" and "C-Cube -- C-Cube Stock Information."
No established trading market exists for DiviCom Capital Stock.
REASONS FOR THE MERGER. In the discussions that led to the signing of the
Reorganization Agreement, C-Cube and DiviCom each identified a number of
potential benefits resulting from the Merger. C-Cube's reasons for the Merger
include the ability to leverage DiviCom's expertise in areas related to C-Cube's
core competency in video compression, the potential for increased sales of
C-Cube decoder products and the potential to enhance C-Cube's understanding of
its customers' systems requirements. DiviCom's reasons for the Merger include
leveraging C-Cube's marketing and efforts to promote standards-based solutions,
increased access to C-Cube's video compression technology and increased
stockholder liquidity. Joint reasons for the Merger include the ability to
combine the expertise of the two companies to service the emerging video
networking market, to more effectively enable and cost reduce end-to-end video
networking solutions as well as the prospect for joint development of next
generation consumer products combining storage-based and transmission-based
video compression technologies. DiviCom's Board of Directors also considered
potential negative factors relating to the Merger, including management
disruptions, potential loss of revenue, the volatility of C-Cube Common Stock,
and the risks that the desired benefits of the Merger might not be achieved. See
"Approval of the Merger and Related Transactions."
RECOMMENDATION OF DIVICOM BOARD OF DIRECTORS. The Board of Directors of
DiviCom (the "DiviCom Board") has unanimously approved the Reorganization
Agreement and believes that the Merger is in the best interests of, DiviCom and
its stockholders. See "Approval of the Merger and Related Transactions --
Material Contacts." The Board of Directors is comprised of Nolan Daines and four
employees of one of the SAGEM Entities.
CONDUCT OF THE COMBINED COMPANIES FOLLOWING THE MERGER. C-Cube intends to
combine certain administrative functions, such as accounting, human resources
and information systems, following the closing of the Merger, but to otherwise
retain DiviCom as a separate, wholly owned subsidiary. See "Approval of the
Merger and Related Transactions -- Legal Structure of the Merger."
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EXCHANGE OF DIVICOM STOCK CERTIFICATES. Prior to the Effective Time,
C-Cube, acting through Boston Equiserve as its exchange agent (the "Exchange
Agent"), will deliver to each DiviCom stockholder of record a Letter of
Transmittal with instructions to be used by such stockholder in surrendering
certificates which, prior to the Merger, represented shares of DiviCom Capital
Stock. CERTIFICATES SHOULD NOT BE SURRENDERED BY THE HOLDERS OF DIVICOM CAPITAL
STOCK UNTIL SUCH HOLDERS RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE
AGENT. At the Effective Time, each then outstanding, unvested option to purchase
DiviCom Common Stock will be assumed by C-Cube without any action on the part of
the holder thereof. At the Effective Time, each then outstanding, vested option
to purchase DiviCom Common Stock that has not been exercised will terminate.
OPTION AGREEMENTS NEED NOT BE SURRENDERED. See "Approval of the Merger and
Related Transactions -- Manner and Basis of Converting Shares."
CONDITIONS TO THE MERGER. Consummation of the Merger is subject to the
satisfaction of various conditions, including approval of the Merger by the
requisite vote of the stockholders of DiviCom.
Consummation of the Merger is also subject to the satisfaction of the
following conditions: the Registration Statement filed with the Commission
relating to the issuance of shares of C-Cube Common Stock in connection with the
Merger shall be effective and such shares shall be authorized for listing on
Nasdaq; no injunction, court order, or other legal restraint preventing
consummation of the Merger shall be in effect; and C-Cube shall be reasonably
satisfied that the Merger will qualify as a "reorganization" within the meaning
of the Internal Revenue Code. In addition, the obligations of DiviCom to
consummate the Merger are subject to the following conditions, unless waived by
DiviCom: the representations and warranties of C-Cube and Merger Sub contained
in the Reorganization Agreement shall be accurate; no material adverse change
will have occured as to C-Cube; C-Cube and Merger Sub shall have performed in
all material respects the covenants required by the Reorganization Agreement;
and DiviCom shall have received a legal opinion from counsel to C-Cube. In
addition, the obligations of C-Cube to consummate the Merger are subject to the
following conditions, unless waived by C-Cube: the representations and
warranties of DiviCom contained in the Reorganization Agreement shall be
accurate except where any breach or breaches did not have or would not
reasonably be expected to have a material adverse effect on DiviCom or C-Cube;
DiviCom shall have performed in all material respects the covenants required by
the Reorganization Agreement; and C-Cube shall have received a legal opinion
from counsel to DiviCom. See "Approval of the Merger and Related Transactions --
Conditions to the Merger."
VOTING AGREEMENT. The SAGEM Entities own in aggregate 2,375,493 shares of
DiviCom Common Stock and 20,723,855 shares of DiviCom Preferred Stock
representing 21.60% and 97.35% of the votes entitled to be cast by holders of
shares of DiviCom Common Stock and DiviCom Preferred Stock issued and
outstanding as of the DiviCom Record Date. Each of these entities, as well as
DiviCom's Chief Executive Officer and C-Cube, has entered into a Voting
Agreement with C-Cube. Each of the foregoing individuals and entities has been
identified by DiviCom as an "affiliate" (as that term is defined for purposes of
Rule 145 promulgated under the Securities Act) of DiviCom. Pursuant to the
Voting Agreement, each of the SAGEM Entities and such affiliates have agreed to
vote in favor of approval and adoption of the Reorganization and approval of the
Merger. The vote of the shares of DiviCom Common Stock and DiviCom Preferred
Stock subject to the Voting Agreements will be adequate to approve the
Reorganization Agreement and the Merger by DiviCom stockholders. See "Approval
of the Merger and Related Transactions -- Voting Agreements."
TERMINATION; EXPENSES. The Reorganization Agreement may be terminated under
certain circumstances, including, without limitation, by C-Cube if DiviCom's
stockholders have not approved the Merger within thirty days after the effective
date of the Registration Statement, by mutual written consent of C-Cube, the
SAGEM Entities and DiviCom and by either of C-Cube or DiviCom if the other party
commits a material breach or breaches of its representations, warranties or
covenants contained in the Reorganization Agreement, or by C-Cube, the SAGEM
Entities or DiviCom if the
8
<PAGE>
Merger is not consummated on or before August 31, 1996. Whether or not the
Merger is consummated, all fees and expenses incurred in connection with the
Merger including, without limitation, all legal, accounting, financial,
advisory, consulting and all other fees and expenses of third parties incurred
by a party in connection with the negotiation and effectuation of the terms and
conditions of the Reorganization Agreement and the transactions contemplated
thereby, are the obligation of the respective party incurring such fees and
expenses.
CERTAIN INCOME TAX CONSIDERATIONS. The Merger is intended to qualify as a
reorganization under Section 368(a) of the Internal Revenue Code of 1986. If the
Merger does so qualify (i) none of C-Cube, DiviCom or Merger Sub will recognize
gain or loss as a result of the Merger, and (ii) holders of DiviCom Capital
Stock that exchange their shares for C-Cube Common Stock and cash will recognize
gain, if any, in the Merger but not in excess of the amount of cash received.
However, it is possible that the Internal Revenue Service may assert that the
Merger does not qualify as a tax-free reorganization. See "Risk Factors -- Tax
Treatment." All DiviCom stockholders should consult their own tax advisors. See
"The Merger and Related Transactions -- Certain Federal Income Tax
Considerations."
ACCOUNTING TREATMENT. The Merger will be accounted for as a purchase of
DiviCom by C-Cube for financial reporting purposes in accordance with generally
accepted accounting principles. See "Approval of the Merger and Related
Transactions -- Accounting Treatment."
AFFILIATE AGREEMENTS. Certain persons identified by DiviCom as "affiliates"
(as that term is defined for purposes of Rule 145 promulgated under the
Securities Act) of DiviCom have entered into agreements restricting sales,
dispositions or other transactions reducing their risk of investment in respect
of the shares of DiviCom Capital Stock held by them prior to the Merger and
two-thirds of the shares of C-Cube Common Stock received by them in the Merger,
subject to a de minimis exception, so as to comply with the requirements of
applicable tax laws. See "Approval of the Merger and Related Transactions --
Conditions to the Merger" and "-- Affiliate Agreements."
TRANSITION AGREEMENT. In connection with the Reorganization Agreement,
SAGEM S.A., on behalf of certain SAGEM Entities, DiviCom, C-Cube, and Nolan
Daines, President and Chief Executive Officer of DiviCom, entered into a
Transition Agreement pursuant to which they agreed to terminate five existing
agreements (the "Prior Agreements") between them (or some of them): (i) the
Joint Venture and Shareholders Agreement, dated April 20, 1993; (ii) the
Business Agreement, dated as of April 20, 1993; (iii) the Registration Rights
and Buy-Out Agreement, dated as of April 20, 1993; (iv) the 1995 Rap-Up
Agreement, dated January 23, 1996; and (v) the ASIC Purchasing Agreement, dated
January 23, 1996. The Prior Agreements concerned, among other things, the
licensing and allocation of marketing rights between DiviCom and the SAGEM
Entities, product development and the supply of products from DiviCom to the
SAGEM Entities.
The Transition Agreement assigns to DiviCom all rights (including all
intellectual property rights) that any party thereto (other than DiviCom) may
have in any technology related to any products manufactured, designed, or sold
by DiviCom. Under the Transition Agreement, DiviCom grants the SAGEM Entities
certain nonexclusive, perpetual licenses to some of its existing technology,
subject to royalties payable by the SAGEM Entities for a three year period. In
addition, the Transition Agreement grants the SAGEM Entities certain
distribution rights to DiviCom products in Europe. While the Transition
Agreement conveys substantial benefits to SAGEM which might not have been
granted to unrelated third parties, it represents the agreement of the parties
to the Reorganization Agreement as to the numerous pre-existing contractual
relationships between DiviCom and SAGEM and provides for continuity of important
supply and licensing arrangements which each of DiviCom and C-Cube believe to be
in the best interests of the Combined Company. See "Approval of the Merger and
Related Transactions -- Transition Agreement."
REGISTRATION RIGHTS AGREEMENT. C-Cube and the SAGEM Entities have entered
into a Registration Rights Agreement which grants the SAGEM Entities certain
rights to have their shares of C-Cube Common Stock obtained as a result of the
Merger registered under the Securities Act. Pursuant to the Registration Rights
Agreement, the SAGEM Entities may, on up to two occasions
9
<PAGE>
beginning 90 days after the effective date of the Merger and ending on the third
anniversary of the Closing Date, require C-Cube to register on a Form S-3 not
less than 10% of the SAGEM Entities' shares of C-Cube Common Stock.
Additionally, in the event C-Cube proposes to register shares of C-Cube Common
Stock for the account of selling stockholders, then C-Cube must generally
include the SAGEM Entities' shares of C-Cube Common Stock in such registration
on a PRO RATA basis to those of the other selling stockholders.
APPRAISAL AND DISSENTERS' RIGHTS. Stockholders of DiviCom who do not vote
in favor of the Merger may, under certain circumstances and by following
procedures prescribed by the Delaware General Corporation Law, exercise
appraisal rights and receive cash for their shares of DiviCom Capital Stock. A
dissenting stockholder of DiviCom must follow the appropriate procedures under
Delaware law or suffer the termination or waiver of such rights. See "Approval
of the Merger and Related Transactions -- Appraisal and Dissenters' Rights."
REGULATORY MATTERS. C-Cube and DiviCom are aware of no governmental or
regulatory approvals required for consummation of the Merger, other than the
filing of a Premerger Notification and Report Form with the Federal Trade
Commission and the Antitrust Division of the Department of Justice pursuant to
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as to which notice of
early termination of the waiting period with respect thereto has been received,
and compliance with federal securities laws and the applicable securities laws
of the various states. See "Approval of the Merger and Related Transactions --
Governmental and Regulatory Approvals."
THE CERTIFICATE AMENDMENTS
Stockholders are being asked to amend three provisions of DiviCom's
Certificate of Incorporation to ensure that DiviCom's Certificate of
Incorporation will not conflict with the actual terms of the proposed Merger.
The Certificate Amendments, if approved, would:
(a) amend Article V(A)(1)(c) to provide that an acquisition shall not be
treated as a liquidation entitling the holders of the DiviCom Preferred Stock to
their liquidation preference. As a result of this amendment, holders of Common
Stock and Preferred Stock would share equally in the Merger Consideration;
(b) delete Article IV(A)(4) that currently provides that upon a dissolution
of DiviCom, the holders of the Series A Preferred Stock have the right to
purchase a significant portion of DiviCom's technology for $1.00 and other
DiviCom assets at fair market value. As a result of this Amendment, DiviCom
would be assured of retaining its technology after the Merger, and
(c) delete Article V that currently provides that holders of more than 5% of
DiviCom's outstanding shares have a preemptive right to acquire a pro rata share
of any new securities offered by DiviCom.
Consistent with the terms of the Reorganization Agreement, the Certificate
Amendments ensure that the consideration is paid on a pro rata basis between the
DiviCom stockholders, that DiviCom retains all of its technology rights and that
C-Cube receives all of DiviCom's outstanding stock and technology. As a result
of approving the Certificate Amendments, the holders of the DiviCom Preferred
Stock will not receive their liquidation preference on the Merger, will not be
able to acquire the DiviCom technology on its dissolution and will no longer
have preemptive rights on future offerings of DiviCom capital stock.
Pursuant to the Reorganization Agreement, the DiviCom Restated Certificate
of Incorporation reflecting the Certificate Amendments will be filed with the
Delaware Secretary of State immediately prior to filing the Agreement of Merger
effectuating the Merger and ONLY if the Merger is to be consummated. It is
intended that if the Merger is approved by the DiviCom stockholders, the meeting
will be adjourned at that point and reconvened immediately prior to the closing,
at which time the Certificate Amendments will be voted on. Given the Voting
Agreement signed by the SAGEM Entities, the Certificate Amendments will be
approved. It is a condition to closing of the Merger that the Certificate
Amendments be approved and effective prior to the Effective Time of the Merger.
10
<PAGE>
UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL DATA
The following table sets forth the Unaudited Selected Pro Forma Combined
Financial Data for the periods and as of the dates indicated which are derived
from the Unaudited Pro Forma Condensed Combined Financial Statements (the "Pro
Forma Financial Statements") which present the pro forma condensed combined
financial position of C-Cube Microsystems Inc. and DiviCom Inc. as of June 30,
1996 and the results of operations for the year ended December 31, 1995 and the
six month period ended June 30, 1996 contained elsewhere in this
Prospectus/Proxy Statement. The unaudited pro forma combined balance sheet has
been prepared as if the Merger, which will be accounted for as a purchase by
C-Cube, was consummated as of June 30, 1996. The unaudited pro forma
consolidated combined statements of operations give effect to the Merger as if
the acquisition were completed at the beginning of the fiscal period presented.
The Unaudited Selected Pro Forma Combined Financial Data is provided for
illustrative purposes only and is not necessarily indicative of the combined
financial position or combined results of operations that would have been
reported had the Merger occurred on the dates indicated, nor do they represent a
forecast of the combined financial position or results of operations for any
future period. No pro forma adjustments have been included herein which reflect
potential effects of (a) efficiencies which may be obtained by combining C-Cube
and DiviCom operations or (b) costs of restructuring, integrating or
consolidating their operations. In addition, the Pro Forma Combined Statement of
Operations Data do not include the effect of the $105.4 million nonrecurring
charge for in-process research and development that has not reached
technological feasibility and does not have alternative future uses. The
Unaudited Selected Pro Forma Combined Financial Data should be read in
conjunction with the Unaudited Pro Forma Condensed Combined Financial Statements
and related notes, and the historical financial statements and related notes of
C-Cube and DiviCom which are included elsewhere herein or incorporated herein by
reference. All amounts are stated in thousands, except for per share amounts.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA: 1995 1996
- ------------------------------------------------------------ ------------ -----------
<S> <C> <C>
Net revenues................................................ $ 155,386 $ 157,852
Cost of revenues............................................ 74,656 72,657
Research and development.................................... 27,914 23,022
Selling, general and administrative......................... 24,859 20,847
Income from operations...................................... 24,157 41,326
Net income.................................................. 21,404 25,687
Net income per share........................................ 0.57 0.67
<CAPTION>
JUNE 30,
PRO FORMA COMBINED BALANCE SHEET DATA: 1996
- ------------------------------------------------------------ -----------
<S> <C> <C>
Cash and equivalents........................................ $ 51,651
Current assets.............................................. 196,402
Working capital............................................. 85,553
Total assets................................................ 288,065
Current liabilities......................................... 110,849
Long term obligations....................................... 87,816
Stockholders' equity........................................ 85,953
</TABLE>
11
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of C-Cube
Microsystems Inc. and DiviCom Inc. and pro forma combined per share data giving
effect to the C-Cube and DiviCom Merger as if the Merger were effective January
1, 1995 and January 1, 1996 for the earnings per share data, and June 30, 1996
for book value per common share data using the purchase method of accounting.
The pro forma combined per share data are derived from the financial information
in the Unaudited Pro Forma Condensed Combined Financial Statements. The pro
forma data are not necessarily indicative of amounts which would have been
achieved had the Merger been consummated at the beginning of the periods
presented and should not be construed as representative of future operations.
This data should be read in conjunction with the Unaudited Pro Forma Condensed
Combined Financial Statements and notes thereto included elsewhere in this
Prospectus/Proxy Statement, and the separate historical financial statements and
notes thereto of C-Cube and DiviCom included elsewhere in this Prospectus/Proxy
Statement.
<TABLE>
<CAPTION>
DIVICOM
EQUIVALENT
PRO FORMA PRO FORMA
COMBINED COMBINED
C-CUBE DIVICOM C-CUBE AND C-CUBE AND
HISTORICAL HISTORICAL DIVICOM(1) DIVICOM
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) per share:
Year ended December 31, 1995.......... $0.72 $(0.11)(2) $0.09 $0.57
Six months ended June 30, 1996........ $0.76 $ 0.02 $0.10 $0.67
Book value per common share at June 30,
1996................................... $3.81 $ 0.51(3) $0.38 $2.50
Tangible book value per common share at
June 30, 1996.......................... $3.67 $ 0.51(3) $0.28 $1.86
</TABLE>
- ------------------------
(1) Calculated as Pro Forma Combined C-Cube and DiviCom multiplied by the
unvested exchange ratio of 0.151017023831 at $25.75 C-Cube average share
price.
(2) Excludes DiviCom Preferred Stock, as the result would be antidilutive.
(3) Assumes conversion of all outstanding DiviCom Preferred Stock into Common
Stock at that date.
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<PAGE>
RISK FACTORS
THIS PROSPECTUS/PROXY STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 2IE OF THE
SECURITIES EXCHANGE ACT OF 1934. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF THE RISK
FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS/PROXY STATEMENT. THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE PROPOSALS TO
BE VOTED ON AT THE DIVICOM MEETING AND THE ACQUISITION OF THE SECURITIES OFFERED
HEREBY. FOR PERIODS FOLLOWING THE MERGER, REFERENCES TO THE PRODUCTS, BUSINESS,
RESULTS OF OPERATIONS OR FINANCIAL CONDITION OF C-CUBE OR, AFTER GIVING EFFECT
TO THE MERGER, C-CUBE AND DIVICOM (THE "COMBINED COMPANY"), SHOULD BE CONSIDERED
TO REFER TO C-CUBE AND ITS SUBSIDIARIES, INCLUDING DIVICOM, UNLESS THE CONTEXT
OTHERWISE REQUIRES.
UNCERTAINTIES RELATING TO INTEGRATION OF OPERATIONS
C-Cube and DiviCom have entered into the Reorganization Agreement with the
expectation that the Merger will result in synergies for the Combined Company.
See "Approval of the Merger and Related Transactions -- Joint Reasons for the
Merger," "-- C-Cube's Reasons for the Merger" and "-- DiviCom's Reasons for the
Merger." Achieving the anticipated benefits of the Merger will depend in part
upon whether the integration of the two companies' businesses is achieved in an
efficient, effective and timely manner, and there can be no assurance that this
will occur. The combination of the two companies will require, among other
things, successful integration of DiviCom's digital video networking business
with C-Cube's current focus on digital video compression technologies. To
C-Cube's knowledge, there is no fabless semiconductor company that has
successfully merged with and integrated a video networking systems company.
Furthermore, certain customers of C-Cube may perceive DiviCom to be a
competitor, and the Merger may affect such customers' willingness to do business
with C-Cube. Moreover, certain of DiviCom's suppliers may perceive themselves as
competitors to C-Cube, and the Merger may affect such suppliers' willingness to
continue doing business on favorable terms or any terms with DiviCom.
There can be no assurance that integration will be accomplished smoothly,
successfully or in a timely manner. The successful expansion of the Combined
Company's business will require communication and cooperation in product
development and marketing among the senior executives and key technical
personnel of C-Cube and DiviCom. Given the inherent difficulties involved in
completing a major business combination, there can be no assurance that such
cooperation will occur or that the integration of the respective businesses will
be successful and will not result in disruptions in one or more sectors of the
Combined Company's business. In addition, there can be no assurance that the
Combined Company will retain its key technical and management personnel, that
the market will favorably view C-Cube's proposed entry into the field of digital
video network systems or that C-Cube will realize any of the other anticipated
benefits of the Merger. The difficulties of such integration may be increased by
the complexity of the technologies being integrated and the necessity of
coordinating separate organizations. The integration of certain operations
following the Merger will require the dedication of management resources which
may temporarily distract attention from the day-to-day business of the Combined
Company. Failure to effectively accomplish the integration of the two companies'
operations could have a material adverse effect on C-Cube's results of
operations and financial condition.
POTENTIAL DILUTIVE EFFECT TO STOCKHOLDERS
Although C-Cube and DiviCom believe that synergies will result from the
Merger, there can be no assurance that the combining of the two companies'
businesses, even if achieved in an efficient, effective and timely manner, will
result in combined results of operations and financial condition superior in
magnitude or timeliness in achievement to what would have been achieved by each
company independently. The issuance of C-Cube Common Stock in connection with
the Merger will have the effect of reducing C-Cube's net income per share and
could reduce the market price of C-Cube Common Stock unless and until revenue
growth or cost savings and other business synergies sufficient to offset the
effect of such issuance can be achieved. There can be no assurance that such
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<PAGE>
synergies will be achieved. In addition, there can be no assurance that
stockholders of DiviCom would not achieve greater returns on investment if
DiviCom were to seek means to liquidity other than by being acquired.
VOLATILITY OF C-CUBE STOCK PRICE
The market price of C-Cube's Common Stock has fluctuated significantly since
the initial public offering in April 1994. The market price of the Common Stock
could be subject to significant fluctuations in the future based on factors such
as announcements of new products by C-Cube or its competitors, quarterly
fluctuations in C-Cube's financial results or other semiconductor companies'
financial results, changes in analysts' estimates of C-Cube's financial
performance, general conditions in the semiconductor industry and conditions in
the financial markets. 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. Many
technology companies, including C-Cube, have recently experienced historic highs
in the market price of their equity securities. The market price of C-Cube's
Common Stock recently has declined substantially from such historic highs, and
may continue to experience significant fluctuations in the future.
LIMITED EFFECT ON EXCHANGE RATIO OF C-CUBE COMMON STOCK
Under the terms of the Reorganization Agreement, the shares of DiviCom
Common Stock issued and outstanding at the Effective Time will be converted into
the right to receive shares of C-Cube Common Stock. In the event of fluctuations
in the price of C-Cube Common Stock, the adjustments to the Vested Exchange
Ratio and the Unvested Exchange Ratio are limited by the Reorganization
Agreement. For example, no adjustment to the number of shares of C-Cube Common
Stock to be issued in the Merger is required in the event that the Average Price
of C-Cube Common Stock is below $48.50, unless the Average Price is greater than
$18.00 and less than or equal to $21.37. Accordingly, the value of the
consideration to be received by stockholders of DiviCom upon the Merger will
depend on the market price of the C-Cube Common Stock at the Effective Time. On
May 28, 1996, the date the Reorganization Agreement was signed, the closing
price of the C-Cube Common Stock was $46.75 reflecting a transaction valued at
$195 million, and on July 22, 1996, the closing price of the C-Cube Common Stock
was $25.75 reflecting a transaction valued at $139 million. There can be no
assurance that the market price of the C-Cube Common Stock on and after the
Effective Time will not be lower than such price. See "-- Volatility of C-Cube
Stock Price."
ATTRACTION AND RETENTION OF KEY EMPLOYEES; DEPENDENCE ON KEY EMPLOYEES
The ability of the Combined Company to maintain its competitive
technological position will depend, in large part, on its ability to attract and
retain highly qualified development and managerial personnel. Competition for
such personnel is intense, and there is a risk of departure of key employees due
to the combination process. As with many private companies that are acquired, a
number of DiviCom employees who may have contemplated an initial public offering
in the future will be disappointed and consider alternative opportunities. The
announcement of the proposed Merger may impede the Combined Company's ability to
attract and retain personnel prior to and after these transactions. The loss of
a significant group of key personnel would adversely affect the Combined
Company's prospects. C-Cube's future success is heavily dependent upon its
ability to hire and retain qualified technical, marketing and management
personnel. The loss of the services of key personnel could have a material
adverse effect on C-Cube's business. C-Cube's success in the future will depend
in part on the successful assimilation of such new personnel. C-Cube also
obtains assistance from customers whose engineers participate in development
programs at C-Cube. The continuing availability of such support is dependent
upon a number of factors, including relationships with customers and the ability
of such engineers, many of whom are foreign residents, to obtain immigration
visas. The competition for such personnel, particularly for engineering
personnel, is intense and the loss of such personnel could have a material
adverse effect on C-Cube. See "-- Dependence on New Product Development; Rapid
Technological Change" and "C-Cube Business -- Employees."
14
<PAGE>
DEPENDENCE ON EMERGING MARKETS
To date, C-Cube has derived substantially all of its product revenues from
sales of products for linear video playback and karaoke, direct broadcast
satellite applications and computer add-in cards, and from 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.
C-Cube expects that Video CD and digital video networking applications will
continue to account for a significant portion of C-Cube's revenues for the near
future. Over the longer term, C-Cube's ability to generate increased revenues
will be dependent on the development of new opportunities for compressed digital
video in the consumer electronics, communications and computer markets. The
potential size of these new market opportunities and the timing of their
development is uncertain. Substantially all of the growth in the sales of
C-Cube's decoder products over the last year has occurred in the Asia-Pacific
region. There can be no assurance that such growth will continue or that other
markets for C-Cube's product will emerge. Further, C-Cube's success in such
markets will depend upon whether system manufacturers select C-Cube's products
for incorporation into the system manufacturers' products, and upon the
successful introduction of such products. There can be no assurance that demand
for Video CD players or other existing applications will be sustained or that
new markets will develop as expected by C-Cube, or at all, or that system
manufacturers developing products for any such markets will design C-Cube's
products into their system products and successfully introduce such system
products. The failure of existing and new markets to develop as expected by
C-Cube or to be receptive to C-Cube's products would have a material adverse
effect on C-Cube's business and results of operations.
The emergence of markets for certain digital video applications will be
affected by a variety of factors beyond C-Cube's or DiviCom's control. In
particular, certain sectors of the communications market will require the
development and deployment of an extensive and costly communications
infrastructure. There can be no assurance that communications providers will
make the necessary investment in such infrastructure or that the creation of
this infrastructure will occur in a timely manner. In addition, the deployment
of such infrastructure will be subject to governmental regulatory policies,
taxes and tariffs. For example, the U.S. Federal Communications Commission
currently restricts the number of new frequencies available for deployment of
new digital video broadcast networks, such as wireless cable. In addition, other
countries have similar governmental restrictions. The development of such
markets could be delayed or otherwise adversely affected by new governmental
regulations or changes in taxes, or tariffs, or by the failure of government
agencies to adopt changes to existing regulations necessary to permit new
technologies to enter the market. The emergence of these and other markets is
also dependent in part upon third party content providers developing and
marketing content for end-user products such as video CD and DVD players,
interactive game consoles, desktop computers and settop decoders in a format
compatible with C-Cube's products. There can be no assurance that these third
parties will develop and introduce such content in a timely fashion, or at all,
or that other factors beyond C-Cube's control will not adversely affect the
development of the digital video applications for which C-Cube's products are
developed. See "C-Cube Business -- Markets and Applications."
FLUCTUATIONS IN OPERATING RESULTS
C-Cube's quarterly and annual operating results have been and will continue
to be affected by a wide variety of factors that could have a material adverse
effect on revenues and profitability during any particular period, including the
level of orders which are received and can be shipped in a quarter, the
rescheduling or cancellation of orders by its customers, competitive pressures
on selling prices, changes in product or customer mix, availability and cost of
foundry capacity and raw materials, fluctuations in yield, loss of any strategic
relationships, C-Cube's ability to introduce new products and technologies on a
timely basis, new product introductions by C-Cube's competitors, market
acceptance of products of both C-Cube and its customers, supply constraints for
other components incorporated into its customers' products, currency
fluctuations, the level of expenditures for research and development and sales,
general and administrative functions and the amount and timing of
15
<PAGE>
recognition of development contract revenues. In addition, many of the customers
for the MPEG 1 decoder products (the "CL480 Family") in the Asia-Pacific region
have been historically unable to accurately forecast their demand, resulting in
very short notice of required delivery by C-Cube, which may, in turn, cause
periods of product shortfall or surplus. C-Cube has also recently become aware
that certain of its customers may be selling some of their excess inventory of
CL480 devices, which could have a material adverse effect on the market price of
such products. In the future, C-Cube customers may sell their excess inventories
of other products comprising the CL480 Family, which could have a material
adverse effect on the market prices of such products. To the extent that
customers cancel orders, C-Cube's results of operations could be subject to
fluctuations. Furthermore, to the extent that C-Cube is unable to fulfill its
customers' purchase orders on a timely basis, such orders may be canceled due to
changes in demand in the markets for its customers' products.
With respect to the DiviCom digital video network systems business, a
substantial portion of revenues are derived from a limited number of customers,
resulting in fluctuations from period to period that are outside of DiviCom's
control. Orders from DiviCom's customers can typically be canceled on relatively
short notice, making revenue prediction subject to uncertainty. C-Cube's
operating results are subject to fluctuations in the markets for its customers'
products, particularly the consumer electronics market, which has been extremely
volatile in the past, and the digital broadcast and cable markets, which are in
an early stage, creating uncertainty with respect to product volume and timing.
Historically, C-Cube has generally recognized a substantial portion of its
product revenues in the last month of a given quarter. A significant portion of
C-Cube's expenses are fixed in the short term, and the timing of increases in
expenses is based in large part on C-Cube's and DiviCom's forecast of future
revenues. As a result, if revenues do not meet C-Cube's or DiviCom's
expectations, the Combined Company may be unable to quickly adjust expenses to
levels appropriate to actual revenues, which could have a material adverse
effect on the Combined Company's business and results of operations.
C-Cube currently anticipates that certain factors may cause its product
gross margins to decline in the future, including increased competition, the
maturation of C-Cube's products and the extent to which revenues derived from
sales of C-Cube's lower margin MPEG 1 and MPEG 2 decoder products increase as a
percentage of C-Cube's overall revenues. See "-- Changing Product Mix;
Increasing Dependence on Decoder Products" and "-- Dependence on New Product
Development; Rapid Technological Change."
The growth in revenues and operating income experienced by C-Cube in recent
quarters is not necessarily indicative of future results. In addition, in view
of the significant growth in recent years, C-Cube believes that period-to-period
comparisons of its financial results should not be relied upon as an indication
of future performance. Due to C-Cube's dependence on the consumer electronics
market, the substantial seasonality of sales in such market could materially
impact C-Cube's revenues and net income. In particular, C-Cube believes that
there may be seasonality in the Asia-Pacific region related to the Chinese New
Year, which falls within the first calendar quarter, which would indicate
relatively lower product demand in the second and third quarters. If the future
geographic mix of C-Cube's sales shifts towards the U.S. and Europe, C-Cube
would anticipate higher revenues and net income in the third and fourth calendar
quarters, as system manufacturers in these areas make purchases in preparation
for the holiday season, and comparatively less revenues and net income in the
first and second calendar quarters. C-Cube's significant growth in prior periods
makes it impossible to assess the effect of any such seasonal trends on C-Cube's
operating results. There can be no assurance, however, that C-Cube's operating
results will not exhibit such seasonal characteristics.
CHANGING PRODUCT MIX; INCREASING DEPENDENCE ON DECODER PRODUCTS
C-Cube anticipates that overall product gross margins may decrease as a
result of a number of factors, including a change in product mix to lower margin
CL480 Family products and anticipated declines in the average selling price for
these products over time. While C-Cube offers a number of products for a variety
of applications, beginning in the second quarter of 1995, sales of C-Cube's
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CL480 Family have represented an increasingly significant percentage of C-Cube's
total net revenues and accounted for a substantial majority of the growth of
C-Cube's total net revenues. C-Cube expects that revenues from its CL480 Family
will account for a significant portion of its product revenues in 1996. C-Cube
derives lower product gross margins from sales of the CL480 Family than from
sales of its encoder products. Therefore, as revenues from sales of the CL480
Family increase as a percentage of C-Cube's net revenue, C-Cube may experience
an adverse effect on its overall product gross margins. In addition, over time,
C-Cube expects that price competition will result in declining average selling
prices for these products. C-Cube may not be able to continue to reduce costs
associated with the CL480 Family sufficiently to offset the adverse effect on
overall product gross margins caused by the increasing dependence on the CL480
Family. Although C-Cube has implemented several programs to further reduce costs
associated with the CL480 Family, in the event that increases in unit sales and
other manufacturing efficiencies of the CL480 Family do not offset decreasing
prices in the future, C-Cube's business and results of operations would be
materially and adversely affected. Moreover, as C-Cube makes changes to its
CL480 Family in an effort to reduce costs, its customers must qualify each new
silicon and/or microcode revision. Delays in customers' ability or willingness
to qualify revisions of the CL480 products could result in higher costs or
dislocations in production and supply, which could have a material adverse
effect on C-Cube's operating results. The timing of volume shipments and the
life cycles of C-Cube's products are difficult to predict due in large measure
to the emerging nature of the markets for C-Cube's products, the future effect
of product enhancements by C-Cube and its competitors and future competition.
Declines in demand for C-Cube's products, particularly the CL480 Family, whether
as a result of competition, technological change or otherwise, would have a
material adverse effect on C-Cube's business and results of operations.
DEPENDENCE ON NEW PRODUCT DEVELOPMENT; RAPID TECHNOLOGICAL CHANGE
The markets for C-Cube's products are characterized by rapidly changing
technology and evolving industry standards. In addition, markets for C-Cube's
products are characterized by intense price competition. As the markets for
C-Cube's products develop and competition increases, C-Cube anticipates that
product life cycles will shorten and average selling prices will decline. In
particular, average selling prices and product gross margin for each of C-Cube's
products will decline as such products mature and as per order unit volumes for
such products increase. C-Cube'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. C-Cube has recently
announced several new products, including additional versions of the CL480 and
next generation MPEG encoders. There can be no assurance that these products
will achieve market acceptance. However, the failure of any of these products to
be successfully introduced and achieve market acceptance could have a material
adverse effect on C-Cube's business and results of operations. The success of
new product introductions is dependent on several factors, including proper new
product definition, product cost, timely completion and introduction of new
product designs, quality of new products, differentiation of new products from
those of C-Cube's competitors and market acceptance of C-Cube's and its
customers' products.
With respect to the DiviCom digital video network systems business, DiviCom
will have to continue to stay abreast of and remain compatible with various
emerging digital video networks and interoperability standards either adopted in
the industry at large or specified by one or more customers. As a result, C-Cube
and DiviCom believe that continued significant expenditures for research and
development will be required in the future. Because of the complexity of their
respective products, both C-Cube and DiviCom have experienced delays from time
to time in completing development and introduction of new products, and, as a
result, have from time to time not achieved the market share anticipated for
such products. There can be no assurance that such delays will not be
encountered in the development and introduction of future products. There can be
no assurance that the Combined Company will successfully identify new product
opportunities and develop and bring new products to market in a timely manner,
that products or technologies developed by others will not render the Combined
Company's products or technologies obsolete or noncompetitive, or that the
Combined
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Company's products will be selected for design into the products of its targeted
customers. The failure of any of the Combined Company's new product development
efforts could have a material adverse effect on C-Cube's business and results of
operations.
POTENTIAL FOR PRODUCT RECALL
As a system designer and provider, DiviCom may be responsible for product
defects that have in the past and may in the future not be discovered until such
products have been deployed. As a result, the cost of correcting such defects
could be considerable, and could have a material adverse effect on the business
and operating results of the Combined Company. Similarly, semiconductor
suppliers such as C-Cube have in the past had to replace substantial numbers of
products which, after incorporation into customers' products, have proven to
have reliability defects. While C-Cube has not experienced any significant
problems with its products to date, there can be no assurance that such an event
could occur, or that were it to occur, it would not have a material adverse
effect on C-Cube's business or results of operations.
DEPENDENCE ON WAFER SUPPLIERS AND SUBCONTRACTORS
C-Cube procures a majority of its integrated circuit products from
Matsushita Electronics Corporation ("MEC"), Taiwan Semiconductor Manufacturing
Corporation ("TSMC") and Yamaha Corporation. In addition, DiviCom is dependent
on a sole supplier of application specific integrated circuits ("ASICs") for
inclusion in certain of its decoder products. This dependence on a small number
of foundries subjects C-Cube and DiviCom to risks associated with an
interruption in supply from these foundries. In connection with the manufacture
of its newer products, C-Cube needs to continue to evaluate and qualify new
foundries that employ advanced manufacturing and process technologies, which are
currently available from a limited number of foundries. For example, certain of
the new products that C-Cube intends to introduce require advanced CMOS
processes and in the past, C-Cube has experienced increased costs and delays in
connection with the qualification of new foundries. There can be no assurance
that any delays, cost increases or quality problems resulting from the
qualification of new foundries will not have a material adverse effect on
C-Cube's business and results of operations.
C-Cube's reliance on subcontractors to manufacture, assemble and test 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 C-Cube intellectual
property. C-Cube obtains foundry capacity through forecasts that are generated
in advance of expected delivery dates and are binding on C-Cube. C-Cube's
ability to obtain the foundry capacity necessary to meet the future demand for
its products is based on its ability to accurately forecast such future demand.
Due to cyclical limitations on foundry capacity in the semiconductor industry
and lengthy order lead times required by many wafer suppliers, if C-Cube fails
to accurately forecast such future demand, C-Cube may be unable to timely obtain
an adequate supply of wafers necessary to manufacture the number of products
required to satisfy its actual demand. There can be no assurance that C-Cube
will accurately forecast future demand for its products and obtain sufficient
foundry capacity in the future. C-Cube's obligation to make binding forecasts
far in advance of delivery subjects C-Cube to inventory risks, including the
risk of obsolescence and commitments for surplus capacity. With respect to
C-Cube's principal foundries, these forecasts are also binding on a foundry upon
acceptance by the foundry, subject to minor adjustments. C-Cube's subcontractors
generally do not have firm supply obligations to C-Cube.
C-Cube has from time to time experienced disruptions in supply, although
none of those disruptions has had a materially adverse effect on results to
date. There can be no assurance that manufacturing or assembly problems will not
occur in the future or that any such disruptions will not have a material
adverse effect upon C-Cube's results of operations. Further, there can be no
assurance that suppliers who have committed to provide product will do so, or
that C-Cube will meet all conditions imposed by such suppliers. Failure to
obtain an adequate supply of products on a timely basis would delay product
delivery to C-Cube's customers, which would have a material adverse effect on
C-Cube's
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business and results of operations. In addition, C-Cube's business could also be
materially and adversely affected if the operations of any supplier are
interrupted for a substantial period of time, or if C-Cube is required, as a
result of capacity constraints in the semiconductor industry or otherwise, to
increase the proportion of wafers or finished goods purchased from higher cost
suppliers in order to obtain adequate product volumes.
The markets into which C-Cube sells its products are characterized by
extreme price competition, and C-Cube expects the selling price of its products
will decrease over the life of each product. In order to offset declines in the
selling price of its products, C-Cube will need to reduce the cost of its
products by implementing cost reduction design changes, obtaining cost
reductions as and if volumes increase, and successfully managing manufacturing
and subcontracting relationships. Since C-Cube does not operate its own
manufacturing facilities and must make binding commitments to purchase products,
it may not be able to reduce its costs as rapidly as companies that operate
their own manufacturing facilities. The failure of C-Cube to design and
introduce lower cost versions of C-Cube's products in a timely manner or to
successfully manage its manufacturing relationships would have a material
adverse effect on C-Cube's business and results of operations. See "C-Cube
Business -- Manufacturing."
DEPENDENCE ON CERTAIN CUSTOMERS
DiviCom has derived substantially all of its revenues from contracts with a
limited number of customers. During 1995, Bell Atlantic, EchoStar and certain of
the SAGEM Entities accounted for over 42%, 25% and 15% of DiviCom's revenues,
respectively. The loss of any one of these customers would have a material
adverse effect on DiviCom's business and results of operations.
POSSIBLE TRANSACTIONS TO OBTAIN ADDITIONAL MANUFACTURING CAPACITY; FUTURE
CAPITAL NEEDS
C-Cube believes that foundry capacity may become increasingly limited over
the next several years, resulting in increased prices, increased lead times and
greater difficulty in obtaining adequate capacity. Any increase in the demand
for semiconductor wafers over currently expected levels, or any failure of
foundry capacity in the industry to grow at anticipated rates would magnify
these shortages. C-Cube's future operating results will depend in substantial
part on its ability to increase the capacity available to it from its existing
or new foundries. In order to secure such capacity, C-Cube has entered into and
may in the future enter into various possible transactions, which have or could
include, without limitation, equity investments in, prepayments to,
non-refundable deposits with or loans to foundries in exchange for guaranteed
capacity, "take or pay" contracts that commit C-Cube to purchase specified
quantities of wafers over extended periods, or joint ventures or other
partnership relationships with foundries. There can be no assurance that C-Cube
will be able to make any further such arrangement in a timely fashion or at all,
that C-Cube will not require additional issuances of equity or debt in order to
raise capital for such arrangements or that any such financing would be
available to C-Cube on acceptable terms or at all. If C-Cube were not able on a
timely basis to obtain additional foundry capacity, its business and results of
operations would be materially and adversely affected. See "C-Cube Business --
Manufacturing."
COMPETITION
The markets in which C-Cube and DiviCom compete are intensely competitive
and are characterized by declining average selling prices and rapid
technological change. C-Cube and DiviCom compete with major domestic and
international companies, most of which have substantially greater financial and
other resources than C-Cube with which to pursue engineering, manufacturing,
sales, marketing and distribution of their products. Some of these companies own
proprietary video compression technology competitive with C-Cube's and DiviCom's
standards-based systems. In the consumer electronics market, principal
competitors include Philips, SGS-Thomson, Oak Technology and ESS Technology,
Inc., as well as several large, integrated Japanese consumer electronics
companies, such as Sony, Toshiba, NEC, and MEI, which have their own
semiconductor design and manufacturing capacity. In the communications market,
C-Cube's principal competitors include SGS-Thomson, LSI Logic, Texas Instruments
and IBM Microelectronics. In its compression and networking business,
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DiviCom competes with vertically integrated system suppliers including General
Instrument, Scientific Atlanta, Philips and Thomson Broadcast, as well as more
specialized suppliers including the DMV division of News Corp., Nuko, and the
TV/COM division of Hyundai. In the computer market, principal C-Cube competitors
include the increasingly powerful CPUs that are now available from, among
others, Intel and Motorola, as well as specialized companies such as Zoran and
8x8, and graphics chip manufacturers such as S3 Incorporated and Trident
Microsystems, Inc. In DiviCom's settop box business, DiviCom competes primarily
with General Instruments, Scientific Atlanta, as well as consumer electronics
companies (which may choose to license DiviCom technology or compete with
DiviCom and its licensees) such as Thomson Consumer Electronics, Philips, Sony,
Matsushita, Mitsubishi, Zenith, Hyundai and Samsung.
Recently, competition among suppliers of encoder chips for the
communications market has intensified significantly. IBM and LSI Logic have
recently announced the commercial availability of their own MPEG 2 encoders.
C-Cube expects that other companies, such as SGS-Thomson and Mitsubishi, among
others, will introduce competing encoder products in the near future. Although
the timing of the availability of such encoders is uncertain, their availability
would likely have an adverse impact on C-Cube's encoder product revenues and
margins. C-Cube may also face increased competition in the future from new
entrants into its markets. In particular, as the markets for C-Cube's products
develop, competition from large semiconductor companies, such as SGS-Thomson,
and from fabless semiconductor companies may increase significantly.
Furthermore, as part of C-Cube's foundry relationships, C-Cube has granted
certain foundries the rights to develop and manufacture derivative products
based on its technology, subject to royalty obligations and certain limitations,
which may facilitate direct competition from these larger semiconductor
companies. The ability of C-Cube and DiviCom 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 C-Cube and
DiviCom products by effective utilization of intellectual property laws, product
quality, reliability, price and the efficiency of production, the pace at which
customers incorporate C-Cube's integrated circuits into their products or
incorporate DiviCom's products or technologies, success of competitors' products
and general economic conditions. There can be no assurance that C-Cube or
DiviCom will be able to compete successfully in the future. See "C-Cube Business
- -- Competition."
A variety of other approaches to digital video compression have been
introduced, including wavelets, fractals, proprietary compression algorithms and
software-only solutions, and other companies are designing products around these
or alternative approaches. In addition, manufacturers of general purpose
microprocessors are positioning their products as offering digital video
compression capability, and there can be no assurance that system manufacturers
will not use such processors for video compression applications. In the event
that any of these other approaches, individually or collectively, are adopted in
the emerging video compression market on a widespread basis, C-Cube's business
and results of operations would be materially and adversely affected. See
"C-Cube Business -- Research and Development" and "-- Competition."
INTELLECTUAL PROPERTY PROTECTION AND DISPUTES
C-Cube and DiviCom attempt to protect their technology through a combination
of patents, copyright and trade secret laws, confidentiality procedures and
licensing arrangements. To that end, C-Cube has obtained and DiviCom has applied
for certain patents and intend to continue to seek patents on their respective
technology when appropriate. There can be no assurance that patents will issue
from any of these pending applications or that any claims allowed from existing
or pending patents will be sufficiently broad to protect C-Cube's or DiviCom's
technology. While C-Cube and DiviCom intend to protect their respective
intellectual property rights vigorously, there can be no assurance that any
patents held by or issued to C-Cube or DiviCom will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
competitive advantages to C-Cube. Moreover, while C-Cube holds or has applied
for patents relating to the design of its products,
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C-Cube's products are based in part on standards, including MPEG 1, MPEG 2 and
JPEG, and C-Cube does not hold patents or other intellectual property rights for
such standards. C-Cube and DiviCom believe that there are outstanding patents in
this area which may need to be licensed by C-Cube or DiviCom. The semiconductor
industry is characterized by frequent litigation regarding patent and other
intellectual property rights. While there is currently no pending intellectual
property litigation against C-Cube or DiviCom, C-Cube and DiviCom receive from
time to time notices of potential infringement of third party rights and there
can be no assurance that third parties will not assert claims against C-Cube and
DiviCom with respect to existing or future products or that licenses will be
available on reasonable terms, or at all, with respect to any third-party
technology including third-party technology which is or may be embodied in
standards. In the event of litigation to determine the validity of any
third-party claims, such litigation could result in significant expense to
C-Cube and divert the efforts of C-Cube's or DiviCom's technical and management
personnel, whether or not such litigation is determined in favor of C-Cube. In
the event of an adverse result in any such litigation, C-Cube could be required
to pay substantial amounts in damages and to cease selling the infringing
product unless and until C-Cube is able to develop non-infringing technology or
to obtain licenses to the technology which was the subject of the litigation.
There can be no assurance that C-Cube would be successful in such development or
that such licenses would be available, and any such development or license could
require expenditure of substantial time and other resources. The protections
afforded C-Cube's and DiviCom's respective intellectual property rights by
foreign legal systems may vary significantly, based on multilateral and
bilateral agreements, as well as the legislative developments in each country.
Neither C-Cube nor DiviCom can assure that the measures utilized by each of them
to protect their intellectual property rights from piracy in foreign countries
will be effective. See "C-Cube Business -- Intellectual Property and Licenses."
MANAGEMENT OF GROWTH
C-Cube has recently experienced a period of significant growth, which has
placed, and could continue to place, a significant strain on C-Cube's limited
personnel and other resources. C-Cube's ability to manage any further growth,
should it occur, would require significant expansion of its manufacturing,
research and development and marketing and sales capabilities and personnel. In
particular, C-Cube is in the process of expanding its research and development
and sales and marketing organizations to increase coverage of the United States
and the Asia-Pacific region. There can be no assurance that C-Cube will be able
to find qualified personnel to fill such sales and marketing positions or be
able to successfully manage a broader sales and marketing organization. In
addition, the sale and distribution of products to numerous large system
manufacturers in diverse markets and the requirements of such manufacturers for
design support would also place substantial demands on C-Cube's research and
development and sales functions. C-Cube's ability to manage any further growth,
should it occur, would depend upon its ability to manage and potentially expand
its foundry relationships. The failure of C-Cube's management to effectively
expand or manage these functions consistent with any growth which may occur
could have a material adverse effect on C-Cube's business and results of
operations.
RISKS ASSOCIATED WITH INTERNATIONAL BUSINESS ACTIVITIES
International revenues have accounted for a significant portion of C-Cube's
net revenues in the past, and C-Cube believes that international revenues will
continue to account for a significant portion of net revenues. C-Cube's success
will depend in part upon its ability to manage international marketing and sales
operations and manufacturing relationships. In addition, C-Cube purchases a
substantial portion of its assembly services from foreign suppliers. C-Cube's
international manufacturing and sales are subject to changes in foreign
political and economic conditions and to other risks including currency exchange
rate fluctuations or export/import controls and changes in tax laws, tariffs and
freight rates. For example, China and Taiwan comprise substantial markets for
consumer electronics products utilizing C-Cube's CL480 Family, such as Video CD
players. As a consequence, any political or economic instability in such
countries could significantly reduce demand for products from certain of
C-Cube's major customers. C-Cube has recently secured additional foundry
capacity in
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the Republic of China (Taiwan) from TSMC. Consequently, C-Cube will 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. In
addition, C-Cube sells certain of its products in international markets and buys
certain products from its foundries in currencies other than the U.S. dollar,
and C-Cube does not currently hedge its exposure to foreign currency exchange
rate fluctuations. As a result, currency exchange rate fluctuations could have a
material adverse effect on C-Cube'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 C-Cube's products relative to
competitive products priced in the local currency. The United States has
considered trade sanctions against Japan and is considering trade sanctions
against 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 C-Cube's current and prospective customers and suppliers are located
in Japan and China, trade sanctions, if imposed, could have a material adverse
effect on C-Cube's business and results of operations. Similarly, protectionist
trade legislation in either the United States or foreign countries could have a
material adverse effect on C-Cube's ability to manufacture or to sell its
products in foreign markets.
TAX TREATMENT
It is possible that the Internal Revenue Service may assert that the Merger
does not qualify as a tax-free reorganization because of a failure to meet the
"continuity of interest" requirement applicable to reorganizations. The law
relating to the continuity of interest requirement and the effect of post-Merger
sales of C-Cube Common Stock, if any, by former DiviCom stockholders is not
clear. A successful Internal Revenue Service challenge to the reorganization
status of the Merger would generally result in a DiviCom stockholder recognizing
gain equal to the difference between the stockholder's basis in his or her
DiviCom Capital Stock and the fair-market value, as of the Effective Time of the
Merger, of the C-Cube Common Stock and cash received in exchange therefor. See
"Terms of the Merger -- Certain Federal Income Tax Considerations."
LIMITED HISTORY OF C-CUBE PROFITABILITY
C-Cube was organized in 1988 and first achieved profitability in the third
quarter of 1993. At June 30, 1996, C-Cube had retained earnings of only $29.8
million and, on a pro forma basis, the Combined Company would have had an
accumulated deficit of $76.8 million at June 30, 1996. See "Unaudited Pro Forma
Condensed Combined Financial Statements." There can be no assurance that C-Cube
or the Combined Company will be able to sustain profitability in the future.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
Certain provisions of C-Cube's Certificate of Incorporation and Bylaws could
discourage potential acquisition proposals and could delay or prevent a change
in control of C-Cube. Such provisions could diminish the opportunities for a
stockholder to participate in tender offers, including tender offers at a price
above the then current market value of the Common Stock. Such provisions may
also inhibit increases in the market price of the Common Stock that could result
from takeover attempts. In addition, the Board of Directors of C-Cube, without
further stockholder approval, may issue Preferred Stock, with such terms as the
Board of Directors may determine, that could have the effect of delaying or
preventing a change in control of C-Cube. The issuance of Preferred Stock could
also adversely affect the voting power of the holders of Common Stock, including
the loss of voting control to others. C-Cube also has a classified board and is
afforded the protections of Section 203 of the Delaware General Corporation Law,
either of which could delay or prevent a change in control of C-Cube or could
impede a merger, consolidation, takeover or other business combination involving
C-Cube or discourage a potential acquiror from making a tender offer or
otherwise attempting to obtain control of C-Cube.
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INTRODUCTION
This Prospectus/Proxy Statement is furnished in connection with the
solicitation of proxies by the DiviCom Board to be used at the DiviCom Meeting.
This Prospectus/Proxy Statement is also furnished by C-Cube to DiviCom
stockholders in connection with the issuance of shares of C-Cube Common Stock in
connection with the Merger described herein.
The information set forth herein concerning C-Cube has been furnished by
C-Cube and the information set forth herein concerning DiviCom has been
furnished by DiviCom.
DIVICOM MEETING
DATE, TIME AND PLACE
The DiviCom Meeting will be held on August 28, 1996 at 9:00 a.m., local
time, at DiviCom's facility located at 1585 Barber Lane, Milpitas, California
(the "DiviCom Meeting").
RECORD DATE AND OUTSTANDING SHARES; QUORUM
Only holders of record of DiviCom Capital Stock at the close of business on
July 31, 1996 (the "DiviCom Record Date") are entitled to notice of, and to vote
at, the DiviCom Meeting. As of the close of business on the DiviCom Record Date,
there were 131 holders of record of DiviCom Common Stock holding an aggregate of
10,999,791 shares of DiviCom Common Stock, four holders of record of DiviCom
Series A Preferred Stock holding an aggregate of 15,788,000 shares of DiviCom
Series A Preferred Stock, and two holders of record of DiviCom Series B
Preferred Stock holding an aggregate of 5,500,000 shares of DiviCom Series B
Preferred Stock. A majority, or 16,143,896, of the combined outstanding DiviCom
Common Stock and Preferred Stock shares present in person or represented by
proxy, will constitute a quorum for the transaction of business.
VOTING OF PROXIES
This Prospectus/Proxy Statement is being furnished to holders of DiviCom
Capital Stock in connection with solicitation of proxies by and on behalf of the
Board of Directors of DiviCom for use at the DiviCom Meeting. In addition to the
consideration of the Reorganization Agreement and the Merger, the only other
matters to be brought before the DiviCom Meeting will be the amendment to
DiviCom's Certificate of Incorporation to (i) ensure that the Merger is not
treated as a liquidation for which the holders of DiviCom Preferred Stock will
receive a liquidation preference, (ii) delete the right of the holders of
DiviCom Series A Preferred Stock to buy certain DiviCom technology for $1.00 on
a DiviCom dissolution and other DiviCom assets at fair market value, and (iii)
delete the preemptive rights provision contained in DiviCom's Certificate of
Incorporation (such amendments collectively constitute the "Certificate
Amendments"). A copy of DiviCom's Restated Certificate of Incorporation
reflecting the Certificate Amendments is attached as Annex C. All shares of
DiviCom Capital Stock that are entitled to vote and are represented at the
DiviCom Meeting either in person or by properly executed proxies received prior
to or at the DiviCom Meeting and not duly and timely revoked may be voted at the
DiviCom Meeting by the holders thereof who are present at such meeting or in
accordance with the instructions indicated on such proxies, respectively. If no
such instructions are indicated, such proxies will be voted for the approval and
adoption of the Reorganization Agreement, the Merger and the Certificate
Amendments. As to any business other than that described herein that may
properly come before the DiviCom Meeting, it is intended that proxies, in the
form enclosed, will be voted in respect thereof in accordance with the judgment
of the persons voting such proxies. Any proxy given pursuant to this
solicitation may be revoked by the person giving it at any time before it is
voted. Proxies may be revoked by (i) delivering to the Secretary of DiviCom (by
any means, including facsimile) a written notice bearing a date later than the
date of the proxy, stating that the proxy is revoked, (ii) a subsequent proxy
that is signed by the person who signed the earlier proxy and is presented at
the DiviCom Meeting or (iii) attendance at the DiviCom Meeting and voting in
person (although attendance at the DiviCom Meeting will not, by itself, revoke a
proxy).
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VOTE REQUIRED
Approval and adoption of the Reorganization Agreement, the Merger and the
Certificate Amendments requires the affirmative vote of (i) the holders of a
majority of the outstanding shares of DiviCom Common Stock and Preferred Stock
entitled to vote thereon, voting together as a single class (with each share of
DiviCom Common Stock entitled to cast one vote per share and each share of
Preferred Stock entitled to a number of votes equal to the number of whole
shares of DiviCom Common Stock into which such share of DiviCom Preferred Stock
could be converted on the record date for the vote), and (ii) two-thirds of the
outstanding DiviCom Preferred Stock entitled to vote thereon, voting separately
as a single class. Each record holder of DiviCom Capital Stock on the DiviCom
Record Date is entitled to cast votes, exercisable in person or by properly
executed proxy, on each matter properly submitted for the vote of the
stockholders of DiviCom at the DiviCom Meeting. The SAGEM Entities, which own
collectively as of the DiviCom Record Date 96% of the Series A Preferred Stock
of DiviCom, 100% of the Series B Preferred Stock of DiviCom and 21.60% of the
outstanding Common Stock of DiviCom, have agreed to vote their shares in favor
of approval of the Merger, as has DiviCom's Chief Executive Officer and C-Cube,
who own collectively as of the DiviCom Record Date an additional 29.54% of the
Common Stock of DiviCom. Therefore, assuming that such stockholders vote as
agreed, the Merger will be approved at the DiviCom Meeting.
ABSTENTIONS
Abstentions will be included in determining the presence of a quorum and
will have the same effect as votes against the proposal to approve the
Reorganization Agreement and the Merger at the DiviCom Meeting.
EXPENSES; SOLICITATION OF PROXIES
The cost of the solicitation of DiviCom stockholders will be borne by
DiviCom. Proxies may be solicited by certain DiviCom directors, officers and
employees personally or by telephone, telegram or other means of communication.
Such persons will not receive additional compensation, but may be reimbursed for
reasonable out-of-pocket expenses incurred in connection with such solicitation.
APPRAISAL AND DISSENTERS' RIGHTS
Stockholders of DiviCom who do not vote in favor of the Merger may, under
certain circumstances and by following procedures prescribed by Section 262 of
the DGCL, exercise appraisal rights and receive cash for their shares of DiviCom
Capital Stock. A dissenting stockholder of DiviCom must follow the appropriate
procedures under Delaware law or suffer the termination or waiver of such
rights. See "Terms of the Merger -- Appraisal and Dissenters' Rights."
CERTIFICATE AMENDMENTS
Stockholders of DiviCom are being asked to amend three provisions of
DiviCom's Certificate of Incorporation to ensure that DiviCom's Certificate of
Incorporation not conflict with the actual terms of the proposed Merger. The
Certificate Amendments, if approved, would:
(a) amend Article V(A)(1)(c) to provide that an acquisition shall not be
treated as a liquidation entitling the holders of the DiviCom Preferred Stock to
their liquidation preference;
(b) delete Article IV(A)(4) that currently provides that upon a dissolution
of DiviCom, the holders of the Series A Preferred have the right to purchase a
significant portion of DiviCom's technology for $1.00 and other DiviCom assets
at fair market value; and
(c) delete Article V that currently provides that holders of more than 5% of
DiviCom's outstanding shares have a preemptive right to acquire a pro rata share
of any new securities offered by DiviCom.
Consistent with the terms of the Reorganization Agreement, the Certificate
Amendments ensure that the consideration is paid on a pro rata basis between the
DiviCom stockholders, that DiviCom retains all of its technology rights and that
C-Cube receives all of DiviCom's outstanding stock and
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technology. As a result of approving the Certificate Amendments, the holders of
the DiviCom Preferred Stock will not receive their liquidation preference on the
Merger, will not be able to acquire the DiviCom technology on its dissolution,
and will no longer have preemptive rights on future offerings of DiviCom capital
stock.
Pursuant to the Reorganization Agreement, DiviCom's Restated Certificate of
Incorporation reflecting the Certificate Amendments will be filed with the
Delaware Secretary of State immediately prior to filing the Agreement of Merger
effectuating the Merger and ONLY if the Merger is to be consummated. It is
intended that if the Merger is approved by the DiviCom stockholders, the meeting
will be adjourned at that point and reconvened immediately prior to the closing,
at which time the DiviCom stockholders will vote on the Certificate Amendments.
The DiviCom Meeting will be adjourned to permit the vote on the Certificate
Amendments to occur just prior to the Closing since it is possible, albeit
unlikely, that the Merger could be approved by DiviCom stockholders, yet fail to
close for some other reason. The DiviCom Meeting will not be adjourned to
solicit additional votes. Given the Voting Agreement signed by the SAGEM
Entities, beneficial holders of 23,099,348 shares of DiviCom Capital Stock, the
Certificate Amendments will be approved. It is a condition to closing of the
Merger that the Certificate Amendments be approved and effective prior to the
Effective Time of the Merger.
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APPROVAL OF THE MERGER AND RELATED TRANSACTIONS
JOINT REASONS FOR THE MERGER
C-Cube and DiviCom have identified several mutual benefits of the Merger
that they believe will contribute to the success of the Combined Company. These
potential benefits include:
-COMPATIBLE STRATEGIES. DiviCom and C-Cube have compatible business
strategies based upon open standards, interoperability and diverse business
relationships with partners and customers. The adoption of open standards
is critical to allow companies such as C-Cube and DiviCom to compete
against entrenched suppliers which often support their own proprietary
standards (e.g. MPEG 2 as an open standard vs. Digicypher, a proprietary
technology of General Instruments). The Merger will allow the Combined
Company to more effectively promote standards-based solutions, including
MPEG 2, ATM, DVB, etc., in their lines of business.
-COMBINED EXPERTISE IN EMERGING DIGITAL VIDEO NETWORKING MARKET. C-Cube has
expertise in the video compression market, the core enabling technology for
digital video networking. DiviCom has expertise in networking, including
video compression. The Combined Company will be able to deliver new product
solutions to a wider range of customers than either company on a stand
alone basis.
-ENABLE END-TO-END DIGITAL VIDEO NETWORKING SOLUTIONS. Delivering digital
video networking systems solutions involves integrating numerous elements,
including video and audio compression, transport multiplexing, conditional
access, subscriber management, transmission, diagnostics and interactive
services, among others. The Combined Company will be better situated to
develop and deliver advanced solutions that incorporate each company's
expertise in these elements.
-REDUCE COST OF SETTOP BOX BY PRODUCT INTEGRATION. Settop boxes today
contain separate subsystems for digital video and audio decoding, network
interface, system control and utilities such as electronic program guides.
By understanding all these disparate elements, the Combined Company
believes it can identify areas for potential integration and cost
reduction, potentially offering solutions which are superior to those that
are based on discrete subsystems.
-DEVELOP NEXT GENERATION SYSTEMS THAT MERGE STORAGE AND TRANSMISSION
TECHNOLOGIES. Today there are different systems sold to consumers for the
consumption of networked digital video (E.G., settop boxes) and the
playback of storage based media (E.G., Video CD players). C-Cube and
DiviCom believe that the combined expertise of C-Cube and DiviCom, through
their understanding of storage-based and network-based digital video
architectures respectively, could lead to the development of a wide range
of platforms that include both technologies, helping to create new types of
consumer products.
-DIVERSIFICATION OF C-CUBE PRODUCT LINE. DiviCom currently markets certain
semiconductor ASIC products under license. In the past, C-Cube has
licensed, manufactured and sold one of these ASICs. As a Combined Company,
there will be increased opportunity to jointly define and sell these
products, diversifying C-Cube's product portfolio and potentially
generating more revenue than if these products were only sold under a
royalty-bearing license.
-BROADEN MARKETING AND SALES SUPPORT CHANNELS. DiviCom customers are highly
concentrated in the U.S. and Europe, while the majority of C-Cube sales
currently come from the Asia-Pacific Region. The Combined Company will have
the opportunity to realize efficiencies in managing customer sales activity
and technical support worldwide.
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C-CUBE'S REASONS FOR THE MERGER
In addition to the anticipated joint benefits described above, C-Cube
believes that the acquisition of DiviCom is a significant strategic opportunity
for C-Cube. C-Cube believes that the acquisition of DiviCom will provide a
variety of advantages to C-Cube, including the following:
-TECHNOLOGY LEVERAGE. C-Cube will be able to leverage DiviCom's expertise
in transport multiplexing, conditional access encryption and statistical
multiplexing and other technologies outside its core video compression
business to enhance future product offerings.
-POTENTIAL FOR INCREASED SALES OF C-CUBE DECODER PRODUCTS. Through the
anticipated benefits accruing from DiviCom's technological expertise,
C-Cube believes that certain of its decoder products may be increasingly
attractive to its customers.
-ENHANCE UNDERSTANDING OF CUSTOMERS' SYSTEMS REQUIREMENTS. C-Cube believes
that, as issues arise in the development of end-to-end solutions in the
video networking applications market, it will be better positioned to
identify improvements in its products in order to make them more suitable
to its video networking customers as a result of the Merger.
-MEET COMPETITIVE CHALLENGE FROM OTHER VERTICALLY INTEGRATED
SUPPLIERS. Certain of C-Cube's and DiviCom's competitors are integrated
systems and semiconductor suppliers. The addition of DiviCom will enable
C-Cube to more effectively compete with such companies than if it were a
stand alone semiconductor supplier.
DIVICOM'S REASONS FOR THE MERGER
The Board of Directors of DiviCom believes that the Merger is in the best
interests of DiviCom and its stockholders and therefore recommends that the
stockholders of DiviCom vote FOR approval and adoption of the Reorganization
Agreement and approval of the Merger. Four of the members of the Board of
Directors are employees of one of the SAGEM Entities. In addition to the
benefits described above, the DiviCom Board considered the following factors in
arriving at this decision:
-STOCKHOLDER VALUE. The Merger will enable DiviCom stockholders to exchange
their privately held DiviCom Capital Stock for cash and publicly traded
C-Cube Common Stock and enable holders of unvested DiviCom options to
receive unvested options to purchase C-Cube Common Stock that will be
registered with the Commission and thus publicly tradable once the options
are exercised. In addition, certain other rights and privileges of DiviCom
stockholders will also change as a result of the Merger. Upon completion of
the Merger, each former DiviCom stockholder will have a substantially
smaller percentage ownership of C-Cube than such stockholder's current
percentage ownership of DiviCom. Accordingly, former DiviCom stockholders
will have a significantly smaller voting influence on a percentage basis
over the affairs of C-Cube than currently enjoyed over the affairs of
DiviCom.
-IMPROVED ABILITY TO COMPETE. DiviCom's competitors include companies that
are larger than DiviCom and have longer operating histories and
significantly greater capital and resources. DiviCom believes that its
ability to compete for certain large sales against such companies has, from
time to time, been adversely affected by customer preferences for larger,
more established suppliers. DiviCom further believes that the Merger has
the potential to improve DiviCom's competitive position by making available
the greater resources of the Combined Company (such as access to capital,
marketing and research and development resources).
-DISTRIBUTION SYNERGIES. The Merger would provide DiviCom with access to
C-Cube merchant semiconductor sales channels that are not currently
available to DiviCom, allowing DiviCom to obtain the higher margins on
sales made through this channel. Moreover, DiviCom believes it can
capitalize upon operating and distribution efficiencies made available
after the Merger as a result of more uniform and global distribution
capabilities provided by C-Cube.
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- ELIMINATION OF PREFERENTIAL RIGHTS. The SAGEM Entities have agreed to
waive all preferential rights to the Merger consideration in favor of
equal treatment with holders of DiviCom Common Stock by signing the Voting
Agreement in which they agreed to vote for the Certificate Amendment. The
Certificate Amendment enables a more favorable allocation of the Merger
consideration to the DiviCom stockholders (other than the SAGEM Entities).
- ELIMINATION OF RESTRICTIONS ON DOING BUSINESS. The SAGEM Entities also
have agreed to eliminate certain business restrictions and reduce
obligations relating to the development and transfer of DiviCom technology
as embodied in the Transition Agreement. This agreement should enable
DiviCom to compete more effectively in the future on a global basis.
- CONSISTENT CORPORATE CULTURE. C-Cube's corporate culture, policies and
practices in retaining employees and its business operations are
consistent with the expectations of DiviCom employees.
DIVICOM BOARD RECOMMENDATION OF APPROVAL OF THE MERGER
In addition to the factors listed above, DiviCom's Board of Directors
considered the following factors. DiviCom's Board of Directors determined not to
pursue a stand-alone public offering as an alternative due to the greater risk,
delay and expense such a transaction entails, and to the lack of certainty that
such a transaction could be completed or that the price at which it could be
completed would be attractive. DiviCom's management determined in early 1996
that DiviCom could benefit from a business combination with a strong industry
partner that would bring to the Combined Company increased financial resources,
complementary product offerings, enhanced market presence and expanded
distribution capabilities, as well as a release from existing technology and
market arrangements with the SAGEM Entities. The DiviCom Board of Directors
believes that as larger, more vertically integrated companies increasingly enter
the digital video technology market, a company such as that resulting from the
Merger has substantially greater chances to compete and grow. In addition,
notwithstanding DiviCom's extensive contacts with leading electronics companies
other than C-Cube, no comparable offers to the transaction proposed by C-Cube
were received by the Board of Directors.
On May 16, 1996, the Board of Directors of DiviCom received a confidential
written preliminary proposal with respect to a potential acquisition of DiviCom
(the "Preliminary Proposal"). The offeror was a major electronics company with
which DiviCom has had business relations. The Preliminary Proposal valued
DiviCom, at that time, at between $115 and $140 million and was subject to a
number of material contingencies, including a financing contingency. DiviCom's
Board of Directors determined after careful consideration that the C-Cube
proposal was both superior in price (approximately $192 million valuation at
signing) and certainty, and offered what the Board and management felt were
superior operating and marketing synergies.
In the course of its deliberations, the DiviCom Board of Directors reviewed
a number of additional factors relevant to the Merger with DiviCom's management.
In particular, the DiviCom Board considered: (i) information concerning C-Cube
and DiviCom's businesses, historical financial performance, product mix and
customer mix; (ii) an evaluation of the prospects of DiviCom on a stand-alone
basis based on internally developed projections of its business which made it
clear that DiviCom's projected growth would require substantial additional
capital, which the majority stockholder was not willing to provide; (iii) the
compatibility of the management and businesses of DiviCom and C-Cube; and (iv)
oral reports from management and legal advisors on the results of their due
diligence investigation of C-Cube, which included reviewing the published
reports of analysts that follow C-Cube's business, which reports were favorable
to C-Cube and its business. The Board also considered certain appraisals
regarding the Company's valuation for purposes of valuing its stock options
obtained on November 1, 1995 (which valued DiviCom's Common Stock at $0.40 to
$0.50 per share) and April 15, 1996 (which valued DiviCom's Common Stock at
$1.60 to $1.70 per share). DiviCom did not engage an investment banker to advise
it regarding the proposed Merger with C-Cube, nor did the DiviCom Board of
Directors or DiviCom's management perform the type of numeric and analytic
activities that
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would ordinarily be performed by a professional financial advisor. After
carefully considering DiviCom and C-Cube's respective businesses, historical
financial performance, operations, products and prospects, C-Cube's financial
resources, its complementary product offerings and strategy, its substantial
market presence and its sales and distribution capabilities, as well as the
other factors referred to above and the potentially negative factors referred to
below, the Board of DiviCom concluded that the relative valuations of DiviCom
and C-Cube reflected in the Vested Exchange Ratio, Unvested Exchange Ratio and
Per Share Cash Amount were appropriate and that the Merger would have the
substantial advantages referred to above for the Combined Company.
The Board of Directors of DiviCom also considered the following potentially
negative factors in its deliberations concerning the Merger: (i) the possibility
of management disruption associated with the Merger and the risk that, despite
the efforts of the Combined Company, the Combined Company may not be able to
retain key technical and management personnel of DiviCom and C-Cube; (ii) the
potential loss of revenues to the Combined Company as a result of confusion in
the marketplace and the possible exploitation of such confusion by competitors
of the Combined Company; (iii) the substantial accounting charges and related
cash requirements expected to be incurred by C-Cube in connection with the
Merger and the risk that the trading price of C-Cube Common Stock may be
adversely affected by these or other factors; (iv) the risk that the benefits
sought to be achieved by the Merger will not be achieved; (v) the volatility of
C-Cube's stock price; and (vi) other risks described above under "Risk Factors."
The DiviCom Board of Directors met on July 25, 1996 to reevaluate its
recommendation of approval of the Merger given the substantial decline in
C-Cube's stock price since the Reorganization Agreement had been executed. The
Board noted that C-Cube's financial results for its second quarter had been
strong and consistent with analysts' published reports and concluded, after
discussion, that the consideration offered by C-Cube still represented
substantial value to the DiviCom stockholders. The Board also reconsidered the
factors discussed above, given DiviCom's current capital requirements and the
current unsettled security markets, and concluded that the Merger represents
DiviCom's best alternative at this time.
In view of the wide variety of factors, both positive and negative,
considered by the DiviCom Board of Directors, the Board did not find it
practical to, and did not, quantify or otherwise assign relative weights to the
specific factors considered. After taking into consideration all of the factors
set forth above, the Board of Directors of DiviCom determined that the Merger
was in the best interests of DiviCom and its stockholders and that DiviCom
should proceed with the Merger at this time.
THE BOARD OF DIRECTORS OF DIVICOM BELIEVES THAT THE MERGER IS IN THE BEST
INTERESTS OF DIVICOM AND ITS STOCKHOLDERS AND THEREFORE UNANIMOUSLY RECOMMENDS A
VOTE FOR APPROVAL OF THE REORGANIZATION AGREEMENT AND THE MERGER.
MATERIAL CONTACTS
In December 1992, Dr. Alexandre Balkanski, then the Vice President of Sales
of C-Cube, asked Mr. Nolan Daines, who would later become the President, Chief
Executive Officer, Chief Financial Officer and a director of DiviCom, to discuss
the subject of incorporation of DiviCom. Dr. Balkanski introduced Mr. Daines to
the SAGEM Entities and helped in the initial organization of DiviCom. At
inception, C-Cube was granted approximately 7% of the Common Stock of DiviCom in
exchange for certain technology and Dr. Balkanski was named to the DiviCom Board
of Directors. In August 1994, C-Cube provided approximately $220,000 in equity
investment for approximately 550,000 shares of DiviCom Preferred Stock.
On November 14, 1994, DiviCom and C-Cube negotiated and signed license
rights for C-Cube to purchase, manufacture and resell a chip subsequently known
as the CL9110 Transport Demultiplexer.
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Dr. Balkanski served on the Board of Directors of DiviCom as a
representative of C-Cube's interests in DiviCom until July 21, 1995. At that
time, Dr. Balkanski submitted his resignation from DiviCom's Board of Directors
due to his appointment as President and Chief Executive Officer of C-Cube as of
July 1, 1995.
Informal discussion between Dr. Balkanski and Mr. Daines regarding a closer
relationship between C-Cube and DiviCom, including potential synergies between
the video network systems business and the video compression semiconductor
business, occurred intermittently after that date. These discussions became more
focused upon a potential business combination in early 1996.
On February 16, 1996, Mr. Daines contacted Gabriel Matter, who serves as a
director of DiviCom as a representative of one of the SAGEM Entities' interests
in DiviCom. Mr. Daines explained that C-Cube might be interested in entering the
digital video systems business by way of a strategic combination and that, due
to the close relations existing between C-Cube and DiviCom, Dr. Balkanski had
asked him whether the SAGEM Entities would be interested in receiving an
acquisition proposal. Mr. Daines added that Dr. Balkanski wished to meet with
Michel Toussan, Vice President and Managing Director of the Electronics Division
of SAGEM S.A. and Chairman of the Board of DiviCom, in order to informally
discuss C-Cube's interest in a possible merger with DiviCom.
From February 16, 1996 through March 31, 1996, C-Cube conducted preliminary
due diligence on DiviCom, and certain members of management of C-Cube, DiviCom
and SAGEM met to discuss a possible merger. Involved in those discussions were
Mr. Daines, Dr. Lookabaugh, Nai-Ting Hsu and Rick Prime from DiviCom, Dr.
Balkanski, Mr. Burke, Dr. LeGall, Mr. Daly and Mr. Foreman from C-Cube and Mr.
Matter and Mr. Toussan of SAGEM. Matters concerning system versus semiconductor
business models, complementary product strategies as well as early views
regarding structure and organizational issues were all discussed. General
business issues concerning customers, key contracts and development activities
were also reviewed.
On February 27, 1996, Dr. Balkanski met with Mr. Michael Wishart of Lehman
Brothers to outline the possibility of a transaction and requested Lehman
Brothers to prepare analyses to establish possible metrics for the valuation of
DiviCom, with a focus on finding comparable valuations of publicly traded
companies.
On March 12, 1996, Dr. Balkanski met in Paris with Mr. Toussan, at which
meeting a potential business combination, and the possible valuation of such a
transaction based on initial data supplied by Lehman Brothers, was discussed.
On April 1, 1996, DiviCom and C-Cube entered into a confidentiality
agreement. Shortly thereafter the companies exchanged preliminary information
and conducted preliminary due diligence investigations of each other's
businesses. This due diligence featured presentations given by the senior
management of DiviCom to Dr. Balkanski, outlining details of operations of each
of the major functional units of DiviCom as well as a discussion of future
product development plans.
A meeting was held in Paris, France, on April 22, 1996. Present at the
meeting were Dr. Balkanski, Messrs. Daines and Toussan and Mario Colaiacovo,
Vice President and Chief Financial Officer of SAGEM S.A. C-Cube then submitted
to the persons present a merger proposal. On the afternoon of the same day, a
summary of terms, after having been negotiated and revised, was signed by Dr.
Balkanski on behalf of C-Cube, Mr. Daines on behalf of DiviCom and Pierre
Faurre, Chairman of the Board and Chief Executive Officer of SAGEM S.A. The
summary of terms contained substantially all of the significant terms of the
proposed Merger, including purchase price, allocation between stock and cash,
the necessity of concluding a Transition Agreement concurrent with the Merger,
and the structure of the transaction. Drafts of the Reorganization Agreement and
other transaction documents were prepared based on the summary of terms and
reviewed by the parties over the course of the next two weeks.
On the afternoon of May 7, 1996, and during the day May 8, 1996, Mr. Daines
of DiviCom, Dr. Balkanski, Mr. Burke and Mr. Foreman of C-Cube and Mr. Matter,
Mr. Toussan and Mr. Galliard of
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SAGEM met at C-Cube's offices to discuss definitive documentation for the
Merger. At those meetings, the parties agreed to the limited "collar" provision
and negotiated other provisions, such as the "no shop" clause and the various
closing conditions and requirements for a tax-free transaction. Revised drafts
of the Reorganization Agreement and the other transaction documents were
prepared and recirculated based on the agreements reached at this meeting.
From May 21, 1996 through May 23, 1996 Mr. Daines, Dr. Balkanski, Mr.
Toussan and Mr. Gaillard met in New York, New York, with Mr. Matter and Mr.
Fallevoz participating from time to time by telephone conference call, to
negotiate the remaining unresolved issues concerning formulation of the
allocation of the Merger consideration, the escrow arrangements, the
representations and warranties in the Reorganization Agreement, the drafting and
discussion of the Transition Agreement and finalizing the other transaction
documents.
On May 23, 1996, the Board of Directors of DiviCom met with DiviCom's legal
counsel, considered the terms of the Reorganization Agreement and related
agreements as then negotiated, as well as the results of the due diligence
review of C-Cube, and unanimously approved the Reorganization Agreement.
On May 24, 1996 the Board of Directors of C-Cube met with C-Cube's legal
counsel, considered the terms of the Reorganization Agreement and related
agreements as then negotiated, the results of the due diligence review of
DiviCom, and unanimously approved the Reorganization Agreement.
On May 28, 1996, officers of DiviCom and C-Cube and representatives of the
SAGEM Entities executed the Reorganization Agreement, and the proposed Merger
was publicly announced.
While meeting at the financial printer to prepare the filing of the
Registration Statement with the SEC, Mr. Daines and Dr. Balkanski began
discussing the possiblity of allowing DiviCom stockholders the option to receive
all stock in the Merger, as opposed to a combination of cash and stock. These
discussions were tabled to facilitate the filing with the SEC on June 12, 1996.
Thereafter, intermittent discussions between Messrs. Daines and Balkanski took
place, and were finalized on July 24, 1996, when it was agreed that DiviCom
stockholders would be given the opportunity to elect all stock, and the
Reorganization Agreement was accordingly amended.
Due to the sharp decline in the market price of C-Cube Common Stock in June
and July, Messrs. Daines and Balkanski also discussed intermittently the
possibility of increasing the merger consideration. These discussions culminated
in an agreement to provide additional price protection to DiviCom stockholders
between the market prices of C-Cube Common Stock of $21.37 and $18.01, and the
Reorganization Agreement was accordingly amended.
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TERMS OF THE MERGER
THE FOLLOWING DISCUSSION SUMMARIZES THE PROPOSED MERGER AND RELATED
TRANSACTIONS. THE FOLLOWING IS NOT, HOWEVER, A COMPLETE STATEMENT OF ALL
PROVISIONS OF THE REORGANIZATION AGREEMENT AND RELATED AGREEMENTS. DETAILED
TERMS OF AND CONDITIONS TO THE MERGER AND CERTAIN RELATED TRANSACTIONS ARE
CONTAINED IN THE REORGANIZATION AGREEMENT, AS AMENDED, A CONFORMED COPY OF WHICH
IS ATTACHED TO THIS PROSPECTUS/PROXY STATEMENT AS APPENDIX A. STATEMENTS MADE IN
THIS PROSPECTUS/PROXY STATEMENT WITH RESPECT TO THE TERMS OF THE MERGER AND SUCH
RELATED TRANSACTIONS ARE QUALIFIED IN THEIR RESPECTIVE ENTIRETIES BY REFERENCE
TO THE MORE DETAILED INFORMATION SET FORTH IN THE REORGANIZATION AGREEMENT.
EFFECTIVE TIME
The Reorganization Agreement provides that the Merger will become effective
upon the filing of a Certificate of Merger by the Secretary of State of the
State of Delaware in accordance with the DGCL (the "Effective Time"). It is
anticipated that if all conditions of the Merger have been fulfilled or waived,
the Effective Time will occur on or about August 28, 1996, or on a date as soon
as practicable thereafter.
OVERVIEW OF MERGER CONSIDERATION AND EXCHANGE RATIOS
Upon consummation of the Merger, C-Cube will pay the DiviCom stockholders up
to $70 million in cash and 2,680,412 shares of C-Cube Common Stock (up to
3,180,412, if the Closing Price of C-Cube Common Stock is greater than $18.00
and less than or equal to $21.37). The allocation of consideration between cash
and C-Cube stock was the result of negotiations between the parties. During the
negotiations, the parties discussed paying either (i) all stock or (ii) stock
plus cash consideration for DiviCom. The majority DiviCom stockholder preferred
to have as large a cash component as possible. C-Cube was not willing to pay
more than $70 million in cash and wanted the remainder of the consideration to
be paid in C-Cube stock in order that the Merger be characterized as
"reorganization" within the meaning of Section 368 of the Code. Similarly,
DiviCom wanted its U.S. DiviCom stockholders to receive C-Cube stock on a
tax-deferred basis.
The $70 million in cash and number of C-Cube shares to be received in the
Merger was the result of arm's length negotiations between C-Cube, DiviCom, and
DiviCom's majority stockholder, the SAGEM Entities. The Reorganization Agreement
does not call for an adjustment to the number of shares of C-Cube Common Stock
that are issued if the Average Price of the C-Cube Common Stock ranges from
$48.50 to $21.37. As a result, the Reorganization Agreement allocates the market
risk of a drop in the value of the consideration to be issued in the Merger in
this price range to the DiviCom stockholders. If the Closing Price of the C-Cube
Common Stock is between $21.37 and $18.00, the number of shares of C-Cube Common
Stock issued will be increased so that the market value of the stock issued is
45% of the value of the total consideration issued in the Merger.
The parties agreed that all DiviCom stockholders would receive consideration
having the same value per share. Whether a DiviCom stockholder has Common Stock
or Preferred Stock, vested stock or unvested stock, or elects to take the
consideration in cash and stock or in stock only, the formulas in the
Reorganization Agreement result in each stockholder receiving consideration with
the same value per share (based on the Average Price of the C-Cube Common Stock
if the Closing Price is greater than $21.37 and based on the Closing Price of
the C-Cube Common Stock if the Closing Price is less than $21.37).
Pursuant to the Reorganization Agreement, the amount of consideration a
DiviCom stockholder receives is determined pursuant to the exchange ratios set
forth below. The parties agreed that there would be two exchange ratios: one of
which converted DiviCom stock solely into C-Cube stock, and another that
converted DiviCom stock into C-Cube stock and a certain amount of cash.
Permitting two forms of payment was considered desirable for several reasons.
First, DiviCom wanted to allow the holders of vested Common Stock to elect to
receive only stock consideration, rather than partly stock and partly cash. By
electing to receive "stock only" consideration, a DiviCom stockholder can obtain
tax deferred treatment on all of the consideration paid by C-Cube. Second, for
certain accounting reasons, C-Cube wanted to require the holders of DiviCom
unvested Common Stock to receive only stock consideration. Although this results
in two different exchange ratios depending on the form of consideration to be
received, the formulas for determining each exchange ratio are designed to
ensure that whether a DiviCom stockholder is to receive all stock or stock and
cash, each DiviCom stockholder will receive an equivalent value of consideration
based on the Average Price of the C-Cube stock.
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The following chart illustrates how a DiviCom stockholder can use the
formulas in the Reorganization Agreement to determine the consideration to be
received at five hypothetical C-Cube Common Stock prices ($18.01, $20, $25.75,
$30, and $53.89) and under two scenarios (Scenario A in which no holder of
DiviCom vested Common Stock elects to receive "stock only," and Scenario B in
which all holders of DiviCom vested Common Stock other than the SAGEM Entities,
C-Cube, and two affiliates, make such a "stock only" election. There can be no
assurance that C-Cube Common Stock will trade at these prices or what number of
shares of DiviCom vested Common Stock, if any, will elect to receive "stock
only" consideration:
<TABLE>
<CAPTION>
CLOSING PRICE CLOSING PRICE AVERAGE PRICE AVERAGE PRICE AVERAGE PRICE
<S> <C> <C> <C> <C> <C>
AT A C-CUBE STOCK PRICE OF: $18.01 $20.00 $25.75 $30.00 $53.89
EACH DIVICOM SHARE RECEIVES CONSIDERATION EQUAL
TO: $3.56 $3.56 $3.89 $4.21 $5.59
SCENARIO A ASSUMES THAT NO STOCKHOLDERS ELECT TO
RECEIVE STOCK ONLY (IF NO ELECTION IS MADE BY THE
STOCKHOLDER MEETING, A HOLDER OF VESTED STOCK WILL
RECEIVE BOTH STOCK AND CASH)
EACH VESTED SHARE AS TO WHICH NO "STOCK ONLY"
ELECTION IS MADE:
TO DETERMINE THE CONSIDERATION YOU ARE TO RECEIVE
FOR SUCH SHARES, USE THE FOLLOWING FORMULA:
TOTAL CONSIDERATION = (A * B) + (A * C)
A = Your vested shares as to which no "stock
only" election was made
B = Cash per share to be received: $2.16 $2.16 $2.16 $2.16 $2.16
Stock value per share to be received: $1.40 $1.40 $1.73 $2.05 $3.43
C = Vested Exchange Ratio (To find number of
C-Cube Shares) 0.075855541850 0.069865791543 0.067026334392 0.068152616274 0.063678692620
EACH UNVESTED SHARE AND EACH VESTED SHARE AS TO
WHICH
A "STOCK ONLY" ELECTION IS MADE:
TO DETERMINE THE NUMBER OF C-CUBE SHARES YOU ARE
TO RECEIVE
FOR SUCH SHARES, USE THE FOLLOWING FORMULA:
SHARES OF C-CUBE STOCK TO BE RECEIVED = D * E
D = Your unvested shares or vested shares as to
which a "stock only" election was made
Stock value per share to be received: $3.56 $3.56 $3.89 $4.21 $5.59
E = Unvested Exchange Ratio (To find number of
C-Cube Shares) 0.197672186780 0.178003813986 0.151017023831 0.140244624709 0.103811560555
SCENARIO B ASSUMES THAT ALL STOCKHOLDERS ELECT TO
RECEIVE STOCK ONLY EXCEPT THE SAGEM ENTITIES,
C-CUBE, AND CERTAIN OTHER AFFILIATES HOLDING IN
THE AGGREGATE 28,042,336 SHARES.
EACH VESTED SHARE AS TO WHICH NO "STOCK ONLY"
ELECTION IS MADE:
TO DETERMINE THE CONSIDERATION YOU ARE TO RECEIVE
FOR SUCH SHARES, USE THE FOLLOWING FORMULA:
TOTAL CONSIDERATION = (A * B) + (A * C)
A = Your vested shares as to which no "stock
only" election was made
B = Cash per share to be received: $2.50 $2.50 $2.50 $2.50 $2.50
Stock value per share to be received: $1.06 $1.06 $1.39 $1.71 $3.09
C = Vested Exchange Ratio (To find number of
C-Cube Shares) 0.059069982076 0.053192518859 0.054076219686 0.057037101151 0.057490801477
EACH UNVESTED SHARE AND EACH VESTED SHARE AS TO
WHICH A
"STOCK ONLY" ELECTION IS MADE:
TO DETERMINE THE NUMBER OF C-CUBE SHARES YOU ARE
TO RECEIVE
FOR SUCH SHARES, USE THE FOLLOWING FORMULA:
SHARES OF C-CUBE STOCK TO BE RECEIVED = D * E
D = Your unvested shares and vested shares as to
which a "stock only" election was made
Stock value per share to be received: $3.56 $3.56 $3.89 $4.21 $5.59
E = Unvested Exchange Ratio (To find number of
C-Cube Shares) 0.197672186780 0.178003804196 0.151017023831 0.140244624709 0.103811560555
AGGREGATE C-CUBE SHARES TO BE ISSUED: 3,180,051 2,863,636 2,680,412 2,680,412 2,412,321
AGGREGATE CASH TO BE ISSUED: $70,000,000 $70,000,000 $70,000,000 $70,000,000 $70,000,000
AGGREGATE VALUE OF CONSIDERATION ISSUED: $127,272,720 $127,272,720 $139,020,609 $150,412,360 $199,999,979
</TABLE>
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The Vested Exchange Ratio, the Per Share Cash Amount and the Unvested
Exchange Ratio will vary in accordance with the formula in "Manner and Basis of
Converting Shares" depending upon the Average Price of the C-Cube Common Stock,
the number of shares of DiviCom vested Common Stock on the Closing Date, and the
number of shares of DiviCom vested Common Stock that elect to receive "stock
only" consideration. In addition, in order to preserve the tax-deferred nature
of the transaction, the parties have agreed to increase the Aggregate Share
Number (and thus adjust the Vested Exchange Ratio and Unvested Exchange Ratio)
if the Closing Price of the C-Cube Common Stock is between $18 and $21.37. If
the Closing Price of the C-Cube Common Stock is $18 or less, DiviCom will
resolicit stockholder approval of the Merger.
In addition to the consideration being paid in the Merger by C-Cube, the
holders of the DiviCom Preferred Stock have agreed to give up certain rights
that they hold under DiviCom's Certificate of Incorporation, and the SAGEM
Entities have agreed to give up certain contractual rights that they have to
DiviCom's technology. See "DiviCom Meeting -- The Certificate Amendment" for a
discussion of amendments to DiviCom's Certificate of Incorporation to allow
equal division of the merger consideration and "Terms of the Merger -- The
Transition Agreement" for a discussion of the elimination of certain
restrictions on DiviCom's ability to do business, intellectual property rights
assigned to DiviCom and marketing and product rights granted to the SAGEM
Entities in connection with the Merger.
MANNER AND BASIS OF CONVERTING SHARES
As a result of the Merger, the maximum number of shares of C-Cube Common
Stock to be issued (including C-Cube Common Stock to be reserved for issuance
upon exercise of any of DiviCom's options to be assumed by C-Cube) in exchange
for the acquisition by C-Cube of all outstanding DiviCom Capital Stock and all
then-outstanding unvested options to acquire DiviCom Capital Stock will be
3,180,412. No adjustment will be made in the number of shares of C-Cube Common
Stock issued in the Merger as a result of any cash proceeds received by DiviCom
from the date of execution of the Reorganization Agreement to the closing date
of the Merger pursuant to the exercise of options to acquire DiviCom Common
Stock.
Subject to the terms and conditions of the Reorganization Agreement, as of
the Effective Time, by virtue of the Merger and without any action on the part
of Merger Sub, DiviCom or the holder of any shares of DiviCom Capital Stock, the
following will occur:
CONVERSION OF DIVICOM CAPITAL STOCK. Each share of DiviCom Capital Stock,
whether Preferred or Common, issued and outstanding immediately prior to the
Effective Time that is not subject to a right of repurchase at original purchase
price ("Vested Shares") (other than any Dissenting Shares) that has not elected
to receive "stock only" consideration will be canceled and extinguished and be
converted automatically into the right to receive that fraction of a share of
C-Cube Common Stock equal to the Vested Exchange Ratio (as defined below), and
cash in the amount of the Per-Share Cash Amount (as defined below) upon
surrender of the certificate representing such share of DiviCom Capital Stock in
the manner provided in a letter of transmittal to be sent to each record holder
of DiviCom Capital Stock prior to the Effective Time (a "Letter of
Transmittal"). Each share of DiviCom Capital Stock issued and outstanding
immediately prior to the Effective Time that is subject to a right of repurchase
at original purchase price ("Unvested Shares") (other than any Dissenting
Shares) and each Vested Share as to which a "stock only" election has been made
will be canceled and extinguished and be converted automatically into the right
to receive that fraction of a share of C-Cube Common Stock equal to the Unvested
Exchange Ratio (as defined below), upon surrender of the certificate
representing such share of DiviCom Capital Stock in the manner provided in the
Letter of Transmittal. Since cash received in the Merger is taxable upon
receipt, holders of Vested Shares are being given the opportunity to elect to
receive the Unvested Exchange Ratio (consisting of "stock only" consideration,
instead of the Vested Exchange Ratio (consisting of stock and cash
consideration). Rights to
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receive C-Cube Common Stock in respect of DiviCom Capital Stock pursuant to the
Reorganization Agreement will be subject to the escrow provisions of the
Reorganization Agreement described under the section entitled "Terms of the
Merger -- Escrow Fund" below.
"Aggregate Cash Amount" means $70,000,000.
"Aggregate Share Number" means
(a) if the Closing Price of C-Cube Common Stock on the day before the
closing (the "Closing Price") is greater than $21.37, the quotient (rounded to
the nearest share) obtained by dividing (i) $130,000,000 by (ii) the lesser of
(x) $53.89 (which would result in a quotient of 2,412,321 shares) and (y) the
average of the closing prices of a share of C-Cube's Common Stock on the Nasdaq
National Market, or the national securities exchange on which C-Cube's Common
Stock is then traded, for the twelve (12) trading days immediately preceding the
date of the Company's stockholder meeting (the "Company Meeting") at which the
Merger and the other transactions contemplated by this Agreement are submitted
for approval (the "Average Price"); provided, however, that if the quotient
obtained thereby is greater than 2,680,412, the quotient shall be deemed to be
2,680,412. Notwithstanding anything herein to the contrary, additional shares of
C-Cube Common Stock shall be issuable in connection with payments to holders of
unvested DiviCom Options and unvested DiviCom Common Stock pursuant to the
Unvested Exchange Ratio; or
(b) if the Closing Price of C-Cube Common Stock is greater than $18.00 and
less than or equal to $21.37, the quotient (rounded to the nearest share)
obtained by dividing $57,272,727 by such Closing Price. If the Closing Price of
C-Cube Common Stock on the day before the closing is equal to or less than
$18.00, DiviCom will resolicit stockholder approval of the Merger.
"Per-Share Cash Amount" means the quotient obtained by dividing the
Aggregate Cash Amount by the number of vested shares of DiviCom Capital Stock
outstanding immediately prior to the Effective Time that are held by
"Non-Electing Stockholders" (as defined below). To determine cash paid to a
particular stockholder, the Per Share Cash Amount shall be multiplied by the
number of Vested Shares held by a Non-Electing Stockholder and then rounded to
the nearest whole cent.
"Price Per DiviCom Share" means the quotient obtained by dividing (a) the
sum of (i) the Aggregate Cash Amount and (ii) the product of the Aggregate Share
Number multiplied by the Average Price, by (b) 35,750,000.
"Stock Portion of Price" means the amount obtained by subtracting the Per
Share Cash Amount from the Price Per DiviCom Share.
"Vested Exchange Ratio" means the quotient obtained by dividing the Stock
Portion of Price by the Average Price.
"Unvested Exchange Ratio" means the quotient obtained by dividing the Price
Per DiviCom Share by the Average Price.
"Non-Electing Stockholders" are those DiviCom stockholders holding vested
shares of DiviCom stock who did not submit to DiviCom, on or before the DiviCom
Meeting, their written election to receive the Unvested Exchange Ratio with
respect to those Vested Shares. Holders may elect to receive the Unvested
Exchange Ratio solely with respect to Vested Shares of DiviCom Common Stock.
No fraction of a share of C-Cube Common Stock will be issued, but in lieu
thereof, each holder of shares of DiviCom Capital Stock who would otherwise be
entitled to a fraction of a share of C-Cube Common Stock (after aggregating all
fractional shares of C-Cube Common Stock to be received by such holder) shall be
entitled to receive from C-Cube an amount of cash (rounded to the nearest whole
cent) equal to the product obtained by multiplying such fraction by the Average
Price.
CONVERSION OF OPTION RIGHTS. Upon consummation of the Merger, each then
outstanding option to purchase DiviCom Common Stock (each, a "DiviCom Option")
granted under DiviCom's 1993 Stock Option Plan or its 1996 Stock Option Plan, to
the extent such DiviCom Option is unvested, will
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<PAGE>
be assumed by C-Cube and will automatically be converted into an option to
purchase a number of shares of C-Cube Common Stock determined by multiplying the
number of shares of DiviCom Common Stock subject to the unvested portion of the
DiviCom Option by the Unvested Exchange Ratio, at an exercise price equal to the
exercise price of the DiviCom Option at the time of the Merger divided by the
Unvested Exchange Ratio, rounded down to the nearest whole cent. To avoid
fractional shares, the number of shares of C-Cube Common Stock subject to an
assumed DiviCom Option will be rounded down to the nearest whole share. Subject
to the treatment of vested DiviCom Options described below, the other terms of
the DiviCom Options, including vesting schedules, will remain unchanged. C-Cube
has agreed to file a Registration Statement on Form S-8 with the Commission,
with respect to the issuance of shares of C-Cube Common Stock upon exercise of
the assumed DiviCom Options, as soon as practicable after the consummation of
the Merger.
THE VESTED PORTION OF DIVICOM OPTIONS WILL NOT BE ASSUMED BY C-CUBE, NOR IS
C-CUBE SUBSTITUTING ITS OPTIONS FOR SUCH VESTED DIVICOM OPTIONS. AS A RESULT,
EACH DIVICOM OPTION, TO THE EXTENT IT IS VESTED AND IS NOT EXERCISED ON OR
BEFORE THE EFFECTIVE TIME, SHALL TERMINATE AND CEASE TO BE OUTSTANDING AS OF THE
CONSUMMATION OF THE MERGER.
As of the DiviCom Record Date, there were 3,225,115 outstanding DiviCom
Options. Assuming that the vesting of such DiviCom Options is calculated as of
an assumed Merger consummation date of August 22, 1996, and assuming that as of
that date 1,846,443 unvested DiviCom Options are assumed by C-Cube, between
258,953 and 328,673 shares of C-Cube Common Stock will be subject to such
options, depending on the Average Price and its effect, if any, on the Unvested
Exchange Ratio.
STOCK OWNERSHIP FOLLOWING THE MERGER
Based upon (i) the capitalization of DiviCom as of the close of business on
July 31, 1996, (ii) the assumption that no holder of DiviCom Capital Stock
exercises appraisal or dissenters' rights, (iii) a closing date of August 22,
1996, and (iv) an Average Price of $25.75, the closing price of C-Cube stock on
July 22, 1996, (the "Exchange Ratio Assumptions"), an aggregate of approximately
2,386,443 shares of C-Cube Common Stock will be issued to DiviCom stockholders
in the Merger. Based upon the number of shares of C-Cube Common Stock issued and
outstanding as of July 31, 1996, and after giving effect to the issuance of
C-Cube Common Stock as described in the previous sentence, the former holders of
DiviCom Capital Stock would hold, and have voting power with respect to,
approximately 6.7% of C-Cube's total issued and outstanding shares, and holders
of former DiviCom Options would hold options exercisable for approximately 0.87%
of C-Cube's total issued and outstanding shares (assuming the exercise of only
such options). The foregoing numbers of shares and percentages are subject to
change in the event that the capitalization of either C-Cube or DiviCom changes
subsequent to July 31, 1996 and prior to the Effective Time, and there can be no
assurance as to the actual capitalization of C-Cube or DiviCom at the Effective
Time.
EMPLOYEE BENEFIT PLANS
Representatives of C-Cube's and DiviCom's respective human resources
departments have met and will continue to meet to coordinate the manner of
transition of the insurance and other benefit plans of DiviCom after the Merger.
C-Cube and DiviCom intend that the continuing employees of DiviCom will be
entitled to receive employee benefits from C-Cube that will be at least
comparable to those being received by the employees of C-Cube, taken as a whole,
who occupy comparable positions and have comparable responsibilities.
DIVICOM OPTIONS. As described above, pursuant to the Reorganization
Agreement, all unvested DiviCom Options outstanding immediately prior to the
Effective Time will be assumed by C-Cube and converted into options to acquire
shares of C-Cube Common Stock. As of July 31, 1996, DiviCom Options to acquire
an aggregate of 3,225,115 shares of DiviCom Common Stock were issued and
outstanding of which 1,870,309 such options were unvested. Notice to the holders
of unvested DiviCom Options as to the terms of such assumption and conversion
will be sent by C-Cube upon consummation of the Merger. Each unvested DiviCom
Option so assumed by C-Cube shall continue to have, and be subject to, the same
terms and conditions set forth in the related option plan and/or
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<PAGE>
option agreement relating to such DiviCom Option. The vested portion of DiviCom
Options will be canceled and extinguished as of the consummation of the Merger.
At the Effective Time, each share will automatically be converted into the right
to receive that fraction of a share of C-Cube Common Stock equal to the Unvested
Exchange Ratio. C-Cube will not assume DiviCom Options that are vested as of the
Effective Time, nor will C-Cube substitute C-Cube options for such vested
DiviCom Options. To the extent that the vested DiviCom Options are not exercised
on or before the Effective Time, such options will terminate and cease to exist.
C-Cube will take all corporate and other actions necessary to reserve and
make available sufficient shares of C-Cube Common Stock for issuance upon
exercise of the DiviCom Options assumed by C-Cube and to prepare and file with
the Commission a registration statement on Form S-8 (or any successor form) with
respect to the underlying shares of C-Cube Common Stock issuable upon exercise
of such DiviCom Options. C-Cube will use its reasonable efforts to have such
registration statement declared effective as soon as practicable following the
Effective Time and to maintain the effectiveness of such registration statement.
SECTION 401(K) PLAN. DiviCom has established a tax-deferred savings plan
(the "DiviCom Plan") qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code"). Under the DiviCom Plan, eligible employees may
authorize voluntary payroll deductions of up to 15% of their base salaries to be
invested in certain independently managed, employee-selected investment funds.
DiviCom has the option on an annual or quarterly basis to match or partially
match any employee contributions. Following the Merger, DiviCom employees will
be eligible to participate in the C-Cube 401(k) Plan (the "C-Cube Plan") by
making new contributions to the C-Cube Plan. It is presently intended that the
assets of the DiviCom Plan will be transferred to the C-Cube Plan.
ESCROW FUND
In connection with the Merger, at the Effective Time, 10% of the shares of
C-Cube Common Stock (the "Escrow Shares") otherwise issuable to each holder of
at least 1% of the outstanding shares of DiviCom Capital Stock prior to the
Merger on a fully diluted, as if converted to Common Stock, basis with respect
to all options to acquire such stock (each a "Significant Stockholder") will be
registered in the name of and deposited with the Escrow Agent, such deposit to
constitute the Escrow Fund. The Escrow Shares shall be contributed to the Escrow
Fund on behalf of each Significant Stockholder in proportion to the aggregate
number of shares of C-Cube Common Stock such Significant Stockholder would
otherwise receive by virtue of the Merger. No portion of the Escrow Fund will be
contributed in respect of any options to acquire shares of DiviCom Capital
Stock. The Escrow Shares will be held in escrow as security for any Losses that
C-Cube incurs. The Significant Stockholders will have voting rights with respect
to their respective Escrow Shares. Resort to the Escrow Fund will be the sole
remedy of C-Cube for any Losses after the Effective Time. Notwithstanding the
foregoing, C-Cube may not receive any shares from the Escrow Fund unless and
until Losses in excess of $2,000,000 have been suffered. For the purpose of
compensating C-Cube for its Losses, the Escrow Shares shall be valued at the
average of the Closing Prices of C-Cube Common Stock for the five consecutive
trading days ending two days prior to the date such shares are delivered to
C-Cube out of the Escrow Fund. Subject to resolution of unsatisfied claims of
C-Cube, the Escrow Fund shall terminate upon on the date which is 270 days
following the closing of the Merger. The rights of Significant Stockholders to
receive Escrow Shares upon the termination of the Escrow Fund will not be
evidenced other than by the Reorganization Agreement and any escrow agreement
that may be entered into with the Escrow Agent. The shares of C-Cube Common
Stock subject to the escrow may be voted by the Significant Stockholders and,
subject to the effect of the escrow and other applicable transfer restrictions
(including the Affiliate Agreements), may be transferred by the Significant
Stockholders.
BY APPROVING THE REORGANIZATION AGREEMENT, THE SIGNIFICANT STOCKHOLDERS WILL
BE DEEMED TO HAVE CONSENTED TO THE APPOINTMENT OF NOLAN DAINES, PRESIDENT AND
CHIEF EXECUTIVE OFFICER OF DIVICOM, AND CAROLINE DE PUYSEGUR, A REPRESENTATIVE
OF THE SAGEM ENTITIES, TO ACT AS THE SECURITYHOLDER AGENTS ON BEHALF
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OF DIVICOM'S SIGNIFICANT STOCKHOLDERS TO AUTHORIZE DELIVERY OF SHARES HELD IN
ESCROW TO C-CUBE IN SATISFACTION OF CLAIMS BROUGHT BY C-CUBE FOR LOSSES, TO
OBJECT TO SUCH DELIVERIES, TO AGREE TO, TO NEGOTIATE AND TO ENTER INTO
SETTLEMENTS AND COMPROMISES WITH RESPECT TO SUCH CLAIMS, AND TO TAKE CERTAIN
OTHER ACTIONS ON BEHALF OF DIVICOM'S SIGNIFICANT STOCKHOLDERS. SEE ARTICLE VII
OF THE REORGANIZATION AGREEMENT FOR A MORE DETAILED EXPLANATION OF THE ESCROW
FUND AND RIGHTS WITH RESPECT THERETO.
LEGAL STRUCTURE OF THE MERGER
Under the Reorganization Agreement, DiviCom will merge with and into Merger
Sub, a wholly owned subsidiary of C-Cube formed for this purpose, with Merger
Sub being the surviving corporation of the Merger (the "Surviving Corporation").
The Certificate of Incorporation and Bylaws of Merger Sub in effect immediately
prior to the Effective Time will remain the Certificate of Incorporation and
Bylaws of the Surviving Corporation and the Board of Directors of Merger Sub
will remain the Board of Directors of the Surviving Corporation. The officers of
DiviCom immediately prior to the Effective Time will be the initial officers of
the Surviving Corporation, each to hold office in accordance with the Bylaws of
the Surviving Corporation.
CONDUCT OF DIVICOM'S BUSINESS PRIOR TO THE MERGER
Under the Reorganization Agreement, DiviCom has agreed, during the period
from the date of the Reorganization Agreement and continuing until the earlier
of the termination of the Reorganization Agreement pursuant to its terms or the
Effective Time, except to the extent that C-Cube otherwise consents in writing,
that DiviCom will carry on its business in the usual, regular and ordinary
course in substantially the same manner as previously conducted, to pay its
debts and taxes when due, to pay or perform other material obligations when due,
and to use all reasonable efforts consistent with past practices and policies to
preserve intact DiviCom's present business organization, keep available the
services of its present officers and employees and preserve its relationships
with customers, suppliers, distributors, licensors, licensees, and others having
business dealings with DiviCom, all with the goal of preserving unimpaired
DiviCom's goodwill and ongoing businesses at the Effective Time. Among other
things, DiviCom has agreed that, subject to certain specific exceptions, it will
not, without the prior written consent of C-Cube:
(a) enter into any commitment or transaction not in the ordinary course
of business;
(b) transfer to any person or entity any rights to DiviCom's
intellectual property (other than pursuant to certain end-user licenses in
the ordinary course of business);
(c) enter into or amend any agreements pursuant to which any other party
is granted marketing, distribution or similar rights of any type or scope
with respect to any products of DiviCom;
(d) amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of the agreements
material to the business of DiviCom;
(e) commence any litigation;
(f) declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of capital stock of DiviCom, or
repurchase, redeem or otherwise acquire, directly or indirectly, any shares
of its capital stock (or options, warrants or other rights exercisable
therefor other than repurchases of employees' restricted shares upon
termination of their employment pursuant to existing arrangements and
consistent with past practices);
(g) issue, grant, deliver or sell or authorize or propose the issuance,
grant, delivery or sale of, or purchase or propose the purchase of, any
shares of its capital stock or securities convertible into, or
subscriptions, rights, warrants or options to acquire, or other agreements
or commitments of any character obligating it to issue any such shares or
other convertible securities,
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except for (i) the issuance of shares of DiviCom Common Stock upon exercise
of presently outstanding DiviCom Options, and (ii) the issuance of
previously authorized options to employees in the ordinary course of
business pursuant to DiviCom's option plans;
(h) except as contemplated by the Reorganization Agreement, cause or
permit any amendments to its Certificate of Incorporation or Bylaws;
(i) acquire or agree to acquire by merging or consolidating with, or by
purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire
any assets in an amount in excess of $200,000 in the case of a single
transaction or in excess of $500,000 in the aggregate;
(j) sell, lease, license or otherwise dispose of any of its properties
or assets, except in the ordinary course of business;
(k) incur any indebtedness for borrowed money without prior consultation
or guarantee any such indebtedness or issue or sell any debt securities of
DiviCom or guarantee any debt securities of others;
(l) grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee except payments made pursuant to
standard written agreements outstanding on the date of the Reorganization
Agreement or DiviCom's pre-existing severance policy;
(m) adopt or amend any employee benefit plan, or enter into any
employment contract, extend employment offers, pay or agree to pay any
special bonus or special remuneration to any director or employee, or
increase the salaries or wage rates of its employees, except as contemplated
by the Reorganization Agreement;
(n) revalue any of its assets, including without limitation writing down
the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business;
(o) pay, discharge or satisfy, in an amount in excess of $100,000 in any
one case or $250,000 in the aggregate, any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction in the ordinary course of
business of liabilities reflected or reserved against in the DiviCom
financial statements attached to the Reorganization Agreement or the notes
thereto or that arose in the ordinary course of business subsequent to March
31, 1996 or expenses consistent with the provisions of the Reorganization
Agreement incurred in connection with any transaction contemplated thereby;
(p) make or change any material election in respect of taxes, adopt or
change any accounting method in respect of taxes, enter into any closing
agreement, settle any claim or assessment in respect of taxes, or consent to
any extension or waiver of the limitation period applicable to any claim or
assessment in respect of taxes; or
(q) take, or agree in writing or otherwise to take, any of the actions
described above, or any other action that would prevent DiviCom from
performing or cause DiviCom not to perform its covenants under the
Reorganization Agreement.
NO SOLICITATION
The Reorganization Agreement provides that DiviCom will not (nor will
DiviCom permit any of DiviCom's officers, directors, agents, representatives or
affiliates to), directly or indirectly, (i) solicit, conduct discussions with or
engage in or continue with negotiations with any person relating to the possible
acquisition of DiviCom (whether by way of merger, purchase of capital stock,
purchase of assets or otherwise) or any material portion of its capital stock or
assets, (ii) provide information with respect to it to any person, other than
C-Cube, relating to the possible acquisition of DiviCom (whether by way of
merger, purchase of capital stock, purchase of assets or otherwise) or any
material portion of its capital stock or assets, (iii) enter into an agreement
with any person, other than C-Cube,
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providing for the acquisition of DiviCom (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise) or any material portion of its
or their capital stock or assets or (iv) make or authorize any statement,
recommendation or solicitation in support of any possible acquisition of DiviCom
(whether by way of merger, purchase of capital stock, purchase of assets or
otherwise) or any material portion of its capital stock or assets by any person,
other than by C-Cube. In addition to the foregoing, DiviCom has agreed that if
it receives prior to the Effective Time or the termination of the Reorganization
Agreement any offer or proposal relating to any of the above, it shall promptly
notify C-Cube thereof, including information as to the identity of the offeror
or the party making any such offer or proposal and the specific terms of such
offer or proposal, as the case may be, and such other information related
thereto as C-Cube may reasonably request.
EXPENSES
Whether or not the Merger is consummated, all fees and expenses incurred in
connection with the Merger including, without limitation, all legal, accounting,
financial, advisory, consulting and all other fees and expenses of third parties
incurred by a party in connection with the negotiation and effectuation of the
terms and conditions of the Reorganization Agreement and the transactions
contemplated thereby, are the obligation of the respective party incurring such
fees and expenses.
CONDITIONS TO THE MERGER
The respective obligations of each party to the Reorganization Agreement to
effect the Merger are subject to the satisfaction at or prior to the Effective
Time of the following conditions: (a) the Reorganization Agreement and the
Merger shall have been approved and adopted by the stockholders of DiviCom by
the requisite vote under applicable law and DiviCom's Certificate of
Incorporation and such Certificate of Incorporation shall have been amended as
provided in the Reorganization Agreement, (b) the Commission shall have declared
the Registration Statement effective; no stop order suspending the effectiveness
of the Registration Statement or any part thereof shall have been issued and no
proceeding for that purpose shall have been initiated or threatened in writing
by the Commission; and all requests for additional information on the part of
the Commission shall have been complied with to the reasonable satisfaction of
the parties, (c) no temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or other
legal or regulatory restraint or prohibition preventing the consummation of the
Merger shall be in effect, nor shall there be any proceeding brought by an
administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign, seeking any of the foregoing be pending;
nor shall there be any action taken, or any statute, rule, regulation or order
enacted, entered or enforced or deemed applicable to the Merger, which makes
consummation of the Merger illegal, (d) any waiting period applicable to the
consummation of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, shall have expired or been terminated and no action shall have been
instituted by the Department of Justice or Federal Trade Commission challenging
or seeking to enjoin the consummation of the Merger, which action shall not have
been withdrawn or terminated, (e) the shares of C-Cube Common Stock issuable to
stockholders of DiviCom pursuant to the Reorganization Agreement and such other
shares required to be reserved for issuance in connection with the Merger shall
have been authorized for listing on the Nasdaq Stock Market, the New York Stock
Exchange or the American Stock Exchange, (f) C-Cube and the SAGEM Entities shall
have executed and delivered a registration rights agreement with respect to the
C-Cube Common Stock to be issued to such stockholder in the Merger, (g) the
Transition Agreement shall be in full force and effect, there shall have
occurred no default thereunder (or any action that, with the passage of time or
the giving of notice or both would result in a default thereunder) that shall
not have been cured or waived, and the parties thereto shall have performed all
actions required to be performed by them thereunder prior to the Effective Time,
and (h) vested DiviCom Options shall have been terminated to the extent not
exercised as of the Effective Time.
In addition, the obligations of DiviCom to consummate the Merger are subject
to the following conditions, unless waived by DiviCom and the SAGEM Entities:
(a) the truth and correctness of the
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representations and warranties of C-Cube and Merger Sub contained in the
Reorganization Agreement with the same force and effect as if made on and as of
the Effective Time, except for those representations and warranties which
address matters only of a particular date (which shall remain true and correct
as of such date) and delivery to DiviCom of a certificate to such effect signed
on behalf of C-Cube by a duly authorized officer of C-Cube, (b) C-Cube and
Merger Sub shall have performed or complied (which performance or compliance
shall be subject to C-Cube's or Merger Sub's ability to cure as provided in the
Reorganization Agreement) in all material respects with all agreements and
covenants required by the Reorganization Agreement to be performed or complied
with by them on or prior to the Effective Time; and the SAGEM Entities and
DiviCom shall have received a certificate to such effect signed by a duly
authorized officer of C-Cube, (c) DiviCom shall have been furnished with
evidence satisfactory to it that C-Cube has obtained the third party consents,
approvals and waivers set forth in the Reorganization Agreement, (d) DiviCom
shall have received a legal opinion from Wilson Sonsini Goodrich & Rosati,
Professional Corporation, counsel to C-Cube, and (e) there shall not have
occurred any material adverse change in the business, assets (including
intangible assets), financial condition, prospects or results of operations of
C-Cube since March 31, 1996, and (f) there shall not have occurred (i) any
suspension or limitation of trading in securities generally on the Nasdaq Stock
market or any national securities exchange, or any setting of minimum prices for
trading on any such exchange or in the over-the-counter market, (ii) any
imposition of governmental restrictions on trading in securities generally,
(iii) a banking moratorium either by Federal or California authorities, or (iv)
an outbreak of major international hostilities or other national calamity in the
United States.
In addition, the obligations of C-Cube and Merger Sub to consummate the
Merger are subject to the following conditions, unless waived by C-Cube: (a) the
truth and correctness of the representations and warranties of DiviCom contained
in the Reorganization Agreement with the same force and effect as if made on and
as of the Effective Time, except for (i) changes contemplated by this
Reorganization Agreement, (ii) those representations and warranties which
address matters only as of a particular date (which shall remain true and
correct as of such date), and (iii) those representations and warranties, the
breach of which, individually or in the aggregate, has not resulted in a
material adverse change in the business, assets (including intangible assets),
financial condition, prospects or results of operations of DiviCom; and C-Cube
and Merger Sub shall have received a certificate to such effect signed on behalf
of DiviCom by a duly authorized officer of DiviCom; provided, however, that no
potential liability shall accrue to the extent representations and warranties
are untrue or inaccurate as a result of actions taken (i) by C-Cube, or (ii) by
DiviCom at the direction of, or with the prior written consent of, C-Cube,
during the period from the date of the Reorganization Agreement through the
Closing, (b) each of the parties identified by DiviCom as being one of its
affiliates shall have delivered an executed affiliate agreement, which shall be
in full force and effect, (c) DiviCom shall have performed or complied (which
performance or compliance shall be subject to DiviCom's ability to cure as
provided in the Reorganization Agreement) in all material respects with all
agreements and covenants required by the Reorganization Agreement to be
performed or complied with by it on or prior to the Effective Time; and C-Cube
and Merger Sub shall have received a certificate to such effect signed by a duly
authorized officer of DiviCom, (d) C-Cube shall have been furnished with
evidence satisfactory to it that DiviCom has obtained the material consents,
approvals and waivers set forth in the Reorganization Agreement, (e) C-Cube
shall have received legal opinions from Fenwick & West LLP, legal counsel to
DiviCom, and from Gibson, Dunn & Crutcher LLP, legal counsel to the SAGEM
Entities, (f) there shall not have occurred any material adverse change in the
business, assets (including intangible assets) financial condition, results of
operations or prospects of DiviCom since March 31, 1996, (g) certain DiviCom
employees shall have executed and delivered to C-Cube noncompetition agreements,
and all such noncompetition agreements shall remain in full force and effect,
(h) holders of more than five percent of the outstanding shares of DiviCom
Capital Stock shall not have exercised, nor shall they have any continued right
to exercise, appraisal, dissenters' or similar rights under applicable law with
respect to their shares by virtue of the Merger, (i) the Commission shall not
have required as a condition to declaring this registration statement effective
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any material change in C-Cube's proposed accounting for the Merger, (j) C-Cube
shall be reasonably satisfied that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code.
TERMINATION OF REORGANIZATION AGREEMENT
The Reorganization Agreement provides that it may be terminated at any time
prior to the Effective Time, whether before or after approval of the Merger by
DiviCom's stockholders, (a) by mutual consent of DiviCom, the SAGEM Entities and
C-Cube, (b) by C-Cube, the SAGEM Entities or DiviCom if: (i) the Effective Time
has not occurred by August 31, 1996 (provided that the right to terminate the
Reorganization Agreement under this clause (b) shall not be available to any
party whose willful failure to fulfill any obligation under the Reorganization
Agreement has been the cause of, or resulted in, the failure of the Effective
Time to occur on or before such date); (ii) there shall be a final nonappealable
order of a federal or state court in effect preventing consummation of the
Merger; or (iii) there shall be any statute, rule, regulation or order enacted,
promulgated or issued or deemed applicable to the Merger by any governmental
entity that would make consummation of the Merger illegal, (c) by C-Cube if
there shall be any action taken, or any statute, rule, regulation or order
enacted, promulgated or issued or deemed applicable to the Merger, by any
governmental entity, which would: (i) prohibit C-Cube's or DiviCom's ownership
or operation of any portion of the business of DiviCom or (ii) compel C-Cube or
DiviCom to dispose of or hold separate, as a result of the Merger, any portion
of the business or assets of DiviCom or C-Cube; in either case, the
unavailability of which assets or business would have a material adverse effect
on C-Cube's ability to realize the benefits expected from the Merger; (d) by
C-Cube if it is not in material breach of its obligations under the
Reorganization Agreement and there has been a breach of any representation,
warranty, covenant or agreement contained in the Reorganization Agreement on the
part of DiviCom and as a result of such breach certain conditions to the Merger
set forth above would not then be satisfied; provided, however, that if such
breach is curable by DiviCom within thirty days through the exercise of its
reasonable best efforts, then for so long as DiviCom continues to exercise such
reasonable best efforts C-Cube may not terminate the Reorganization Agreement
under this clause (d) unless such breach is not cured within thirty days (but no
cure period shall be required for a breach which by its nature cannot be cured);
(e) by DiviCom if it is not in material breach of its obligations under the
Reorganization Agreement and there has been a breach of any representation,
warranty, covenant or agreement contained in the Reorganization Agreement on the
part of C-Cube or Merger Sub and as a result of such breach certain conditions
to the Merger set forth above would not then be satisfied; provided, however,
that if such breach is curable by C-Cube or Merger Sub within thirty days
through the exercise of C-Cube's or Merger Sub's reasonable best efforts, then
for so long as C-Cube or Merger Sub continues to exercise such reasonable best
efforts DiviCom may not terminate the Reorganization Agreement under this clause
(e) unless such breach is not cured within thirty days (but no cure period shall
be required for a breach which by its nature cannot be cured); and (f) by C-Cube
if DiviCom shall not have obtained the approval of its stockholders to the
Merger and the transactions contemplated by this Agreement by thirty days after
the effective date of this registration statement.
TRANSITION AGREEMENT
In connection with the Reorganization Agreement, the SAGEM Entities,
DiviCom, C-Cube and Nolan Daines entered into a Transition Agreement pursuant to
which they agreed to terminate, as of the Effective Time, five existing
agreements (the "Prior Agreements") to which all or some of them are parties:
(i) the Joint Venture and Shareholders Agreement, dated April 20, 1993; (ii) the
Business Agreement, dated as of April 20, 1993; (iii) the Registration Rights
and Buy-Out Agreement, dated as of April 20, 1993; (iv) the 1995 Rap-Up
Agreement, dated January 23, 1996; and (v) the ASIC Purchasing Agreement, dated
January 23, 1996. The Prior Agreements concerned, among other things, the
licensing and allocation of technology ownership between DiviCom and the SAGEM
Entities, and the supply of products to the SAGEM Entities. The Transition
Agreement assigns, as of the Effective Time, to DiviCom all rights (including
all intellectual property rights) that any party thereto (other than DiviCom)
may have in any technology related to any products manufactured,
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designed, or sold by DiviCom. Under the Transition Agreement, DiviCom grants to
the SAGEM Entities certain non-exclusive licenses under certain DiviCom
technology. These licenses are perpetual, irrevocable, non-transferable, and
non-sublicensable (except to affiliates). In particular, the SAGEM Entities are
granted a license under the DiviCom technology, including DiviCom's ASIC
designs, to design, manufacture, distribute, make derivative products from and
sell certain decoder products, consumer decoders and SAGEM-developed decoders.
These licenses in general continue licensing arrangements that were in place
under the Prior Agreements. None of these licenses entitle the SAGEM Entities to
receive updated versions of DiviCom technology, and, in most instances, the
DiviCom technology that is licensed is limited to the December 31, 1995 version
thereof. Royalties, on a per unit basis, are payable by the SAGEM Entities on
SAGEM products manufactured and sold under these licenses for three years from
the date of the Transition Agreement. Thereafter, the licenses continue in
perpetuity as fully paid-up licenses.
In addition, the Transition Agreement provides the SAGEM Entities with the
right to distribute, and to provide customer support for, DiviCom system
products in Europe. This license is non-exclusive; however during the two-year
term of such license, DiviCom will, to the extent permitted by law, not license
any third party to sell or lease or otherwise distribute DiviCom systems in
France. The SAGEM Entities have the right to purchase certain system products
from DiviCom, for distribution and sale by SAGEM, on a most-favored-customer
basis. DiviCom also agrees to provide the SAGEM Entities' customers support on a
most-favored-customer basis with respect to DiviCom products sold by the SAGEM
Entities prior to the date of the Transition Agreement.
While the Transition Agreement conveys substantial benefits to SAGEM which
might not have been granted to unrelated third parties, it represents the
agreement of the parties to the Reorganization Agreement as to the numerous
pre-existing contractual relationships between DiviCom and SAGEM which each of
DiviCom and C-Cube believe to be in the best interests of the Combined Company.
Although the Transition Agreement treats SAGEM as one of DiviCom's most favored
customers, it should be noted that DiviCom is currently SAGEM's subsidiary,
SAGEM paid for the development of much of DiviCom's technology and currently
markets DiviCom products in Europe. SAGEM agreed to give up its existing rights
to DiviCom technology and operations on the condition that it retain sufficient
rights to DiviCom's technology and products to permit it to continue its
existing business selling DiviCom products in Europe.
In addition to the foregoing provisions, the Transition Agreement includes
terms regarding, among other things, the supply of ASICs to the SAGEM Entities,
representations and warranties, limitations of liability, protection of
confidential information and other terms relevant to an agreement for the
transfer and licensing of technology.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the terms of the Reorganization Agreement, the SAGEM Entities
entered into a Registration Rights Agreement with C-Cube which grants the SAGEM
Entities certain rights to have their shares of C-Cube Common Stock obtained as
a result of the Merger registered under the Securities Act. Under the
Registration Rights Agreement, the SAGEM Entities may, on up to two occasions
beginning 90 days after the effective date of the Merger and ending on the third
anniversary of the Closing Date, require C-Cube to register on a Form S-3 not
less than 10% of the SAGEM Entities' shares of C-Cube Common Stock. C-Cube is
only obligated to effect such a registration once every 365 days, provided that
such period may be shortened to 180 days in the event that the SAGEM Entities'
shares of C-Cube Common Stock exceed the greater of (i) 1% of C-Cube's
outstanding Common Stock and (ii) the average weekly reported volume of public
trading in C-Cube Common Stock during the preceding four full calendar weeks.
C-Cube may delay the filing or effectiveness of such registration by up to 90
days in the event such registration would interfere with a significant
transaction involving C-Cube or in the event C-Cube is working on an
underwritten public offering of C-Cube Common Stock and the SAGEM Entities are
afforded an opportunity to include at least 50% of their shares of C-Cube Common
Stock in such offering.
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Additionally, pursuant to the Registration Rights Agreement, in the event
C-Cube proposes to register shares of C-Cube Common Stock for the account of
selling securityholders, then C-Cube must generally include the SAGEM Entities'
shares of C-Cube Common Stock in such registration on a PRO RATA basis to those
of the other selling securityholders.
C-Cube is required to pay all expenses of a registration of the SAGEM
Entities' shares of C-Cube Common Stock pursuant to the Registration Rights
Agreement, except for discounts, commissions and fees of underwriters, selling
brokers and dealers relating to such shares, and any fees of the SAGEM Entities'
counsel.
The Registration Rights Agreement requires C-Cube to indemnify the SAGEM
Entities and their directors and officers and any underwriter for any
liabilities or losses relating to any untrue (or alleged untrue) statement or
misleading (or alleged misleading) omission made by C-Cube and requires the
SAGEM Entities to indemnify C-Cube and its directors and officers and any
underwriter under similar circumstances.
VOTING AGREEMENT
The SAGEM Entities own in the aggregate 2,375,493 shares of DiviCom Common
Stock and 20,723,855 shares of DiviCom Preferred Stock representing 21.60% and
97.3% of the votes entitled to be cast by holders of shares of DiviCom Common
Stock and DiviCom Preferred Stock, respectively, issued and outstanding as of
July 31, 1996. Each of these entities, as well as the CEO (who beneficially owns
a total of 1,877,895 shares of DiviCom Common Stock representing approximately
17.07% of the number of shares of DiviCom Common Stock outstanding as of July
31, 1996) of DiviCom, have entered into a Voting Agreement with C-Cube. In
addition, C-Cube and its affiliates hold 3.6% of the Series A Preferred Stock
and 12.5% of the Common Stock of DiviCom and intend to vote in favor of the
Merger and the Certificate Amendment. Each of the foregoing entities and
individual has been identified by DiviCom as an "affiliate" (as that term is
defined for purposes of Rule 145 promulgated under the Securities Act) of
DiviCom. Pursuant to the Voting Agreement, each of the foregoing DiviCom
stockholders has agreed to vote in favor of approval and adoption of the
Reorganization Agreement and approval of the Merger.
The vote of the shares of DiviCom Capital Stock subject to the Voting
Agreement will be adequate to approve the Reorganization Agreement, the Merger
and the Certificate Amendment by DiviCom stockholders.
NONCOMPETITION AGREEMENTS
Certain officers and other employees of DiviCom have entered into
noncompetition agreements with C-Cube and DiviCom. The restrictions contained in
such agreements cease if the restricted party's employment is terminated by
C-Cube or DiviCom and C-Cube does not elect to continue paying the restricted
party's salary during the remainder of the noncompetition period ending three
years after the Effective Time.
AFFILIATE AGREEMENTS
The C-Cube Common Stock to be issued pursuant to the Merger will be freely
transferable under the Securities Act, except for shares issued to any person
who is an "affiliate" of C-Cube or DiviCom within the meaning of Rules 144 and
145 under the Securities Act. Rules 144 and 145 impose restrictions on the
manner in which such affiliates may resell securities and also on the quantity
of securities that such affiliates and others with whom they might act in
concert may resell within any three-month period.
In connection with the parties entering into the Reorganization Agreement,
each person who has been identified by DiviCom as an affiliate of DiviCom is
required to have entered into an agreement with C-Cube providing that such
person will not offer to sell or otherwise dispose of any C-Cube Common Stock
obtained as a result of the Merger except in compliance with the Securities Act
and the rules and regulations thereunder. Generally, this will require that such
sales be made in accordance with Rule 145(d) under the Securities Act, which in
turn requires that, for specified periods, such sales
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be made in compliance with the volume limitations, manner of sale provisions and
current information requirements of Rule 144 under the Securities Act. The
volume limitations should not pose any material limitations on any C-Cube
stockholder who owns less than one percent of the outstanding C-Cube Common
Stock after the Merger unless, pursuant to Rule 144, such stockholder's shares
are required to be aggregated with those of another stockholder and together
they exceed the one percent threshold.
The affiliate agreements executed by each affiliate of DiviCom contain a
representation that such affiliate has no plan or intention to sell any of the
shares of C-Cube Common Stock received in the Merger (and will have no such plan
or intention at the Effective Time).
CERTAIN BENEFITS TO DIVICOM MANAGEMENT AND EMPLOYEES
DiviCom has forgiven the non-interest bearing obligation of Nolan Daines and
Tom Lookabaugh to repay $73,342.10 and $48,671.05, respectively, that would
otherwise be due from them under certain Executive Compensation Agreements as a
result of the Merger. These amounts had been paid to Messrs. Daines and
Lookabaugh as a bonus in 1995 by DiviCom. Although Messrs. Daines and Lookabaugh
recognized such amounts as taxable income, the Executive Compensation Agreements
required them to repay the bonuses if DiviCom were acquired. DiviCom's Board of
Directors has decided to waive this obligation. Options granted to certain
DiviCom officers, including Nolan Daines, Brian Johnson and Thomas Lookabaugh,
contain provisions that require DiviCom to achieve certain development
milestones in order for such options to vest. Furthermore, Eurodec, one of the
SAGEM Entities, is to make the determination of whether the milestones have been
achieved and provide written notice to that effect. DiviCom achieved the
milestones in October 1995, but has not received the written notice from
Eurodec. The Transition Agreement that will be effective upon the Closing of the
Merger acknowledges the achievement of such milestones. Eurodec has agreed to
provide such written notice, which will have the effect of ratifying the
achievement in October 1995. The SAGEM Entities have been granted certain
licenses and distribution rights under the Transition Agreement. See "--
Transition Agreement."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
consequences of the Merger that are generally applicable to holders of DiviCom
Capital Stock and is based on the opinions of counsel described below. This
discussion does not deal with all income tax considerations that may be relevant
to particular DiviCom stockholders in light of their particular circumstances,
such as stockholders who are dealers in securities, foreign persons,
stockholders who acquired their shares in connection with previous mergers
involving DiviCom or an affiliate, or stockholders who acquired their shares in
connection with stock option or stock purchase plans or in other compensatory
transactions. In addition, the following discussion does not address the tax
consequences of transactions effectuated prior to or after the Merger (whether
or not such transactions are in connection with the Merger), including without
limitation transactions in which shares of DiviCom Capital Stock were or are
acquired or shares of C-Cube Common Stock were or are disposed of. Furthermore,
no foreign, state or local tax considerations are addressed herein. ACCORDINGLY,
DIVICOM STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL,
STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER.
As discussed more fully below, it is a condition to the consummation of the
Merger, that C-Cube will not waive, that counsel to C-Cube and DiviCom deliver
opinions to the effect that, for federal income tax purposes, the Merger will
constitute a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), with the result that (i)
none of C-Cube, DiviCom or Merger Sub should recognize gain or loss as a result
of the Merger and (ii) holders of DiviCom Capital Stock that exchange their
shares for Common Stock and cash should recognize any realized gain (but not
loss) in the Merger but not in excess of the amount of cash received.
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As a condition to the consummation of the Merger that C-Cube will not waive,
Wilson Sonsini Goodrich & Rosati and Fenwick & West, counsel to C-Cube and
DiviCom, respectively, will render their respective legal opinions, subject to
the qualifications set forth below, that the Merger qualifies as a
reorganization. Assuming that the C-Cube Common Stock received by each DiviCom
stockholder holding such stock are held as capital assets within the meaning of
Section 1221 of the Code, the following tax consequences will result:
GENERAL. A DiviCom stockholder will not recognize any loss upon the receipt
of C-Cube Common Stock and cash. A DiviCom stockholder receiving both C-Cube
Common Stock and cash in exchange for DiviCom Capital Stock will recognize gain
(measured by the sum of the fair market value of the C-Cube Common Stock
received plus the amount of any cash received minus the tax basis of the shares
of DiviCom Capital Stock exchanged), if any, but only to the extent of the
amount of any cash received. Under applicable U.S. Supreme Court precedent, such
gain should generally be capital gain, subject to recharacterization as a
dividend as described more fully below, and should generally be long-term
capital gain if the shares of DiviCom Capital Stock exchanged for cash have been
held for more than one year.
The tax basis of the C-Cube Common Stock received (including the Escrow
Stock as defined herein -- see "Terms of the Merger -- Escrow Fund") will be the
same as the tax basis of the DiviCom Capital Stock exchanged, decreased by (i)
the basis of any fractional share interest for which cash is received in the
Merger and (ii) the amount of cash received at the Effective Time (other than
cash received for a fractional share interest), and increased by the amount of
gain (or dividend income) recognized on the exchange.
In certain circumstances, a DiviCom stockholder that exchanges DiviCom
Capital Stock for C-Cube Common Stock in the Merger will be required to treat
any gain recognized as dividend income (rather than capital gain, if any) up to
the amount of cash received in the Merger if the receipt of cash by such
stockholder has the effect of a distribution of a dividend. Whether the receipt
of cash has the effect of the distribution of a dividend would depend upon the
stockholder's particular circumstances.
In general, the determination of whether a stockholder who exchanges DiviCom
Capital Stock and receives C-Cube Common Stock and cash recognizes capital gain
or dividend income is made under Sections 356(a)(2) and 302 of the Code. Under
Section 356(a)(2) of the Code, each stockholder of DiviCom Capital Stock will be
treated for tax purposes as if such stockholder had received only C-Cube Common
Stock in the Merger, and immediately thereafter C-Cube had redeemed appropriate
portions of such C-Cube Common Stock in exchange for the cash actually
distributed to such stockholder in the Merger. Under Section 302 of the Code,
the gain recognized by a stockholder on the exchange will be taxed as capital
gain if the deemed redemption from such stockholder (i) is a "substantially
disproportionate redemption" of stock with respect to such stockholder, or (ii)
is "not essentially equivalent to a dividend" with respect to such stockholder.
In making this determination, stockholders should be aware that, under Section
318 of the Code, a stockholder may be considered to own, after the Merger,
C-Cube Common Stock owned (and in some cases constructively owned) by certain
related individuals and entities and C-Cube Common Stock which the stockholder
(or such related individuals or entities) has the right to acquire upon the
exercise or conversion of options.
The deemed redemption of a DiviCom stockholder's C-Cube Common Stock will be
a "substantially disproportionate redemption" if, as a result of the deemed
redemption, the ratio determined by dividing the number of shares of C-Cube
Common Stock owned by such stockholder immediately after the Merger by the total
number of outstanding shares of C-Cube Common Stock is less than 80% of the same
ratio calculated as if only C-Cube Common Stock, and not cash, were issued to
the DiviCom stockholder in the Merger.
The deemed redemption of a stockholder's C-Cube Common Stock will be "not
essentially equivalent to a dividend" if the stockholder experiences a
"meaningful reduction" in his or her proportionate equity interest in C-Cube by
reason of the deemed redemption. Although there are no fixed rules for
determining when a meaningful reduction has occurred, the Internal Revenue
Service (the
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"IRS") has indicated in a published ruling that the receipt of cash in the
Merger would not be characterized as a dividend if the stockholder's percentage
ownership interest in C-Cube and DiviCom prior to the Merger was minimal, the
stockholder exercises no control over the affairs of C-Cube or DiviCom, and the
stockholder's percentage ownership interest in C-Cube is reduced in the deemed
redemption by any extent. If neither of the redemption tests set forth above are
satisfied, the stockholder will be treated as having received a dividend equal
to the amount of such stockholder's recognized gain, assuming that such
stockholder's ratable share of the earnings and profits of DiviCom (and,
possibly, C-Cube) equals or exceeds such recognized gain.
RETURN OF ESCROW STOCK. Upon a return of the Escrow Stock to C-Cube, a
DiviCom stockholder may recognize gain or loss. If gain is recognized, the value
of any shares of Escrow Stock returned to C-Cube should be added to the tax
basis of the C-Cube Common Stock held by such stockholder.
DISSENTING STOCKHOLDERS. A DiviCom stockholder that exercises such
stockholder's right to seek an appraisal of such stockholder's shares of DiviCom
Capital Stock generally will recognize capital gain or loss measured by the
difference between the amount of cash received and the tax basis of the shares
of DiviCom Capital Stock exchanged therefor. Such capital gain or loss will be
long-term capital gain or loss if the shares of DiviCom Capital Stock exchanged
by such dissenting stockholder have been held for more than one year. In
addition, the amount of cash received may be treated as dividend income if the
dissenting stockholder actually or constructively owns C-Cube Common Stock after
the Merger as discussed above.
FRACTIONAL SHARES. If a holder of shares of DiviCom Capital Stock receives
cash in lieu of a fractional share of C-Cube Common Stock in the Merger, such
cash amount will be treated as received in exchange for the fractional share of
C-Cube Common Stock. Gain or loss recognized as a result of that exchange will
be equal to the cash amount received for the fractional share of C-Cube Common
Stock reduced by the proportion of the holder's tax basis in shares of DiviCom
Capital Stock exchanged and allocable to the fractional share of C-Cube Common
Stock. Such gain or loss will be long-term capital gain or loss if the shares of
DiviCom Capital Stock exchanged therefor have been held for more than one year.
The parties are not requesting a ruling from the IRS in connection with the
Merger. However, it is a condition to the consummation of the Merger that C-Cube
be reasonably satisfied that the Merger will qualify as a reorganization and
C-Cube does not intend to waive this condition. Accordingly, the consummation of
the Merger is conditioned on the delivery of the opinions of Fenwick & West LLP
and Wilson Sonsini Goodrich & Rosati, Professional Corporation, to the effect
that, for federal income tax purposes, the Merger will constitute a
"reorganization" within the meaning of Section 368(a) of the Code. These
opinions, which are collectively referred to herein as the "Tax Opinions,"
neither bind the IRS nor preclude the IRS from adopting a contrary position. In
addition, the Tax Opinions are based upon (i) representations made by C-Cube,
Merger Sub, DiviCom and certain stockholders of DiviCom and (ii) the assumption
that the "continuity of interest" requirement for tax-free reorganization
treatment will be satisfied. In general, the continuity of interest requirement
will be satisfied if (i) the C-Cube Common Stock received in the Merger, in the
aggregate, represents a substantial portion of the entire consideration received
by the DiviCom stockholders in the Merger and (ii) the DiviCom stockholders do
not pursuant to a plan or intent existing at the time of the Merger dispose of
so much of the C-Cube Common Stock received in the Merger that the DiviCom
stockholders no longer have a substantial proprietary interest in the DiviCom
business being conducted by C-Cube after the Merger. DiviCom stockholders should
be aware that the law relating to the continuity of interest requirement is
unclear and the Internal Revenue Service could argue that post-Merger sales, if
any, by former DiviCom stockholders could result in the Merger failing to
qualify as a reorganization.
A successful IRS challenge to the "reorganization" status of the Merger (as
a result of a failure of the "continuity of interest" requirement or otherwise)
would generally result in a DiviCom stockholder recognizing the full amount of
his or her gain or loss with respect to each share of DiviCom
47
<PAGE>
Capital Stock surrendered equal to the difference between the stockholder's
basis in such share and the fair market value, as of the Effective Time of the
Merger, of the C-Cube Common Stock received in exchange therefor plus the cash
received.
THE PRECEDING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN UNITED
STATES INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE A
COMPLETE ANALYSIS OR DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT THERETO.
THUS, DIVICOM STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING
REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FOREIGN, FEDERAL, STATE, LOCAL,
AND OTHER APPLICABLE TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX
LAWS.
GOVERNMENTAL AND REGULATORY APPROVALS
C-Cube and DiviCom are aware of no governmental or regulatory approvals
required for consummation of the Merger, other than the filing of a Premerger
Notification and Report Form with the Federal Trade Commission and the Antitrust
Division of the Department of Justice pursuant to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as to which notice of early termination of
the waiting period with respect thereto has been received, and compliance with
federal securities laws and the applicable securities laws of the various
states.
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase for financial reporting
purposes in accordance with generally accepted accounting principles. C-Cube
currently anticipates expensing approximately $105.4 million for in-process
research and development expenses upon the closing of the Merger. Consummation
of the Merger is conditioned on the Commission not requiring as a condition to
declaring this Registration/Proxy Statement effective any material change in
C-Cube's proposed accounting for the Merger.
APPRAISAL AND DISSENTERS' RIGHTS
Stockholders of DiviCom who do not vote in favor of the Merger may, under
certain circumstances and by following the procedure prescribed by the DGCL,
exercise appraisal rights and receive cash for their shares of DiviCom Capital
Stock. A dissenting stockholder must follow the appropriate procedures under the
DGCL or suffer the termination or waiver of such rights. The failure of a
DiviCom stockholder to vote on the Merger will not constitute a termination or
waiver of such stockholder's appraisal and dissenter's rights under the DGCL.
Each holder of DiviCom Capital Stock who is entitled to appraisal rights
shall have 120 days after the Effective Time of the Merger to exercise such
appraisal rights. Such stockholder must file a petition in the Delaware Court of
Chancery demanding a determination of the value of its DiviCom Capital Stock.
Merger Sub will send a statement setting forth the aggregate number of shares
not voted in favor of the Merger to all stockholders entitled to appraisal
rights who perfected such rights and submitted written requests for such
statement to Merger Sub within 120 days after the Effective Time of the Merger.
If a holder of DiviCom Capital Stock exercises appraisal rights in
connection with the Merger under Section 262 of the DGCL ("Section 262"), any
shares of DiviCom Capital Stock in respect of which such rights have been
exercised and perfected will not be converted into C-Cube Common Stock but
instead will be converted into the right to receive such consideration as may be
determined by the Delaware Court of Chancery (the "Court") to be due with
respect to such shares pursuant to the laws of the State of Delaware. This
Prospectus/Proxy Statement is being sent by personal delivery or by mail to all
holders of record of shares of DiviCom Capital Stock on the DiviCom Record Date
and constitutes notice of the appraisal rights available to such holders under
Section 262.
48
<PAGE>
The following summary of the provisions of Section 262 is not intended to be
a complete statement of such provisions and is qualified in its entirety by
reference to the full text of Section 262, a copy of which is attached to this
Prospectus/Proxy Statement as Annex B and incorporated herein by reference.
Holders of shares of DiviCom Capital Stock who object to the Merger and who
follow the procedures in Section 262 will be entitled to have their shares of
DiviCom Capital Stock appraised by the Court and to receive payment of the "fair
value" of such shares as of the Effective Time of the Merger.
A stockholder of DiviCom electing to exercise appraisal rights must, prior
to the vote concerning the Merger at the DiviCom Meeting, perfect his, her or
its appraisal rights by demanding in writing from DiviCom the appraisal of his,
her or its shares of DiviCom Capital Stock. A vote against the Merger will not
constitute a demand for appraisal. A stockholder electing to take such action
must do so by a separate written demand as provided in Section 262. A holder who
elects to exercise appraisal rights should mail or deliver his, her or its
written demand to DiviCom at 1708 McCarthy Boulevard, Milpitas, California
95035. The demand should specify the holder's name and mailing address, the
number of shares of DiviCom Capital Stock owned and that such holder is
demanding appraisal of his, her or its shares. Within ten days after the
Effective Time of the Merger, DiviCom must provide notice of the Effective Time
of the Merger to all stockholders who have complied with Section 262 and have
not voted in favor of approval and adoption of the Reorganization Agreement and
approval of the Merger. Only a holder of record of shares of DiviCom Capital
Stock (or his, her or its duly appointed representative) is entitled to assert
appraisal rights for the shares registered in that holder's name.
Within 120 days after the Effective Time of the Merger, any stockholder who
has made a valid written demand and who has not voted in favor of approval and
adoption of the Reorganization Agreement and approval of the Merger may (i) file
a petition in the Court demanding a determination of the value of shares of
DiviCom Capital Stock, and (ii) upon written request, receive from DiviCom a
statement setting forth the aggregate number of shares of DiviCom Capital Stock
not voted in favor of approval and adoption of the Reorganization Agreement and
approval of the Merger and with respect to which demands for appraisal have been
received and the aggregate number of holders of such shares. Such statement must
be mailed within ten days after the written request therefor has been received
by DiviCom.
If a petition for an appraisal is timely filed, at a hearing on such
petition, the Court is required to determine the holders of Dissenting Shares
entitled to appraisal rights and to determine the "fair value" of the Dissenting
Shares exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest, if any, to be
paid upon the value of the Dissenting Shares. In determining such "fair value",
the Court is required to take into account all relevant factors, including the
market value of DiviCom Capital Stock and the net asset and earnings value of
DiviCom, and in determining the fair value of interest, the Court may consider
the rate of interest which DiviCom would have had to pay to borrow money during
the pendency of the proceeding. Upon application by a stockholder, the Court may
also order that all or a portion of the expenses incurred by any stockholder in
connection with the appraisal proceeding, including, without limitation,
reasonable attorneys' fees and the fees and expenses of experts utilized in the
appraisal proceeding, be charged pro rata against the value of all the shares of
DiviCom Capital Stock entitled to appraisal.
Any holder of Dissenting Shares who has duly demanded an appraisal under
Section 262 will not, after the Effective Time of the Merger, be entitled to
vote the shares subject to such demand for any purpose or be entitled to the
payment of dividends or other distributions on such Dissenting Shares (except
dividends or other distributions payable to stockholders of record as of a date
prior to the Effective Time of the Merger).
If any holder of shares of DiviCom Capital Stock who demands appraisal under
Section 262 effectively withdraws or loses, his, her or its right to appraisal,
the shares of such holder will be converted into a right to receive that number
of shares of C-Cube Common Stock as is determined in
49
<PAGE>
accordance with the Reorganization Agreement. A holder will effectively lose his
right to appraisal if he, she or it votes in favor of approval and adoption of
the Reorganization Agreement and approval of the Merger, or if no petition for
appraisal is filed within 120 days after the Effective Time of the Merger, or if
the holder delivers to DiviCom a written withdrawal of such holder's demand for
an appraisal and an acceptance of the Merger, except that any such attempt to
withdraw made more than 60 days after the Effective Time of the Merger requires
the written approval of DiviCom. A holder of stock represented by certificates
may also lose his, her or its right to appraisal if he, she or it fails to
comply with the Court's direction to submit such certificates of stock to the
Register in Chancery for notation thereon of the pendency of the appraisal
proceedings.
50
<PAGE>
C-CUBE AND DIVICOM
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
give effect to the proposed Merger of C-Cube and DiviCom. The Merger is subject
to stockholder and regulatory approval and other conditions. The unaudited pro
forma condensed combined balance sheet has been prepared as if the acquisition,
which will be accounted for as a purchase of DiviCom by C-Cube, was consummated
as of June 30, 1996. Such pro forma balance sheet combines C-Cube's and
DiviCom's balance sheets as of that date.
The aggregate net purchase price of $133.9 million has been calculated based
on the assumption that C-Cube's stock price is $25.75 (closing price as of July
22, 1996) and together with the fair value of the liabilities assumed has been
allocated to the DiviCom assets acquired. Included in the pro forma purchase
price are cash of $66.2 million plus the fair value of the approximately 2.3
million shares of C-Cube to be issued in exchange for all of the outstanding
Preferred Stock and Common Stock of DiviCom, the fair value of the assumed
options to acquire DiviCom Common Stock of $7.8 million and the estimated direct
transaction costs of $1.3 million. The DiviCom Common Stock and options were
valued using a C-Cube stock price of $25.75 per share. The allocation of the
purchase price was based upon a preliminary independent appraisal of the fair
value of the assets acquired and liabilities assumed. Such appraisal allocated
$116.8 million to purchased technology, $105.4 million of which represented
in-process research and development, and $3.6 million to goodwill.
The unaudited pro forma condensed combined statements of operations for the
year ended December 31, 1995 and for the six months ended June 30, 1996 give
effect to the proposed merger as if the acquisition was completed at the
beginning of the year and six month period, respectively, and combines C-Cube's
and DiviCom's statements of operations for each of those periods. Such
statements do not include the effect of the $105.4 million nonrecurring charge
for in-process research and development that has not reached technological
feasibility and does not have alternative future uses. However such statements
do reflect adjustments for the elimination of transactions between C-Cube and
DiviCom, amortization of purchased technology and goodwill, adjustment of
interest income to effect cash used in the transaction and related income tax
effects.
This method of combining historical financial statements for the preparation
of the pro forma condensed combined statements is for presentation only. Actual
statements of operations of the companies will be combined from the closing date
of the acquisition with no retroactive restatements. The unaudited pro forma
condensed combined financial statements are provided for illustrative purposes
only and are not necessarily indicative of the combined financial position or
combined results of operations that would have been reported had the Merger
occurred on the dates indicated, nor do they represent a forecast of the
combined financial position or results of operations for any future period. The
unaudited pro forma condensed combined financial statements should be read in
conjunction with the historical financial statements and accompanying notes for
C-Cube and DiviCom.
51
<PAGE>
C-CUBE AND DIVICOM
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
C-CUBE DIVICOM ADJUSTMENTS* COMBINED
----------- ---------- ------------------- ------------
<S> <C> <C> <C> <C>
Current assets:
Cash and equivalents............................... $ 107,115 $ 10,782 $ (66,246)(b) $ 51,651
Short-term investments............................. 35,003 35,003
Receivables........................................ 35,940 16,835 52,775
Inventories........................................ 23,249 17,932 (1,770)(a) 39,411
Deferred taxes and other current assets............ 13,030 4,406 126(j) 17,562
----------- ---------- ---------- ------------
Total current assets............................. 214,337 49,955 196,402
Property & equipment, net.......................... 14,553 4,789 19,342
Production Capacity Rights......................... 47,600 47,600
Distribution rights, net........................... 1,895 1,895
Purchased technology, net.......................... 1,473 11,437(d) 12,910
Goodwill, net...................................... 1,366 3,570(d) 4,936
Other assets....................................... 4,442 538 4,980
----------- ---------- ---------- ------------
Total............................................ $ 285,666 $ 55,282 $ (52,883) $ 288,065
----------- ---------- ---------- ------------
----------- ---------- ---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 26,558 $ 10,107 $ 1,350(g) $ 38,015
Notes payable...................................... 24,500 24,500
Current portion of long-term obligations........... 969 969
Deferred revenues.................................. 19,747 19,747
Accrued liabilities................................ 18,590 9,028 27,618
----------- ---------- ------------
Total current liabilities........................ 70,617 38,882 110,849
Deferred taxes..................................... 2,471(d) 2,471
Long-term obligations.............................. 87,816 87,816
----------- ---------- ------------
Total liabilities................................ 158,433 38,882 201,136
----------- ---------- ------------
Minority interest in subsidiary...................... 976 976
Stockholders' equity
Preferred stock.................................... 21 (21)(c) 0
Common stock, $0.001 par value, 50,000 shares
authorized, 33,156 shares outstanding............. 98,391 11 66,243(b) 164,645
Additional paid-in capital......................... 29,258 (29,258)(c) 0
Unrealized loss on investments..................... (74) (74)
Deferred stock compensation........................ (448) (448)
Notes receivable................................... (368) (60) 60(c) (368)
Accumulated translation adjustments................ (1,050) (1,050)
Retained earnings.................................. 29,806 (12,830) (105,408)(e) (76,752)
(1,150)(a)
12,830(a)
----------- ---------- ------------
Total stockholders' equity....................... 126,257 16,400 85,953
----------- ---------- ---------- ------------
Total............................................ $ 285,666 $ 55,282 $ (52,883) $ 288,065
----------- ---------- ---------- ------------
----------- ---------- ---------- ------------
</TABLE>
*See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
52
<PAGE>
C-CUBE AND DIVICOM
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
C-CUBE DIVICOM ADJUSTMENTS* COMBINED
----------- --------- ------------- -----------
<S> <C> <C> <C> <C>
Net revenues:
Product.................................................... $ 123,190 $ 34,119 $ (3,335)(a) $ 153,974
Development contracts...................................... 1,412 -- 1,412
----------- --------- ------------- -----------
Total.................................................... 124,602 34,119 (3,335) 155,386
----------- --------- ------------- -----------
Costs and expenses:
Cost of product revenues................................... 59,253 16,451 (3,335)(a) 74,656
2,287(f)
Research and development................................... 14,342 13,572 27,914
Selling, general and administrative........................ 19,227 5,275 357(f) 24,859
Purchased in-process technology............................ 3,800 3,800
----------- --------- ------------- -----------
Total.................................................... 96,622 35,298 (691) 131,229
----------- --------- ------------- -----------
Income (loss) from operations................................ 27,980 (1,179) (2,644) 24,157
Other income (expense), net.................................. 2,059 163 2,222
----------- --------- ------------- -----------
Income (loss) before income taxes & minority interest........ 30,039 (1,016) (2,644) 26,379
Income tax expense (benefit)................................. 4,933 (169) 4,764
----------- --------- ------------- -----------
Income (loss) before minority interest....................... 25,106 (847) (2,644) 21,615
Minority interest in net income of subsidiary................ 211 211
----------- --------- ------------- -----------
Net income (loss)............................................ $ 24,895 $ (847) $ (4,795) $ 21,104
----------- --------- ------------- -----------
----------- --------- ------------- -----------
Net income (loss) per share.................................. $ 0.72 $ (0.11) $ 0.57
----------- --------- -----------
----------- --------- -----------
Shares used in computation................................... 34,651 7,670 2,680(h) 37,331
----------- --------- ------------- -----------
----------- --------- ------------- -----------
</TABLE>
*See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
53
<PAGE>
C-CUBE AND DIVICOM
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
C-CUBE DIVICOM
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30 JUNE 30 PRO FORMA PRO FORMA
1996 1996 ADJUSTMENTS* COMBINED
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Net revenues:
Product................................................... $ 140,858 $ 22,545 $ (5,751)(a) $ 157,652
Development contracts..................................... 200 -- 200
----------- ----------- ------------- -----------
Total................................................... 141,058 22,545 (5,751) 157,852
----------- ----------- ------------- -----------
Costs and expenses:
Cost of product revenues.................................. 65,540 9,954 (3,981)(a) 72,657
1,144(f)
Research and development.................................. 16,213 6,809 23,022
Selling, general and administrative....................... 16,094 4,575 178(f) 20,847
----------- ----------- ------------- -----------
Total costs and expenses................................ 97,847 21,338 (2,659) 116,526
----------- ----------- ------------- -----------
Income from operations...................................... 43,211 1,207 (3,092) 41,326
Other income (expense), net................................. 708 149 857
----------- ----------- ------------- -----------
Income before income taxes and minority interest............ 43,919 1,356 3,092 43,183
Income tax expense.......................................... 15,811 624 (620)(i) 15,815
----------- ----------- ------------- -----------
Income before minority interest............................. 28,108 732 2,472 26,368
Minority interest........................................... 681 681
----------- ----------- ------------- -----------
Net income.................................................. $ 27,427 $ 732 $ 2,472 $ 25,687
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
Net income per share........................................ $ 0.76 $ 0.02 $ 0.67
----------- ----------- -----------
----------- ----------- -----------
Shares used in computation.................................. 35,869 34,873 2,680(h) 38,549
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
</TABLE>
*See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
54
<PAGE>
C-CUBE AND DIVICOM
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1 -- PURCHASE PRICE
The purchase price of the acquisition of DiviCom is computed as follows:
<TABLE>
<S> <C>
Common stock to be issued.................................... $ 58,454,000
Cash......................................................... 66,246,000
Employee stock options....................................... 7,800,000
Direct transaction costs..................................... 1,350,000
-------------
TOTAL........................................................ $ 133,850,000
-------------
-------------
</TABLE>
The purchase price is expected to be allocated as follows:
<TABLE>
<S> <C>
Current assets............................................... $ 49,955,000
Liabilities assumed.......................................... (41,847,000)
Equipment and Other.......................................... 5,327,000
In-process technology........................................ 105,408,000
Existing technology.......................................... 11,437,000
Goodwill..................................................... 3,570,000
-------------
TOTAL........................................................ $ 133,850,000
-------------
-------------
</TABLE>
The allocation of the purchase price among identifiable intangible assets
was based on a preliminary independent appraisal of the fair value of those
assets. Such appraisal allocated $105.4 million to purchased in-process research
and development. The $105.4 million will be expensed in the third calendar
quarter upon closing as the technology has not yet reached technological
feasibility and does not have alternative future uses. The unaudited pro forma
condensed combined statements of operations do not include this one-time charge
for purchased in-process technology as it represents a material nonrecurring
charge in accordance with the rules for the preparation of pro forma financial
statements.
NOTE 2 -- PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been made to the unaudited pro
forma condensed combined financial statements:
(a) Eliminate intercompany sales, cost of sales and profit in inventory.
(b) Reflects the value of C-Cube cash and stock issued to effect the
transaction and the fair value of options assumed by C-Cube.
(c) Reflects elimination of DiviCom Common Stock and Preferred Stock and
shareholders' deficit.
(d) Reflects allocation of purchase price to existing technology.
(e) Reflects one-time charge for purchased in-process technology.
(f) Reflects amortization on a straight-line basis of purchased existing
technology and goodwill over five and ten years, respectively.
(g) Reflects accrual of direct transaction costs.
(h) Reflects the issuance of 2,386,443 shares of C-Cube Common Stock to
effect the transaction and the dilutive effects of options to acquire 293,969
shares of C-Cube Common Stock which represent the unvested DiviCom options
assumed by C-Cube.
(i) Reflects the effect of the above adjustments on income tax expense. The
differences between the actual and pro forma effective income tax rates are due
to the tax accounting for the purchased technology.
The deferred tax assets recorded by DiviCom are included in the current
assets assumed.
55
<PAGE>
INFORMATION CONCERNING C-CUBE
THE COMPANY
C-Cube Microsystems Inc. (referred to herein as "C-Cube" or the "Company"),
established as a California corporation in 1988 and reincorporated in Delaware
in 1994, is a provider of powerful, highly integrated, standards-based digital
video compression solutions. The Company's innovative encoder, decoder and codec
products enable high quality video to be provided cost-effectively by a broad
range of end user systems. Digital video compression technology has enabled the
development of a significant number of new or enhanced applications in the
consumer electronics, computer and communications markets including video
compact disc ("Video CD") players, desktop video production systems, Direct
Broadcast Satellite ("DBS") systems, wireless cable systems and distributed
video networks.
BACKGROUND
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. Digital
formats also provide users with the benefits of random access and superior
editing capabilities. In the 1980s, the benefits of digital formats led the U.S.
consumer audio industry to convert from analog long playing records to digital
CDs, resulting in growth in the market for CD players. In the 1990s, the ongoing
evolution from analog to digital is transforming the way in which video is
produced, stored, transmitted and viewed.
A significant barrier to the greater market acceptance of digital video has
been the large volume of data required to represent images and video in a
digital format, making storage or transmission economically impractical. For
example, storage of an hour long video program in uncompressed digital form
would require well over 100 CD-ROMs. Through emerging digital compression
techniques, a substantial number of the redundancies inherent in video data can
be detected and eliminated, significantly reducing the overall amount of data
which needs to be retained, without affecting perceived image quality. These
compression techniques allow the same hour long video program which required 100
CD-ROMs for storage in uncompressed format to be stored on a single CD-ROM.
Similarly, a single uncompressed digital video program requires as much
bandwidth for effective transmission as 50 compressed video programs, making
uncompressed digital video impractical for markets such as broadcast and cable.
As a result of these limitations, C-Cube believes that the emergence of
cost-effective and practical video compression technology is critical to the
development of mass market digital video applications.
Cost-effective video compression solutions are now becoming available, and
the benefits provided by the combination of digital video and compression
technology are enabling the deployment of a large number of new applications and
improving or expanding existing applications. Existing and potential
applications in the consumer electronics, communications and computer markets
include Video CD players, digital video disk players, video conferencing
equipment, video editing systems, and video networks, including DBS, wireless
cable and switched digital systems.
Market development for C-Cube's new and expanded applications requires
communication of shared content among various products and across multiple
industries. This interoperability requires the widespread adoption of
international compression standards. In response to the need for standards,
industry leaders in consumer electronics, computers and communications including
AT&T, IBM, JVC, Matsushita, NTT, Philips, Scientific Atlanta and Sony joined
together with C-Cube in various committees sanctioned by the International
Standards Organization (the "ISO") to define standards for the compression of
still images and digital video for consumer electronics and broadcast
industries. The first standard ISO adopted was a recommendation from the Joint
Photographic Experts Group ("JPEG") committee for the compression of still
images. C-Cube believes that in 1990 it introduced the first product which
complied with the JPEG standard. The Moving Pictures Experts
56
<PAGE>
Group ("MPEG") committee made a recommendation for a standard for compression of
audio and video to CD-ROM, which was subsequently adopted by the ISO, and the
first products complying with the MPEG 1 standard were introduced by C-Cube in
1991. MPEG 2, a compression standard used for audio and video broadcast systems
and high density disk players, was recommended by the MPEG committee and adopted
by the ISO in 1994, with initial compliant products introduced by C-Cube earlier
the same year. These ISO standards specify a data format or syntax in which the
compressed data stream must be presented in order to enable equipment from
multiple vendors to be tied together into a single system that can transmit and
display image or video content in a common format. These standards do not,
however, specify the actual compression methodology and, therefore, do not
determine image quality or compression efficiency. For example, poorly
compressed data may comply with the relevant standard but contain visual
artifacts such as blocking, ringing, pixelation and blurring which may result in
poor image quality or loss in efficiency, costing capacity or play time. As a
result, there can be significant differences in overall image quality between
two solutions based on the same standard. Therefore, system manufacturers can
differentiate their products by the quality of the compression solution which
they select.
Applications utilizing compressed digital video require an encoder for
compression and a decoder for decompression. Encoding, the process of
compressing digital images using complex mathematical algorithms to eliminate
redundant information, determines the potential quality of the resulting image
and the achievable degree of compression. Decoding, the process of
reconstructing compressed video, restores a compressed digital bitstream back
into an uncompressed and viewable format. The design and architecture of
encoders and decoders are extremely complex, presenting significant technical
challenges.
In the past, as system vendors sought compression solutions, several
problems emerged. First, the cost and complexity of encoding and decoding and
the time required to compress digital video were significant limitations on the
use of digital compression. The implementation of the encoding process required
multiple circuit boards containing hundreds of expensive discrete digital logic
devices. The expense, power requirements and physical size of such systems made
encoding impractical for most applications. Many of these solutions also
generally required 10 to more than 100 hours to compress a single hour of video,
eliminating their usefulness in applications where significant time delay cannot
be tolerated such as in news or sports broadcasting. The complexity in designing
decoders results from the need for decoders to be highly integrated to meet the
demand for low system cost and to be compatible with all applicable compression
standards in order to ensure interoperability among products from different
system manufacturers.
In the past, most compression solutions have been hard-wired implementations
developed for a single application which could not be optimized for use in other
applications. In addition, the cost, size, image quality, compression ratio and
architectural requirements vary widely among system manufacturers. These factors
have made economies of scale and associated cost reductions difficult to
achieve. In addition, the limited programmability of such systems has restricted
their ability to take advantage of improvements in algorithms or to be modified
to address changes in standards or new applications. As a result, these
solutions have not fully addressed the needs of system manufacturers to bring
new applications to market quickly or to differentiate their products.
Furthermore, the rapid pace of change in digital compression technology, the
ongoing implementation of standards and the continuing emergence of new
applications necessitate that emerging compression technology be flexible in
order to respond to changing market requirements.
MARKETS AND APPLICATIONS
Products enabled by digital video compression technology can be divided into
three broad markets: consumer electronics, communications and computers.
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CONSUMER ELECTRONICS
Using MPEG, video can be distributed on the same 5-inch (12 cm) CDs that are
commonly used for audio. Potential future applications for video compression
technology in the consumer electronics market include the new digital video disk
(DVD) formats currently being finalized, digital video camcorders and digital
video cassette machines.
VIDEO CD PLAYERS. A Video CD player is essentially a CD audio player with
an MPEG 1 decoder and a video output. Adding this functionality increases the
retail price of a typical CD audio player by $100 to $200 and gives these
machines the ability to play movies, music videos and other titles from MPEG 1
encoded CDs. The physical Video CD disk format is identical to a standard 12 cm
audio CD and is limited to 72 minutes play time with video quality generally
perceived to be comparable to an analog VHS tape. Several thousand Video CD
titles are now available, including movies, music videos, and karaoke titles.
China, Japan, Korea, Taiwan and other Asian countries are known markets for
Video CDs.
DIGITAL VIDEO DISK ("DVD") PLAYERS. Unlike the Video CD standard which is
an adaptation of the audio CD, next generation Digital Video Disks have recently
been defined specifically for the very high quality playback of feature length
movies. This new format, which is not yet commercially available, provides 135
minutes average play time (270 minutes for a double-sided disk) on a high
density CD-ROM at four times the image resolution of a standard Video CD. The
Company believes that this format, which uses MPEG 2 variable bit rate encoding
and playback, will achieve widespread use in the United States, Europe and Asia.
CONSUMER DIGITAL VIDEO CAMERAS. Digital video cameras (camcorders) designed
as an alternative to today's analog-based home equipment could potentially offer
advantages in areas such as image quality, cost, size and interoperability with
other digital home consumer appliances such a DVD players and home editing
equipment. The first tape-based, consumer-grade products using DCT-based formats
called DV and DVCpro were recently introduced by companies including Sony, JVC
and Matsushita. Other formats which support recordable disk-based media are
currently being defined. C-Cube does not currently offer products supporting
these formats but may choose to do so in the future.
COMMUNICATIONS
Digital video compression has the potential to enable a number of new
applications and capabilities in the communications market, including expanding
the capacity and services of DBS systems, wireless cable and telephone
distribution systems.
DIRECT BROADCAST SATELLITE ("DBS") NETWORKS. By combining digital video
compression technology with high-power Ku-band satellites, DBS systems have the
potential to broadcast over 150 channels directly to an 18-inch dish antenna.
The increased channel capacity could be used for new services such as near video
on demand, movie delivery, pay-per-view and programming directed to specific
segments of the viewing audience. Furthermore, in these new DBS systems, a
single satellite can cover a geographical area the size of the contiguous United
States, making reception possible throughout rural areas. DirecTV, the first
U.S. deployment of a digital DBS system, was been introduced by Hughes in 1994
using the Company's encoder products.
MULTICHANNEL MULTIPOINT DISTRIBUTION SERVICE ("MMDS"). MMDS, more commonly
referred to as wireless cable, is a relatively new method for distributing video
programming. The service relies on super high frequencies ("SHF") to transmit
over the air instead of through overhead or underground wires, requiring a small
receiving antenna to be placed in each home. It is initially being deployed in
areas where there may not be an existing cable system or as an alternative to
existing cable services in high-density urban centers. The use of digital
compression and modulation in MMDS systems provides increased signal range, more
channels and higher reliability than that of older analog MMDS systems.
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SWITCHED DIGITAL NETWORKS. A number of new systems are in development and
are expected to allow telephone companies to deliver new services, including
digital video, to the home. These include audio and video encoders, transport
multiplexers and sophisticated modulation technologies to provide video over
twisted pair copper phone lines (ADSL), fiber to the curb (FTTC) and hybrid
fiber coax (HFC) networks. Since telephone networks are inherently
bidirectional, these new systems have the potential to allow for such two-way
services as video on demand, videophones and interactive services such as home
shopping. Each of these systems would typically require a settop decoder in the
home to decode the transmitted digital signal. IBM, DiviCom, Compression Labs,
Apple and Scientific Atlanta are providing equipment which incorporates the
Company's encoder and decoder products for use in trials and deployments.
AD INSERTION EQUIPMENT. Ad insertion equipment enables local advertising
and program segments to be compressed for storage and retrieval by cable systems
and local television stations using high capacity random access disks. These
digital-based systems are typically more reliable and cost effective than older
systems which were based on racks of analog tapes. The Company's encoder and
decoder products are being incorporated into ad insertion products in the early
stages of deployment by Scientific Atlanta, Digital Equipment Corporation and
Optibase.
VIDEO CONFERENCING EQUIPMENT. Standards for high quality video conferencing
such as H.320 and "low delay" MPEG have met with limited acceptance due to the
lack of appropriate high speed digital switched services such as ISDN. As
digital video networks become increasingly available, the market for such
products could represent a significant opportunity. Video conferencing systems
require both an encoder and decoder as well as an appropriate network interface.
COMPUTER
Digital video compression technology is currently being used for a number of
computer applications including add-in cards for games and Video CD playback,
content encoding equipment, non-linear video editing products and desktop video
conferencing systems.
ADD-IN CARDS FOR GAMES AND VIDEO CD PLAYBACK. Low cost, MPEG 1-based video
compression solutions can substantially improve the quality of video games
played on a desktop computer. Consequently, support for MPEG 1 video is growing
among operating system providers, with both Apple and Microsoft announcing
support for MPEG 1. Boards have been introduced by several companies which use
C-Cube MPEG 1 decoders. However, more powerful CPUs can decode MPEG 1 video in
software and as a result the Company anticipates that the market for dedicated
decoding hardware will decrease over time.
ADD-IN CARDS FOR DVD PLAYBACK The newly defined DVD is a potential
high-density media format with over seven times the data storage capacity of a
standard CD-ROM. So called Super Density ROM ("SD-ROM") drives are expected to
replace high-speed CD-ROM drives as standard PC peripherals starting in late
1996 or early in 1997. The addition of an add-in card which provides MPEG 2
video decode, Dolby AC3 audio decode and other DVD-specific functions will allow
these drives to play back disks with material encoded in the DVD, Video CD and
other video formats. However, it is anticipated that over time, CPUs will become
powerful enough to decode MPEG 2 video in software.
CONTENT ENCODING EQUIPMENT. Interactive game consoles and MPEG-based
hardware and software playback solutions for desktop computers, content To keep
pace with the growth in Video CD player markets, interactive game consoles,
MPEG-based hardware and software playback solutions for desktop computers,
content providers must efficiently and cost-effectively compress video content
into MPEG 1 syntax. For example, to support the sales of video karaoke systems,
thousands of titles must be compressed into MPEG syntax. This compression
capability is also needed to prepare digital video for video games, multimedia
presentations and storage for video on demand services. Several manufacturers
have introduced MPEG 1 content encoding equipment in the form of PC or Macintosh
add-in boards or complete systems based on C-Cube solutions. As DVD formats gain
wider useage, it is anticipated that desktop encoder solutions for MPEG 2 will
also become available.
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VIDEO EDITING SYSTEMS. Non-linear video editing is a computer-based
authoring application that allows editors to quickly and flexibly cut and paste
video sequences, reducing the time and cost of video post production. Several
companies utilize the Company's products in their professional editing systems.
In the future, lower price points and user interfaces targeted toward home use
may open up a new market for editing equipment. To date most of these
applications have been JPEG based but C-Cube recently introduced the CLM4100
family which supports MPEG-based editing.
DEPENDENCE ON EMERGING MARKETS
To date, C-Cube has derived substantially all of its product revenues from
sales of products for linear video playback (E.G. movies) and karaoke, direct
broadcast satellite applications and computer add-in cards, and from 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. The Company expects that Video CD and digital video networking
applications will continue to account for a significant portion of C-Cube's
revenues for the near future. Over the longer term, the Company's ability to
generate increased revenues will be dependent on the development of new
opportunities for compressed digital video in the consumer electronics,
communications and computer markets. The potential size of these new market
opportunities and the timing of their development is uncertain. Substantially
all of the growth in the sales of C-Cube's decoder products over the last year
has occurred in the Asia-Pacific region. There can be no assurance that such
growth will continue or that other markets for C-Cube's product will emerge.
Further, C-Cube's success in such markets will depend upon whether system
manufacturers select the Company's products for incorporation into the system
manufacturers' products, and upon the successful introduction of such products.
There can be no assurance that demand for Video CD players or other existing
applications will be sustained or that new markets will develop as expected by
the Company, or at all, or that system manufacturers developing products for any
such markets will design C-Cube's products into their system products and
successfully introduce such system products. The failure of existing and new
markets to develop as expected by the Company or to be receptive to C-Cube's
products would have a material adverse effect on the Company's business and
results of operations.
The emergence of markets for certain digital video applications will be
affected by a variety of factors beyond C-Cube's control. In particular, certain
sectors of the communications market will require the development and deployment
of an extensive and expensive communications infrastructure. There can be no
assurance that communications providers will make the necessary investment in
such infrastructure or that the creation of this infrastructure will occur in a
timely manner. In addition, the deployment of such infrastructure will be
subject to governmental regulatory policies, taxes and tariffs. For example, the
U.S. Federal Communications Commission currently restricts the number of new
frequencies available for deployment of new digital video broadcast networks,
such as wireless cable. In addition, other countries have similar governmental
restrictions. The development of such markets could be delayed or otherwise
adversely affected by new governmental regulations or changes in taxes, or
tariffs, or by the failure of government agencies to adopt changes to existing
regulations necessary to permit new technologies to enter the market. The
emergence of these and other markets is also dependent in part upon third party
content providers developing and marketing content for end user products such as
Video CD and DVD players, interactive game consoles, desktop computers and
settop decoders in a format compatible with the Company's products. There can be
no assurance that these third parties will develop and introduce such content in
a timely fashion, or at all, or that other factors beyond C-Cube's control will
not adversely affect the development of the digital video applications for which
the Company's products are developed.
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PRODUCTS
C-Cube is focused on providing powerful, highly integrated, standards-based,
programmable digital compression solutions that are cost-effective and deliver
high image quality for the compression needs of customers in the consumer
electronics, communications and computer markets. The Company has developed
extensive expertise in programmable architectures, algorithms, microcode
development and VLSI circuit design. This expertise has enabled C-Cube to be a
leading innovator in the development of digital video compression solutions. The
following table lists the Company's products, including the quarter in which
initial production units of the products were first made available to customers.
<TABLE>
<CAPTION>
PRODUCTION
MARKET PRODUCT NAME AND FUNCTION APPLICATION EXAMPLES RELEASE
<C> <S> <C> <C>
CL450 MPEG 1 Video Decoder Video CD players 2Q 92
CL480VCD MPEG 1 System Decoder 3Q 94
CL484VCD MPEG 1 Video CD 1Q 96
Decoder
CONSUMER
ELECTRONICS
CLM4500 MPEG 1 Video Encoder Content encoding equipment 4Q 93
CLM4550 Advanced MPEG 1 Video 2Q 96
Encoder
CL9100 MPEG 2 Video Decoder DBS receivers, Settop decoders, 2Q 94
CL9110 MPEG 2 Transport Ad insertion equipment 2Q 94
Demultiplexer
CLM4400 Half D1 MPEG 2 Encoder Satellite news gathering, 2Q 96
CLM4440 Half D1 MPEG 2 Encoder Distance learning, Ad 2Q 96
COMMUNICATIONS insertion equipment
CLM4700 Broadcast Resolution Cable headends, Satellite 4Q 94
MPEG 2 Encoders uplinks, Video servers
CLM4720 MPEG 2 Storage Encoder 2Q 96
CLM4740 MPEG 2 Broadcast 2Q 96
Encoder
CLM4200 H.261 Video Video conferencing equipment 4Q 94
Conferencing Codec
CL450 (SWA) MPEG 1 Video Add-in cards for MPEG 1 2Q 92
Decoder decoding 3Q 94
CL480PC MPEG 1 System Decoder
CL550 JPEG Codec Video editing equipment, Color 1Q 90
CL560 Advanced JPEG Codec laser printers, facsimiles and 4Q 93
copiers
COMPUTER
MVM121 Multimedia Video Manager Computer add-in cards for VGA 2Q 94
MVP131 Multimedia Video video display 1Q 95
Processor
CLM4100 Multistandard Codec Computer add-in cards for MPEG 4Q 93
1 content encoding
</TABLE>
CONSUMER ELECTRONICS
CL450 MPEG 1 VIDEO DECODER
The Company believes the CL450 was the first commercially available MPEG 1
video decoder. The CL450 has been most widely used as the core enabling
technology for a variety of digital karaoke players and jukeboxes for commercial
and professional applications. These players represented advances over large,
more expensive analog laser disk based systems.
CL480VCD MPEG 1 SYSTEM DECODER
The CL480VCD is an MPEG 1 decoder designed specifically for low-cost
consumer electronics Video CD players. The CL480VCD is a single chip MPEG 1
audio and video decoder, including advanced features such as system decoding,
audio/video synchronization, CD-ROM decoding support and on-chip error
concealment. It allows system manufacturers to significantly lower the retail
price of consumer electronics applications while shortening development time and
effort.
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CL484 MPEG 1 VIDEO CD DECODER
The CL484 is an advanced MPEG 1 System decoder which includes new levels of
functionality and integration while maintaining pin and software compatibility
with the CL480VCD. The CL480VCD includes DiscView-TM-, which allows quick
scanning and selection of disk contents. In addition, the CL484 VCD offers
playback of CD-G formats, bitmapped on-screen display and audio key control.
CLM4500 MPEG 1 VIDEO ENCODER
The CLM4500 is a consumer electronics resolution MPEG 1 video encoder which
consists of two VideoRISC processors and associated MPEG encoding microcode. The
primary application for the CLM4500 is real-time Video CD authoring, but the
product is also used in low-bandwidth video networks. The CLM4500 microcode
incorporates C-Cube's proprietary rate control and masking algorithms, enabling
the encoders to deliver consumer grade video quality at low bit rates.
CLM4550 ADVANCED MPEG 1 VIDEO ENCODER
Noise, graininess or other video artifacts in original material can often
adversely affect the quality of MPEG encoded bitstreams. The CLM4550 is a four
chip encoder designed to provide extra filtering capability to complement the
encoding algorithms contained in the CLM4500. The CLM4550 is designed for use in
professional applications such as Video CD mastering which demand the high
quality video encoding.
COMMUNICATIONS
CL9100 MPEG 2 VIDEO DECODER AND CL9110 MPEG 2 TRANSPORT DEMULTIPLEXER
The CL9100 is a single chip MPEG 2 broadcast video decoder which decodes
video in the MPEG 1 and MPEG 2 formats and provides system level features such
as error concealment and advanced on-screen display. The CL9110 is a companion
chip sold under license from DiviCom that separates MPEG 2 data into video and
audio and implements a number of broadcast-specific features, including a
descrambler interface and conditional access functions. The CL9100 and CL9110
are built around proprietary RISC CPU cores and are optimized for settop decoder
applications.
CLM4400 AND CLM4440 HALF D1 RESOLUTION MPEG 2 VIDEO ENCODERS
The CLM4400 is a low-cost implementation of the MPEG 2 standard which
encodes video at half the horizontal resolution of the full CCIR-601 broadcast
standard. This four chip implementation is designed to be used in applications
that require lower data rates or smaller form-factors than provided by the full
CLM4700 family such as distance learning, local video networks and ADSL
deployments. The CLM4440 is based on the third generation VRP-3 encoder and
reduces the form-factor to a 2-chip set.
CLM4700 BROADCAST RESOLUTION MPEG 2 ENCODERS
The CLM4700 is a family of real time, broadcast resolution MPEG 2 encoders,
which consist of eight to fourteen VideoRISC processors and associated
microcode. The CLM4700 microcode incorporates the Company's proprietary rate
control and masking algorithms, enabling the encoders to deliver broadcast video
quality at low bit rates. The CLM4700 is available in an 8 or 9 chip set to
encode material as individual frames or as a 12 or 13 chip set to adaptively
encode material as either fields or frames. The CLM4700, based upon VRP-2,
C-Cube's second generation encoder technology, is shipping in production
quantities, but new designers are now encouraged to use VRP-3-based chipsets,
such as the CLM4740 and CLM4720.
CLM4740 MPEG 2 BROADCAST ENCODER
The CLM4740 is a seven chip set based on VRP-3, C-Cube's third generation
encoder technology. The chipset encodes broadcast-resolution video into MPEG 2
Main Level/Main Profile format in real time using adaptive field/frame encoding
techniques. The CLM4740 performs statistical multiplexing, closed captioning and
external reference rate control.
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CLM4720 STORAGE ENCODER
The CLM4720 is a five chip set based upon VRP-3. The chipset performs
frame-based encoding using either real time constant bit rate or variable bit
rate (VBR) encoding for improved storage capacity in video servers and other
applications.
CLM4200 H.261 VIDEO CONFERENCING CODEC
The CLM4200 is a two-chip 15 frame per second full duplex video codec
conforming to the H.261 video compression subset of the H.320 ITU video
conferencing standard. The CLM4200 was developed in cooperation with PictureTel
and provides a high quality solution complete with features such as picture-in-
picture and high resolution still pictures.
COMPUTER
CL450SWA MPEG 1 VIDEO DECODER
The CL450 MPEG 1 video decoder, while initially designed for consumer
applications, is now used in a variety of add-in cards for the PC and Macintosh
platforms which enable the playback of Video CDs and high quality interactive
games. In CL450-based systems, audio decoding is performed either with the
addition of a dedicated chip or through the use of software-based audio decoder
applications, offering a range of price-performance solutions. The CL450SWA
(Software Audio) includes device drivers that utilize the host CPU to decode the
MPEG audio bitstream in software.
CL480PC MPEG 1 SYSTEM DECODER
The CL480PC is a microcode-based variant of the CL480VCD, specially intended
for the efficient playback of MPEG 1 titles on the PC. Features contained in the
product allow it to interface easily to ISA and PCI busses as well as popular
scaler/overlay and graphics chips. The lower power requirement of the CL480PC is
well-suited for power sensitive applications such as notebook computers, Green
PCs and PCMCIA add-in cards.
CL550 AND CL560 ADVANCED JPEG CODECS
The CL550 was the first commercially available codec implementing the JPEG
image compression standard. The CL550 is highly integrated and compresses and
decompresses high resolution still images as well as quarter-screen resolution
video at 30 frames per second. The CL550 is used in a variety of products where
a low-cost codec is required, including digital cameras, security and LAN-based
video conferencing. The CL560 is a second generation product which compresses
and decompresses video at full broadcast resolution and is being incorporated
into digital video editing systems and designed into color laser printers,
facsimiles and copiers.
MVM121 AND MVP131 MULTIMEDIA VIDEO PROCESSORS
The MVM121 and MVP131 are high-quality scaler/overlay chips that were added
to the C-Cube product line with the acquisition of Media Computer Technologies
("MCT") in November 1995. These chips allow the integration of a video input
from an MPEG decoder, NTSC decoder, TV tuner or other source into ISA-based PCs.
The resultant video can then be placed into a window (overlayed) on the VGA
screen and optionally "scaled" in both the horizontal and vertical directions.
CLM4100 MULTISTANDARD CODEC
The CLM4100 provides the capabilities of capturing quarter-screen resolution
video in real time and storing it to disk. The user can then edit the material
and once complete, recode into full MPEG format at only slightly slower than
real time. The Company believes that this single chip solution provides
affordable MPEG 1 encoding solutions for applications such as Video CD
production, video editing for desktop computers and high quality encoding of
video for the Internet.
REFERENCE DESIGNS AND DEMONSTRATION SYSTEMS
In addition to its encoder, decoder and codec VLSI products, C-Cube offers
board and system-level products which serve as reference designs and
demonstration systems for C-Cube customers that wish to bring stand-alone
products into production quickly or plan to incorporate C-Cube's compression
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solutions in their own products. C-Cube believes these products promote the use
of C-Cube's compression solutions by assisting customers in the design of
systems and by reducing the customer's time to market.
REFERENCE DESIGNS. For the Video CD market, C-Cube offers full
manufacturing kits which include all the information required for a manufacturer
to immediately begin production of a CL480 Family-based design with minimal
engineering required. These kits are designed to allow customers their choice of
several popular CD front-ends, including CD drives and system microcontrollers.
In addition, C-Cube offers boards that plug directly into an audio CD player to
upgrade its functionality to include Video CD playback.
For other products, C-Cube offers reference designs which are intended to
give customers sufficient information such that they can design C-Cube
components into their own system-level solutions. Generally, these are ISA or
PCI add-in cards together with software drivers and applications.
C-Cube believes that such manufacturing kits and reference designs are
important because they allow customers to bring C-Cube products into production
in a shorter time and with less effort than would otherwise be possible. In
addition, C-Cube believes that the application knowledge gained during the
development of these designs is directly applicable toward the development of
new, more highly integrated products.
DEMONSTRATION SYSTEMS PRODUCTS. The MPEG Encoder Development Station is a
real time consumer and broadcast resolution MPEG 1 and MPEG 2 video and audio
encoder system that is based on the Company's VideoRISC processor. This
desk-side system incorporates a SPARC microprocessor-based board together with
four C-Cube designed boards for video capture, video encoding, audio encoding
and compressed bitstream transmission. It is designed as a prototyping tool for
customers developing MPEG-based systems. The Development Station has also been
used by certain customers to encode music videos, karaoke and movies for
distribution on Video CD or via video on demand systems.
CHANGING PRODUCT MIX; INCREASING DEPENDENCE ON DECODER PRODUCTS
C-Cube anticipates that overall product gross margins may decrease as a
result of a number of factors, including a change in product mix to lower margin
CL480 Family products and anticipated declines in the average selling price for
these products over time. While C-Cube offers a number of products for a variety
of applications, beginning in the second quarter of 1995, sales of the Company's
CL480 Family have represented an increasingly significant percentage of the
Company's total net revenues and accounted for a substantial majority in the
growth of the Company's total net revenues. The Company expects that revenues
from its CL480 Family will account for a significant portion of its product
revenues in 1996. The Company derives lower product gross margin from sales of
the CL480 Family than from sales of its encoder products. Therefore, as revenues
from sales of the CL480 Family increase as a percentage of the Company's net
revenue, the Company may experience an adverse effect on its overall product
gross margins. In addition, over time, C-Cube expects that price competition
will result in declining average selling prices for these products. C-Cube may
not be able to continue to reduce costs associated with the CL480 Family
sufficiently to offset the adverse effect on overall product gross margins
caused by the increasing dependence on the CL480 Family. Although the Company
has implemented several programs to further reduce costs associated with the
CL480 Family, in the event that increases in unit sales and other manufacturing
efficiencies of the CL480 Family do not offset decreasing prices in the future,
the Company's business and results of operations would be materially and
adversely affected. Moreover, as C-Cube makes changes to its CL480 Family in an
effort to reduce costs, its customers must qualify each new silicon and/or
microcode revision. Delays in customers' ability or willingness to qualify
revisions of the CL480 Family could result in higher costs or dislocations in
production and supply, which could have a material adverse effect on C-Cube's
operating results. The timing of volume shipments and the life cycles of the
Company's products are difficult to predict due in large measure to the emerging
nature of the markets for C-Cube's products, the future effect of product
enhancements by the Company and its
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competitors and future competition. Declines in demand for the Company's
products, particularly the CL480 Family, whether as a result of competition,
technological change or otherwise, would have a material adverse effect on
C-Cube's business and results of operations.
CUSTOMERS
The following table lists certain of the Company's customers:
<TABLE>
<CAPTION>
MARKET CUSTOMERS
<C> <S> <C>
JVC Oksori
CONSUMER ELECTRONICS Digital Video Systems Samsung
Matsushita Sony
Celestica Scientific Atlanta
Compression Labs Thomson Consumer Electronics
COMMUNICATIONS DiviCom TV/Com
SAGEM
Apple Sigma Designs
Avid Technologies Sun Microsystems
COMPUTER Digital Equipment
FutureTel
</TABLE>
For the first quarter of 1996, three divisions of Samsung collectively
accounted for 22% of net revenues and sales to Kanematsu Corporation, a
distributor, accounted for 12% of the Company's net revenues. During 1995, three
divisions of Samsung collectively accounted for 14% of net revenues, and sales
to Serial Systems, a distributor selling to six customers, accounted for 10% of
the Company's net revenues. There can be no assurance that such customers will
continue to account for a significant percentage of the Company's revenues in
the future. The loss of any of such customers could have a material adverse
effect on the Company's business and results of operations. During 1994 and 1993
no individual customer represented 10% or more of net revenues.
RESEARCH AND DEVELOPMENT
C-Cube believes that the continued introduction of new products in its
target markets is essential to its growth. As of June 30, 1996, the Company had
216 full-time employees engaged in research and development. Expenditures for
research and development for the first six months of 1996 and during fiscal
years 1995, 1994 and 1993 were approximately $16.2 million, $14.3 million, $9.8
million and $7.4 million, respectively.
The markets for the Company's products are characterized by rapidly changing
technology and evolving industry standards. In addition, markets for C-Cube's
products are characterized by intense price competition. As the markets for the
Company's products develop and competition increases, C-Cube anticipates that
product life cycles will shorten and average selling prices will decline. In
particular, average selling prices and product gross margin for each of the
Company's products will decline as such products mature and as per order unit
volumes for such products increase. The Company's operating results will depend
to a significant extent on its ability to continue to successfully introduce new
products on a timely basis and to reduce costs of existing products. C-Cube has
recently announced several new products, including additional versions of the
CL480 and next generation MPEG encoders. There can be no assurance that these
products will be successfully developed or will achieve market acceptance.
However, the failure of any of these products to be successfully introduced and
achieve market acceptance could have a material adverse effect on the Company's
business and results of operations. The success of new product introductions is
dependent on several factors, including proper new product definition, product
cost, timely completion and introduction of new product designs, quality of new
products, differentiation of new products from those of the Company's
competitors and market acceptance of C-Cube's and its customers' products. As a
result, the Company believes that continued significant expenditures for
research and development will be
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required in the future. Because of the complexity of its products, C-Cube has
experienced delays from time to time in completing the development and
introduction of new products, and, as a result, has from time to time not
achieved the market share anticipated for such products. There can be no
assurance that such delays will not be encountered in the development and
introduction of future products. There can be no assurance that the Company will
successfully identify new product opportunities and develop and bring new
products to market in a timely manner, that products or technologies developed
by others will not render C-Cube's products or technologies obsolete or
noncompetitive, or that the Company's products will be selected for design into
the products of its targeted customers. The failure of any of the Company's new
product development efforts could have a material adverse effect on C-Cube's
business and results of operations.
SALES AND MARKETING
C-Cube's sales and marketing strategy targets markets for which digital
video compression is an enabling technology in order to achieve key design wins
with industry leaders as well as early adopters of digital video technology. To
implement its strategy, the Company has established a direct sales force and a
worldwide network of independent sales representatives and distributors. In
addition, C-Cube has a team of application engineers deployed both in the
factory and the field who assist customers in incorporating the Company's
products.
In the United States, the Company sells its products to key customers
through its direct sales channel. Sales to other accounts in the United States
are made through independent representatives. The Company records revenues from
product sales to customers at the time of shipment. Generally, the Company pays
its independent sales representatives on a fixed commission basis. As of
December 1995, C-Cube had North American regional sales offices in northern
California, Georgia, Texas and Quebec and international sales offices in the
United Kingdom, China, Korea, Hong Kong, Singapore and Taiwan and is considering
opening additional offices in Asia, Europe and the U.S. In Japan, C-Cube
distributes products through the direct sales force of Kubota C-Cube ("KCC").
KCC was formed by the Company and Kubota in 1988 and is owned 65% by C-Cube and
35% by Kubota. The primary business of KCC is the marketing, sales and support
of the Company's products in Japan.
Internationally, the Company has commissioned sales representatives or
distributors in Australia, Canada, China, France, Germany, Great Britain, Hong
Kong, India, Italy, Korea, Malaysia, Scandinavia, Singapore, and Taiwan. Certain
of the Company's agreements with its distributors permit limited stock rotation
and provide for price protection. Allowances for returns and adjustments are
provided at the time revenues from product sales are recorded and for price
protection when the Company reduces its published list prices.
INTERNATIONAL BUSINESS ACTIVITIES
During the first six months of 1996 and during fiscal years 1995, 1994 and
1993, international revenues accounted for approximately 79%, 70%, 38% and 37%
of the Company's net revenues, respectively, and C-Cube believes that
international revenues will continue to account for a significant portion of net
revenues. The significant increase in international revenues in 1995 is due
primarily to the increase in the sales of MPEG 1 decoder products in Asia. The
Company's success will depend in part upon its ability to manage international
marketing and sales operations and manufacturing relationships. In addition,
C-Cube purchases a substantial portion of its assembly services from foreign
suppliers. C-Cube's international manufacturing and sales are subject to changes
in foreign political and economic conditions and to other risks including
currency exchange rate fluctuations or export/import controls and changes in tax
laws, tariffs and freight rates. For example, China and Taiwan comprise
substantial markets for consumer electronics products utilizing the Company's
CL480 Family, such as Video CD players. As a consequence, any political or
economic instability in such countries could significantly reduce demand for
products from certain of the Company's major customers. The Company is in the
process of securing additional foundry capacity in the Republic of China
(Taiwan). Consequently, the Company will be subject to the risk of political
instability in Taiwan, including but not limited to the potential for conflict
between Taiwan and the People's
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Republic of China. In addition, the Company sells certain of its products in
international markets and buys certain products from its foundries in currencies
other than the U.S. dollar, and the Company does not currently hedge its
exposure to foreign currency fluctuations. As a result, currency exchange rate
fluctuations could have a material adverse effect on the Company'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 the
Company's products relative to competitive products priced in the local
currency. The United States has considered trade sanctions against Japan and is
considering trade sanctions against China relating to trade and human rights
issues. If trade sanctions were imposed, Japan or China could enact trade
sanctions in response. Because a number of the Company's current and prospective
customers and suppliers are located in Japan and China, trade sanctions, if
imposed, could have a material adverse effect on C-Cube's business and results
of operations. Similarly, protectionist trade legislation in either the United
States or foreign countries could have a material adverse effect on the
Company's ability to manufacture or to sell its products in foreign markets.
MANUFACTURING
C-Cube has chosen to use independent silicon foundries to fabricate its
integrated circuits, and assembly, test and packaging are subcontracted to third
parties. This approach enables the Company to concentrate its resources on
product design and development, where C-Cube believes it has greater competitive
advantages. The Company, however, continues to evaluate other sources for wafer
capacity in 1997 and beyond.
The Company's devices are currently fabricated using complementary metal
oxide semiconductor ("CMOS") process technology with 0.8 micron, 0.65 micron and
0.5 micron feature sizes, using either two or three layers of metal
interconnect. Certain of C-Cube's new products are being prototyped with 0.35
micron feature sizes. Certain products are received as fully assembled and
tested units. For other products the Company takes receipt of untested wafers
and works with subcontract testing facilities. Once the fully tested and
accepted wafers are received by C-Cube, the die are assembled into packages by
subcontractors, primarily located in the United States, Japan and Korea. C-Cube
then performs final test and quality assurance checking at its testing
subcontractor before shipping product to its customers.
The Company established a strategic foundry relationship with TI in 1994,
and TI made an equity investment of $3.0 million in C-Cube at the time. Under
the TI agreement, TI received the right to manufacture derivatives based on
C-Cube decoders, including the CL450 and CL9100. C-Cube has entered into a
binding memorandum of understanding with AMD providing for a similar
arrangement. The AMD agreement relates to all C-Cube compression products. Both
the TI and the AMD agreements apply to current and future generations of the
products subject to such agreements. Under these agreements, and subject to the
requirement for product differentiation, TI and AMD may introduce products which
compete with existing or future C-Cube products. TI has introduced certain
products which may compete with present or future C-Cube products in certain
applications. AMD is not presently manufacturing products for C-Cube. In April
1996, TI and C-Cube agreed to discontinue any additional product or derivative
product transfers. Otherwise the balance of the agreement remains in effect
until its expiration in December 1997. The AMD agreement expires December 2002.
The Company believes that foundry capacity may become increasingly limited
over the next several years, resulting in increased prices, increased lead times
and greater difficulty in obtaining adequate capacity. Any increase in the
demand for semiconductor wafers over currently expected levels, or any failure
of foundry capacity in the industry to grow at anticipated rates would magnify
these shortages. C-Cube's future operating results will depend in substantial
part on its ability to increase the capacity available to it from its existing
or new foundries. In order to secure such capacity, C-Cube has considered and
will continue to consider various possible transactions, which could include,
without limitation, equity investments in, prepayments to, non-refundable
deposits with or loans to foundries in exchange for guaranteed capacity, "take
or pay" contracts that commit C-Cube to
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purchase specified quantities of wafers over extended periods or joint ventures
or other partnership relationships with foundries. There can be no assurance
that C-Cube will be able to make any such arrangement in a timely fashion or at
all, that C-Cube will not require additional issuances of equity or debt in
order to raise capital for any such arrangements or that any such financing
would be available to C-Cube on acceptable terms or at all. If C-Cube were not
able on a timely basis to obtain additional foundry capacity, its business and
results of operations would be materially and adversely affected.
C-Cube has entered into an agreement with Matsushita Electronics Corporation
("MEC"), JVC and Sharp whereby they provide assistance in the development of the
CL480 and the CL9100 and their derivatives and provide C-Cube with preferential
access to MEC's 0.5 and 0.35 micron manufacturing processes. As part of the
agreement C-Cube provides MEC the right to sell the CL480 to its internal
divisions and to a limited group of Video CD manufacturers. MEC's right to sell
the CL480 has certain volume limitations and is subject to royalty payments to
C-Cube.
C-Cube procures its integrated circuit products from MEC, TSMC and Yamaha
Corporation and is in the process of qualifying additional foundries including
Samsung Semiconductor Inc. This dependence on a small number of foundries
subjects C-Cube to risks associated with an interruption in supply from these
foundries. In connection with the manufacture of its newer products, C-Cube
needs to continue to evaluate and qualify new foundries that employ advanced
manufacturing and process technologies, which are currently available from a
limited number of foundries. For example, certain of the new products that
C-Cube intends to introduce require advanced CMOS processes and in the past
C-Cube has experienced increased costs and delays in connection with the
qualification of new foundries. There can be no assurance that any delays, cost
increases or quality problems resulting from the qualification of new foundries
will not have a material adverse effect on C-Cube's business and results of
operations.
C-Cube's reliance on subcontractors to manufacture, assemble and test 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 C-Cube intellectual
property. C-Cube obtains foundry capacity through forecasts that are generated
in advance of expected delivery dates and are binding on C-Cube. C-Cube's
ability to obtain the foundry capacity necessary to meet the future demand for
its products is based on its ability to accurately forecast such future demand.
Due to cyclical limitations on foundry capacity in the semiconductor industry
and lengthy order lead times required by many wafer suppliers, if C-Cube fails
to accurately forecast such future demand, C-Cube may be unable to timely obtain
an adequate supply of wafers necessary to manufacture the number of products
required to satisfy its actual demand. There can be no assurance that C-Cube
will accurately forecast future demand for its products and obtain sufficient
foundry capacity in the future. C-Cube's obligation to make binding forecasts
far in advance of delivery subjects C-Cube to inventory risks, including the
risk of obsolescence and commitments for surplus capacity. With respect to
C-Cube's principal foundries, these forecasts are also binding on the foundries
upon acceptance by the foundry, subject to minor adjustments. C-Cube's
subcontractors generally do not have firm supply obligations to C-Cube.
C-Cube has from time to time experienced disruptions in supply, although
none of those disruptions have to date materially adversely affected results.
There can be no assurance that manufacturing or assembly problems will not occur
in the future or that any such disruptions will not have a material adverse
effect upon C-Cube's results of operations. Further, there can be no assurance
that suppliers who have committed to provide product will do so, or that C-Cube
will meet all conditions imposed by such suppliers. Failure to obtain an
adequate supply of products on a timely basis would delay product delivery to
C-Cube's customers, which would have a material adverse effect on C-Cube's
business and results of operations. In addition, C-Cube's business could also be
materially and adversely affected if the operations of any supplier are
interrupted for a substantial period of time, or if C-Cube is required, as a
result of capacity constraints in the semiconductor industry or otherwise, to
increase the proportion of wafers or finished goods purchased from higher cost
suppliers in order to obtain adequate product volumes.
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The markets into which C-Cube sells its products are characterized by
extreme price competition, and C-Cube expects the average selling prices of its
products will decrease over the life of each product. In order to partially
offset declines in the selling price of its products, C-Cube will need to reduce
the cost of its products by implementing cost reduction design changes,
obtaining costs reductions as and if volumes increase and successfully managing
manufacturing and subcontracting relationships. Since C-Cube does not operate
its own manufacturing facilities and must make binding commitments to purchase
products, it may not be able to reduce its costs as rapidly as companies that
operate their own manufacturing facilities. The failure of C-Cube to design and
introduce lower cost versions of C-Cube's products in a timely manner or to
successfully manage its manufacturing relationships would have a material
adverse effect on C-Cube's business and results of operations.
COMPETITION
The markets in which C-Cube competes are intensely competitive and are
characterized by declining average selling prices and rapid technology change.
C-Cube believes that it competes favorably in the areas of product definition,
system cost, functionality, time-to-market, reliability and reputation. C-Cube
competes with major domestic and international companies, most of which have
substantially greater financial and other resources than C-Cube with which to
pursue engineering, manufacturing, marketing and distribution of their products.
Some of these companies own proprietary video compression technology competitive
with C-Cube's standards-based systems. In the consumer electronics market,
principal competitors include Philips, SGS-Thompson, Oak Technology and ESS
Technology, Inc., as well as several large, integrated Japanese consumer
electronics companies, such as Sony, Toshiba, NEC, and MEI, which have their own
semiconductor design and manufacturing capacity. In the computer market,
principal C-Cube competitors include the increasingly powerful CPUs that are now
available from, among others, Intel and Motorola, as well as specialized
companies such as Zoran and 8x8, and graphics chip manufacturers such as S3
Incorporated and Trident Microsystems, Inc. In the communications market,
C-Cube's principal competitors include SGS-Thomson, LSI Logic, Texas Instruments
and IBM Microelectronics.
Recently, competition among suppliers of decoder chips for the
communications market has intensified significantly. C-Cube believes the
scale-up from limited trials to wide deployment of settop decoders will occur
only gradually over time, if at all. Therefore, success in this market may be
dependent upon future design wins rather than upon design wins for trials or
early deployment. IBM and LSI Logic have recently announced the commercial
availability of their own MPEG 2 encoders. C-Cube expects that other companies,
such as SGS-Thomson and Mitsubishi, among others, will introduce competing
encoder products in the near future. Although the timing of the production
availability of such encoders is uncertain, their availability would likely have
an adverse impact on C-Cube's encoder product revenues and margins. C-Cube may
also face increased competition in the future from new entrants into its
markets. In particular, as the markets for C-Cube's products develop,
competition from large semiconductor companies, such as SGS-Thomson, and from
fabless semiconductor companies may increase significantly. Furthermore, as part
of C-Cube's foundry relationships, C-Cube has granted certain foundries the
rights to develop and manufacture derivative products based on its technology,
subject to royalty obligations and certain limitations, which may facilitate
direct competition from those larger semiconductor companies. The ability of
C-Cube to compete successfully in the rapidly evolving markets for high
performance video compression technology depends on factors both within and
outside of its control, including success in designing and subcontracting the
manufacture of new products that implement new technologies, adequate sources of
raw materials, protection of Company products by effective utilization of
intellectual property laws, product quality, reliability, price and the
efficiency of production, the pace at which customers incorporate C-Cube's
integrated circuits into their products or technologies, success of competitors'
products and general economic conditions. There can be no assurance that C-Cube
will be able to compete successfully in the future.
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A variety of other approaches to digital video compression have been
introduced, including wavelets, fractal, proprietary compression algorithms and
software only solutions, and other companies are designing products around these
or alternative approaches. In addition, manufacturers of general purpose
microprocessors, such as Intel and graphics chip manufacturers such as
Chromatics, are positioning their products as offering digital video compression
capability, and there can be no assurance that system manufacturers will not use
such processors for video compression applications. In the event that any of
these other approaches, individually or collectively, are adopted in the
emerging video compression market on a widespread basis, C-Cube's business and
results of operations would be materially and adversely affected.
INTELLECTUAL PROPERTY AND LICENSES
C-Cube attempts to protect its technology through a combination of patents,
copyrights, trade secret laws, confidentiality procedures and licensing
arrangements. As of June 30, 1996, C-Cube has 9 issued United States patents and
36 U.S. patent applications pending and has filed corresponding applications in
certain foreign jurisdictions. These patents expire at various times from 2010
to 2013. Notwithstanding its patent position, C-Cube 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 C-Cube's future technological
success.
There can be no assurance that patents will issue from any pending
applications or that any claims allowed from existing or pending patents will be
sufficiently broad to protect C-Cube's technology. While C-Cube intends to
protect its intellectual property rights vigorously, there can be no assurance
that any patents held by C-Cube will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to C-Cube. Moreover, while C-Cube holds or has applied for patents
relating to the design of its products, C-Cube's products are based in part on
standards, including MPEG 1, MPEG 2 and JPEG, and C-Cube does not hold patents
or other intellectual property rights for such standards. C-Cube believes that
there are outstanding patents in this area which may need to be licensed by
C-Cube or DiviCom. The semiconductor industry is characterized by frequent
litigation regarding patent and other intellectual property rights. While there
is currently no pending intellectual property litigation against C-Cube, C-Cube
receives from time to time notices of potential infringement of third party
rights and there can be no assurance that third parties will not assert claims
against C-Cube with respect to existing or further products or that licenses
will be available on reasonable terms, or at all, with respect to any
third-party technology including third-party technology which is or may be
embodied in standards. In the event of litigation to determine the validity of
any third-party claims, such litigation could result in significant expense to
C-Cube and divert the efforts of C-Cube's technical and management personnel,
whether or not such litigation is determined in favor of C-Cube. In the event of
an adverse result in any such litigation, C-Cube could be required to pay
substantial amounts in damages and to cease selling the infringing product
unless and until C-Cube is able to develop non-infringing technology or to
obtain licenses to the technology which was the subject of the litigation. There
can be no assurance that C-Cube would be successful in such development or that
such licenses would be available, and any such development or license could
require expenditure of substantial time and other resources.
C-Cube has entered into certain technology exchange agreements with TI and
AMD. The purpose of these licenses has, in general, been to exchange certain of
C-Cube's core cells for preferential wafer fabrication rights. To the extent
C-Cube develops products that are based on or incorporate the technology
licensed from TI or AMD, C-Cube will be obligated to pay royalties on sales of
such products. C-Cube has also entered into a development and licensing
agreement with MEC.
In 1992, certain license agreements between C-Cube, Kubota and KCC
originally entered into in 1988 were amended to provide in part that Kubota's
license to technology would be limited to a perpetual, royalty-free license to
sell derivatives of C-Cube's CL550 product provided that such derivatives are
not pin-compatible or competitive with C-Cube's or KCC's products. In addition,
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Kubota has a right to develop system level products based on C-Cube's board
designs provided those products are not competitive with C-Cube's products.
Kubota also has the right to purchase certain products at most favored customer
pricing for use in Kubota's products.
In February 1992, C-Cube entered into an agreement providing that it would
deposit into escrow certain technology relating to the CL450, CL950, and CL4000
to be released to JVC in the event of bankruptcy or failure to perform
development obligations. In the event of such release, JVC may manufacture such
products for its own use, subject to certain royalties. In June 1993, C-Cube
entered into a joint development agreement with JVC regarding the development of
the CL480 pursuant to which JVC paid C-Cube a development fee and which provides
for payment of royalties to JVC based on sales of the product.
In order to defray the cost of developing its products and to develop
products with specifications meeting customer requirements, C-Cube established
development relationships with JVC, Philips and Thomson Consumer Electronics.
Under these arrangements, customers provided C-Cube with significant development
funding and development assistance for the CL450, CL950, CLM4500 and CLM4600. In
addition, these customers participated with C-Cube in determining the
specifications for the performance requirements of these products. As a result
of these relationships, C-Cube believes it has been able to more rapidly
introduce products meeting the demands of these as well as other customers for
similar applications. As consideration for development funding, C-Cube has
agreed to pay certain royalties to such customers while generally retaining
ownership of such products.
EMPLOYEES
As of May 31, 1996, C-Cube had approximately 395 employees, 216 of whom are
engaged in, or directly support, C-Cube's research and development, 105 of whom
are in sales and marketing, 35 of whom are in manufacturing and 39 of whom are
in administration. C-Cube's employees are not represented by any collective
bargaining agreement, and C-Cube has never experienced a work stoppage. C-Cube
believes its employee relations are good.
C-Cube's future success is heavily dependent upon its ability to hire and
retain qualified technical, marketing and management personnel. The loss of the
services of key personnel could have a material adverse effect on C-Cube's
business. C-Cube has recently added a number of new key people to its management
team and is currently seeking certain additional engineering, marketing and
management personnel. C-Cube's success in the future will depend in part on the
successful assimilation of such new personnel. C-Cube also obtains assistance
from customers whose engineers participate in development programs at C-Cube.
The continuing availability of such support is dependent upon a number of
factors, including relationships with customers and the ability of such
engineers, many of whom are foreign residents, to obtain immigration visas. The
competition for such personnel, particularly for engineering personnel, is
intense and the loss of such personnel could have a material adverse effect on
C-Cube.
FACILITIES
C-Cube's principal facilities consist of approximately 149,000 square feet
of space in three buildings located in Milpitas, California. This space is
leased pursuant to two agreements that expire on January 1, 1998 and April 14,
2005, respectively. C-Cube believes its existing facilities and other available
facilities will be adequate to meet its requirements for at least the next 12
months.
LEGAL PROCEEDINGS
C-Cube is not involved in any material pending legal proceedings but may be
involved from time to time as a plaintiff in routine litigation incidental to
its business.
ACQUISITIONS
On November 17, 1995, C-Cube completed the acquisition of Media Computer
Technologies, Inc. ("MCT"), a privately-held supplier of digital video
processing and video windowing technology for the personal computer market based
in Santa Clara, CA. The primary motivation behind the acquisition
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was to have MCT personnel supplement C-Cube's capabilities in the area of
reference designs, application software and the development of highly integrated
video solutions that optimize C-Cube's existing product lines.
C-CUBE STOCK PRICE AND DIVIDEND INFORMATION
C-Cube Common Stock has been traded on Nasdaq under the symbol "CUBE" since
C-Cube's initial public offering on April 22, 1994. The following table sets
forth the range of high and low closing prices for the C-Cube Common Stock as
reported on Nasdaq for the periods indicated (adjusted to reflect a 2-for-1
stock split on December 19, 1995).
<TABLE>
<CAPTION>
HIGH LOW
------- ---------
<S> <C> <C>
Fiscal 1996
Third Quarter (through August 7, 1996).................... $36 $23 3/8
Second Quarter (through June 30, 1996).................... 61 1/2 29 3/4
First Quarter............................................. 71 42 3/4
Fiscal 1995
Fourth Quarter............................................ $62 1/2 $19 7/8
Third Quarter............................................. 24 1/8 13 5/16
Second Quarter............................................ 13 7/8 8 15/16
First Quarter............................................. 10 1/8 7 1/2
Fiscal 1994
Fourth Quarter............................................ $11 7/8 $ 7 13/16
Third Quarter............................................. 12 1/8 7 1/2
Second Quarter (since April 22, 1994)..................... 10 7 5/8
</TABLE>
At August 7, 1996, there were approximately 685 stockholders of record.
The market price of C-Cube's Common Stock has fluctuated significantly since
the initial public offering in April 1994. The market price of the Common Stock
could be subject to significant fluctuations in the future based on factors such
as announcements of new products by C-Cube or its competitors, quarterly
fluctuations in C-Cube's financial results or other semiconductor companies'
financial results, changes in analysts' estimates of C-Cube's financial
performance, general conditions in the semiconductor industry and conditions in
the financial markets. 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. Many
technology companies, including C-Cube, have recently experienced historic highs
in the market price of their equity securities. There can be no assurance that
the market price of the Common stock will not decline substantially from such
historic highs, or otherwise continue to experience significant fluctuations in
the future.
DIVIDEND POLICY
C-Cube has never paid cash dividends on its Common Stock. C-Cube presently
intends to retain all cash for use in the operation and expansion of C-Cube's
business and does not anticipate paying any cash dividends in the near future.
In addition, the Company's existing bank credit agreement prohibits the
declaration or payment of cash dividends on its Common Stock.
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SELECTED CONSOLIDATED FINANCIAL DATA OF C-CUBE
The following selected consolidated financial data for each of the three
years in the period ended December 31, 1995 have been derived from the audited
consolidated financial statements of C-Cube included herein. The selected
consolidated financial data for 1991 and 1992 have been derived from audited
financial statements of C-Cube not included herein. The following selected
financial data as of June 30, 1996 and for the six month periods ended June 30,
1996 and 1995 have been derived from the unaudited financial statements of
C-Cube and in the opinion of management, include all adjustments, consisting
only of normal recurring accruals, necessary for fair presentation of the
financial statements for the periods indicated. The selected consolidated
financial data set forth below should be read in conjunction with "C-Cube
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto included
elsewhere in this Registration Statement.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30, YEARS ENDED DECEMBER 31,
---------------------- -------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----------- --------- ----------- --------- --------- --------- ---------
(UNAUDITED) (IN THOUSANDS, EXCEPT PERCENTAGE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues........................... $ 141,058 $ 38,727 $ 124,602 $ 45,019 $ 23,739 $ 13,631 $ 5,508
Cost of product revenues............... 65,540 18,273 59,253 19,574 8,304 4,850 2,766
Research and development............... 16,213 5,753 14,342 9,774 7,372 7,219 6,178
Selling, general and administrative.... 16,094 7,988 19,227 11,283 8,217 5,326 3,893
Purchased in-process technology........ -- -- 3,800 -- -- -- --
Income (loss) from operations.......... 43,211 6,713 27,980 4,388 (154) (3,764) (7,329)
Net income (loss)...................... $ 27,427 $ 7,329 $ 24,895 $ 5,008 $ (482) $ (5,329) $ (8,404)
Net income (loss) per share (1)........ $ 0.76 $ 0.21 $ 0.72 $ 0.16 $ (0.02)
Shares used in computation (1)......... 35,869 34,176 34,651 31,764 25,406
BALANCE SHEET DATA:
Cash and short-term investments........ $ 142,118 $ 144,089 $ 43,833 $ 8,608 $ 10,907 $ 1,784
Working capital........................ 143,720 158,577 48,751 7,200 7,898 958
Total assets........................... 285,666 203,526 67,862 23,925 23,943 5,657
Short-term debt and current portion of
long-term obligations................. 25,469 3,093 6,908 6,429 5,972 896
Long-term obligations, net of current
portion............................... 87,816 88,010 2,081 2,613 2,529 2,448
Stockholders' equity................... 126,257 87,535 53,488 10,445 10,793 319
</TABLE>
- ------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the computation of net income (loss) per share.
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C-CUBE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
RESULTS OF OPERATIONS -- 1995, 1994 AND 1993
The following table sets forth certain operating data as a percentage of net
revenues for the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Net revenues:
Product.......................................................... 98.9% 93.4% 86.0%
Development contracts............................................ 1.1 6.6 14.0
--------- --------- ---------
Total.......................................................... 100.0 100.0 100.0
Costs and expenses:
Cost of product revenues......................................... 47.6 43.5 35.0
Research and development......................................... 11.5 21.7 31.0
Selling, general and administrative.............................. 15.4 25.1 34.6
Purchased in-process technology.................................. 3.0 -- --
--------- --------- ---------
Total.......................................................... 77.5 90.3 100.6
--------- --------- ---------
Income (loss) from operations...................................... 22.5 9.7 (0.6)
Interest income (expense), net..................................... 1.6 1.5 (1.1)
--------- --------- ---------
Income (loss) before income taxes and minority interest............ 24.1 11.2 (1.7)
Income tax expense................................................. 4.0 0.1 0.3
--------- --------- ---------
Income (loss) before minority interest............................. 20.1 11.1 (2.0)
--------- --------- ---------
Minority interest.................................................. 0.1 -- --
--------- --------- ---------
Net income (loss).................................................. 20.0% 11.1% (2.0)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
NET REVENUES
Product revenues increased 193% to $123.2 million in 1995 compared to $42.0
million in 1994. The increase in product revenues was primarily due to volume
shipments of the CL480 and CL450 MPEG 1 decoder products, C-Cube's MPEG 2
encoder products and the CL9100 and CL9110 MPEG 2 decoder products. The CL480
began shipping at the end of 1994, but began significant volume shipments in the
first quarter of 1995. The CLM4700 MPEG 2 encoders began volume shipping in the
second half of 1994. The CL9100 and CL9110 began shipping at the end of 1994,
but began to ship in significant volume in the second half of 1995. 1994
revenues increased 106% to $42.0 million compared to $20.4 million in 1993. The
increase in 1994 product revenues was primarily due to volume shipments, which
commenced in the second half of 1993, of the CLM4500 and CLM4600 encoders and
the CL560 codec products and increased unit sales of the CL450 decoder product.
C-Cube's revenues from development contracts decreased to $1.4 million in
1995 as compared to $3.0 million in 1994 and $3.3 million in 1993 due to
C-Cube's focus on product sales.
During 1995, three divisions of Samsung collectively accounted for 14% of
net revenues and sales to Serial Systems, a distributor selling to six
customers, accounted for 10% of C-Cube's net revenues. There can be no assurance
that such customers will continue to account for a significant percentage of
C-Cube's revenues in the future. The loss of any of such customers could have a
material adverse effect on C-Cube's business and results of operations. During
1994 and 1993 no individual customer represented 10% or more of net revenues.
74
<PAGE>
International revenues accounted for 70%, 38%, and 37% of net revenues in
1995, 1994, and 1993, respectively. The significant increase in international
revenues is due primarily to volume shipments of the CL480 in Asia for Video CD
players in the consumer market. C-Cube sells products and supports customers in
Japan primarily through Kubota C-Cube, Inc. ("KCC"), C-Cube's 65% owned joint
venture with Kubota Corporation. C-Cube expects that international revenues will
continue to represent a significant portion of net revenues. C-Cube's
international sales and manufacturing are subject to changes in foreign
political and economical conditions and to other risks, including fluctuations
in foreign exchange rates, export/import controls and changes in tax laws,
tariffs and freight rates.
PRODUCT GROSS MARGIN
C-Cube's product gross margin percentage decreased to 51.9% in 1995 from
53.4% in 1994 primarily due to a shift in product mix whereby the lower margin
MPEG 1 and MPEG 2 decoder products made up a larger portion of sales. The
decline in product gross margin was partially offset by cost reductions and
lower scrap costs in 1995 as compared to 1994. C-Cube's product gross margin
percentage decreased to 53.4% in 1994 from 59.3% in 1993 primarily due to a
shift in product mix whereby the lower margin CL450 products made up a larger
portion of sales and a decline in average selling prices. Additionally, product
gross margins were reduced by higher scrap costs in 1994 as compared to 1993.
These factors were partially offset by increased sales of higher margin
products, including the CLM4500 and CLM4600 encoders.
The markets into which C-Cube sells its products are characterized by
extreme price competition, and C-Cube expects the average selling prices of its
products and the gross margin for such products will decrease over the life of
each product. In particular, C-Cube expects to experience significant price
competition over the next year with respect to decoder products. C-Cube
anticipates that its product gross margin may decrease due to a continuing
change in product mix toward lower margin MPEG 1 decoder products (CL450 and
CL480) and to decreases in average selling prices of certain products. In order
to partially offset declines in the average selling prices of its products,
C-Cube will need to reduce the cost of its products through design changes,
obtaining cost reductions from its manufacturers as and if volumes increase, and
successfully managing manufacturing and subcontracting relationships. In
addition, capacity constraints in the semiconductor industry could result in
higher costs to C-Cube. The failure of C-Cube to design and introduce lower-cost
versions of its products in a timely manner, to take advantage of lower-cost
processes, or to successfully manage manufacturing relations could have a
material adverse effect on C-Cube's business and results of operations.
RESEARCH AND DEVELOPMENT EXPENSES
In 1995, research and development expenses, which include development costs
associated with customer development contracts, were $14.3 million or 11.5% of
net revenues, compared to $9.8 million or 21.7% of net revenues, in 1994. The
increase in research and development expenses from the prior year is primarily
related to an increase in employee-related costs as well as an increase in
product start-up costs. In 1994, research and development expenses were $9.8
million or 21.7% of net revenues, compared to $7.4 million or 31.0% of net
revenues in 1993. The increase in research and development expenses from 1993
reflects higher staffing levels including outside consultants. The increase in
research and development expenses reflects C-Cube's continued efforts to develop
and bring to market innovative and cost-effective digital video solutions.
C-Cube anticipates that absolute levels of research and development expenses
will increase in future periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $19.2 million or
15.4% of net revenues in 1995 compared to $11.3 million or 25.1% of net revenues
for 1994. The increase in absolute dollars was primarily due to increased
staffing and related expenses, increased commissions on higher sales levels and
a higher provision for doubtful accounts. Selling, general and administrative
expenses increased to $11.3 million or 25.1% of net revenues in 1994 compared to
$8.2 million or 34.6% of net revenues for 1993. The increase from 1993 was
primarily due to increased commissions on higher sales levels as well as
increased headcount and related expenses, partially offset by a lower provision
75
<PAGE>
for doubtful accounts. The decrease in selling, general and administrative
expenses as a percentage of net revenues over the past three years is primarily
due to the significant increase in net revenues over the same period. C-Cube
expects that absolute levels of selling, general and administrative expenses
will continue to increase in future periods.
INTEREST INCOME (EXPENSE)
Interest income increased to $3.6 million in 1995 compared to $1.6 million
in 1994 primarily due to the significant increase in cash and investments from
cash provided by operations as well as the proceeds from C-Cube's convertible
subordinated note offering in the fourth quarter of 1995. Interest income
increased to $1.6 million in 1994 compared to $0.3 million in 1993 primarily due
to the significant increase in cash and investments from the proceeds of
C-Cube's initial public offering. Interest expense and other increased to $1.6
million in 1995 from $1.0 million in 1994 due primarily to interest paid on the
$86.3 million principal on convertible subordinated notes issued in the fourth
quarter of 1995. Interest expense and other increased to $1.0 million in 1994
from $0.6 million in 1993.
INCOME TAX EXPENSE
C-Cube's effective tax rate for 1995 of 16.5% is lower than the federal
statutory rate as C-Cube has reduced its valuation allowance against its
deferred tax assets in order to recognize the earned benefit from operating loss
carryforwards. As the benefits from operating loss carryforwards were fully
utilized during the second half of 1995, C-Cube expects that its effective
income tax rate will increase in 1996. C-Cube's effective tax rate for 1994 of
1% primarily represents the federal alternative minimum tax rate.
RESULTS OF OPERATIONS -- QUARTER ENDED JUNE 30, 1996
The following table sets forth certain operating data as a percentage of net
revenues for the quarters ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE
30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Net revenues:
Product................................................................... 100.0% 97.4%
Development contracts..................................................... 0.0 2.6
--------- ---------
Total................................................................... 100.0 100.0
Costs and expenses:
Cost of product revenues.................................................. 46.0 48.5
Research and development.................................................. 12.8 13.9
Selling, general and administrative....................................... 11.4 19.6
--------- ---------
Total................................................................. 70.2 82.0
--------- ---------
Income from operations...................................................... 29.8 18.0
Interest income (expense), net.............................................. 0.3 2.4
--------- ---------
Income before income taxes and minority interest............................ 30.1 20.4
Income tax expense.......................................................... 11.1 1.3
--------- ---------
Income before minority interest............................................. 19.0 19.1
Minority interest........................................................... -- --
--------- ---------
Net income.................................................................. 19.0% 19.1%
--------- ---------
--------- ---------
</TABLE>
NET REVENUES
Product revenues in the second quarter of 1996 were $73.0 million, an
increase of 247% from the corresponding quarter a year ago. The increase in
product revenues was primarily due to significantly
increased volume of shipments for the CL480 MPEG 1 system decoder product, the
CL9100 MPEG 2
76
<PAGE>
video decoder product, the MPEG 2 encoder family of products, and the CL9110
MPEG 2 transport demultiplexer product. In addition, the CL484VCD advanced MPEG
1 system decoder was introduced and began significant volume shipments in the
first quarter of 1996. The increase in product revenues noted above were
partially offset by a decline in the CL450 MPEG 1 video decoder product
shipments.
The Company's had no revenues from development contracts in the second
quarter of 1996 as compared to $0.6 million in the second quarter of 1995.
During the second quarter of 1996, Samsung accounted for 17% of net
revenues, and sales to Kanematsu Semiconductor Corporation, a distributor
selling to seventeen customers, accounted for 14% of the Company's net revenues.
During the same period last year, no individual customer represented 10% or more
of net revenues. There can be no assurance that such customers will continue to
account for a significant percentage of the Company's revenues in the future.
The loss of any of such customers could have a material adverse effect on the
Company's business and results of operations.
International revenues accounted for 82% of net revenues for the second
quarter, compared to 47% for the same period last year. The significant increase
in international sales is primarily due to volume shipments of the CL480 and
CL484 MPEG 1 system decoders in Asia for video CD players in the consumer market
and the CL9100 MPEG 2 video decoder product and the CL9110 MPEG 2 transport
demultiplexer product primarily for international deployments of direct
broadcast satellite. The Company expects that international revenues will
continue to represent a significant portion of net revenues. C-Cube's
international sales and manufacturing are subject to changes in foreign
political and economic conditions and to other risks including fluctuations in
foreign exchange rates, export/import controls and changes in tax laws, tariffs
and freight rates. For example, China and Taiwan comprise substantial markets
for consumer electronics products utilizing the Company's MPEG 1 system
decoders, such as Video CD players. As a consequence, any political or economic
instability in such countries could significantly reduce demand for products
from certain of the Company's major customers.
PRODUCT GROSS MARGIN
The following table sets forth the components of product gross margin for
the quarters ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE
30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Product gross margin:
Net product revenues................................................. $ 72,958 $ 21,054
Cost of product revenues............................................. 33,561 10,480
--------- ---------
Product gross margin................................................. $ 39,397 $ 10,574
--------- ---------
--------- ---------
Product gross margin percentage...................................... 54.0% 50.2%
--------- ---------
--------- ---------
</TABLE>
C-Cube's product gross margin percentage increased to 54.0% in the second
quarter of 1996 from 50.2% in the prior year quarter primarily due to cost
reductions over the same period, partially offset by a decline in the average
selling prices of several of the Company's products, an increased provision for
inventory reserves and a shift in product mix to the lower margin decoder
products.
The markets into which C-Cube sells its products are characterized by
extreme price competition, and the Company expects the average selling prices of
its products and the gross margin for such products will decrease over the life
of each product. In order to partially offset declines in the selling price of
its products, C-Cube will need to reduce the cost of its products by
implementing cost reduction design changes, obtaining costs reductions as and if
volumes increase and successfully managing manufacturing and subcontracting
relationships. Since the Company does not operate its own manufacturing
facilities and must make long-term binding commitments to purchase products, it
77
<PAGE>
may not be able to reduce its costs as rapidly as companies that operate their
own manufacturing facilities. The failure of the Company to design and introduce
lower cost versions of the Company's products in a timely manner or to
successfully manage its manufacturing relationships would have a material
adverse effect on C-Cube's business and results of operations.
RESEARCH AND DEVELOPMENT EXPENSES
In the second quarter of 1996, research and development expenses were $9.4
million, or 13% of net revenues, as compared to $3.0 million, or 14% of net
revenues, in the comparable prior year period. The decrease in research and
development expenses as a percent of net revenues is primarily due to the
significant increase in net revenues over the same period. The increase in
research and development spending from the prior year quarter reflects an
increase in employee-related costs as well as the Company's continuing efforts
to develop and bring to market innovative and cost-effective digital video
solutions. The Company expects 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 $8.3 million, or
11% of net revenues, in the second quarter of 1996, as compared to $4.2 million,
or 20% of net revenues, for the same quarter last year. The decrease in selling,
general and administrative expenses as a percent of net revenues is primarily
due to the significant increase in net revenues over the same period. The
increase in spending was primarily due to increased headcount and related
expenses and increased commissions on higher sales levels. The Company expects
that absolute levels of selling, general and administrative expenses will
continue to increase in future periods.
INTEREST INCOME (EXPENSE)
Interest income, net of interest expense decreased to $0.2 million for the
second quarter of 1996 from $0.5 million for the second quarter of 1995
primarily due to interest accrued for the Company's convertible subordinated
notes which were issued in the fourth quarter of 1995. The decline was partially
offset by the increased interest income from the proceeds of a sale of
convertible subordinated notes in November 1995. See "Liquidity and Capital
Resources."
INCOME TAX EXPENSE
The Company's effective tax rate for the second quarter of 1996 was 37%. The
Company's effective tax rate increased from that of 1995 as the benefits from
operating loss carryforwards were fully utilized.
78
<PAGE>
RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1996
The following table sets forth certain operating data as a percentage of net
revenues for the six months ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Net revenues:
Product................................................................... 99.9% 96.9%
Development contracts..................................................... 0.1 3.1
--------- ---------
Total................................................................. 100.0 100.0
--------- ---------
--------- ---------
Costs and expenses:
Cost of product revenues.................................................. 46.5 47.2
Research and development.................................................. 11.5 14.9
Selling, general and administrative....................................... 11.4 20.6
--------- ---------
Total................................................................. 69.4 82.7
--------- ---------
Income from operations...................................................... 30.6 17.3
Interest income (expense), net.............................................. 0.5 2.6
--------- ---------
Income before income taxes and minority interest............................ 31.1 19.9
Income tax expense.......................................................... 11.2 1.0
--------- ---------
Income before minority interest............................................. 19.9 18.9
Minority interest........................................................... 0.5 --
--------- ---------
Net income.................................................................. 19.4% 18.9%
--------- ---------
--------- ---------
</TABLE>
NET REVENUES
Product revenues for the first half of 1996 were $140.9 million, a 275%
increase from $37.5 million in product revenues during the corresponding period
in 1995. The increase in product revenues was primarily due to significantly
increased volume of shipments for the CL480 MPEG 1 system decoder product, the
CL9100 MPEG 2 video decoder product, the MPEG 2 encoder family of products, and
the CL9110 MPEG 2 transport demultiplexer product. In addition, the CL484VCD
advanced MPEG 1 system decoder was introduced and began significant volume
shipments in the first quarter of 1996. The increase in product revenues noted
above were partially offset by a decline in the CL450 MPEG 1 video decoder
product shipments.
The Company's revenues from development contracts decreased to $0.2 million
in the first half of 1996 from $1.2 million in the first half of 1995.
PRODUCT GROSS MARGIN
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Product gross margin:
Net product revenues.............................................. $ 140,858 $ 37,515
Cost of product revenues.......................................... 65,540 18,273
----------- -----------
Product gross margin.............................................. $ 75,318 $ 19,242
----------- -----------
----------- -----------
Product gross margin percentage................................... 53.5% 51.3%
----------- -----------
----------- -----------
</TABLE>
C-Cube's product gross margin percentage increased to 53.5% in the first
half of 1995 from 51.3% in the prior year period primarily due to cost
reductions over the same period, partially offset by a decline in the average
selling prices of several of the Company's products, an increased provision for
inventory reserves and a shift in product mix to the lower margin decoder
products.
79
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
In the first half of 1996, research and development expenses, which include
development costs associated with customer development contracts, were $16.2
million or 11% of net revenues, as compared to $5.8 million, or 15% of net
revenues, in the comparable prior year period. The increase in research and
development expenses from the prior year period reflects an increase in
employee-related costs as well as an increase in product start-up costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $16.1 million, or
11% of net revenues in the first half of 1996, as compared to $8.0 million, or
21% of net revenues for the same period last year. The increase was primarily
due to increased commissions on higher sales levels as well as increased
headcount and related expenses, partially offset by a lower provision for
doubtful accounts.
INTEREST INCOME (EXPENSE)
Interest income net of interest expense decreased to $0.7 million for the
first half of 1996 from $1.0 million for the first half of 1995 primarily due to
interest accrued for the Company's convertible subordinated notes which were
issued in the fourth quarter of 1995. The decline was partially offset by the
increased interest income from the proceeds of a sale of convertible
subordinated notes in November 1995. See "Liquidity and Capital Resources."
INCOME TAX EXPENSE
The Company's effective tax rate for the first half of 1996 was 36%. The
Company's effective tax rate increased from that of 1995 as the benefits from
operating loss carryforwards were fully utilized.
FACTORS THAT MAY AFFECT FUTURE RESULTS
C-Cube's quarterly and annual operating results have been, and will continue
to be, affected by a wide variety of factors that could have a material adverse
effect on revenues and profitability during any particular period, including the
level of orders which are received and can be shipped in a quarter, the
rescheduling or cancellation of orders by its customers, competitive pressures
on selling prices, changes in product or customer mix, availability and cost of
foundry capacity and raw materials, fluctuations in yield, loss of any strategic
relationships, C-Cube's ability to introduce new products and technologies on a
timely basis, new product introductions by C-Cube's competitors, market
acceptance of products of both C-Cube and its customers, supply constraints for
other components incorporated into its customers' products, currency
fluctuations, and the level of expenditures in research and development and
sales, general and administrative functions.
In addition, C-Cube's operating results are subject to fluctuation in the
markets for its customers' products, particularly the consumer electronics
market, which has been extremely volatile in the past, and the broadcast and
cable markets, which are in an early stage creating uncertainty with respect to
product volume and timing. Furthermore, to the extent C-Cube is unable to
fulfill its customers' purchase orders on a timely basis, these orders may be
cancelled due to changes in demand in the markets for its customers' products.
Historically, C-Cube has generally recognized a substantial portion of its
product revenues in the last month of a given quarter. A significant portion of
C-Cube's expenses is relatively fixed, and the timing of increases in expenses
is based in large part on C-Cube's forecast of future revenues. As a result, if
revenues do not meet C-Cube's expectations, it may be unable to quickly adjust
expenses to levels appropriate to actual revenues, which could have a material
adverse effect on C-Cube's business and results of operations.
The growth in revenues and operating income experienced by C-Cube in recent
quarters is not necessarily indicative of future results. In addition, in view
of the significant growth in recent years,
C-Cube believes that period-to-period comparisons of its financial results
should not be relied upon as an indication of future performance. Due to
C-Cube's dependence on the consumer electronics and home computer markets, the
substantial seasonality of sales in such markets could impact C-Cube's revenues
and net income, with the highest levels experienced in the third and fourth
calendar
80
<PAGE>
quarters as system manufacturers make purchases in preparation for the holiday
season, and relatively less strong demand in the first and second calendar
quarters. C-Cube's significant growth in prior periods makes it impossible to
assess the effect of any such seasonal trends on C-Cube's operating results.
There can be no assurance, however, that C-Cube's operating results will not
exhibit such seasonal characteristics in the future.
As a result of the foregoing, C-Cube's operating results and stock price may
be subject to significant volatility, particularly on a quarterly basis. Any
shortfall in net revenues or net income from levels expected by securities
analysts could have an immediate and significant adverse effect on the trading
price of C-Cube's common stock.
C-Cube has recently experienced a period of significant growth, which has
placed, and could continue to place, a significant strain on C-Cube's limited
personnel and other resources. C-Cube's ability to manage any further growth,
should it occur, would require significant expansion of its research and
development and marketing and sales capabilities and personnel. In particular,
C-Cube is in the process of expanding its sales and marketing organization to
increase coverage of the United States and the Asia-Pacific region. There can be
no assurance that C-Cube will be able to find qualified personnel to fill such
sales and marketing positions or be able to successfully manage a broader sales
and marketing organization. In addition, the sale and distribution of products
to numerous large system manufacturers in diverse markets and the requirements
of such manufacturers for design support would also place substantial demands on
C-Cube's research and development and sales functions. C-Cube's ability to
manage any further growth, should it occur, would depend upon its ability to
manage and potentially expand its foundry relationships. The failure of C-Cube's
management to effectively expand or manage these functions consistent with any
growth which may occur could have a material adverse effect on C-Cube's business
and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
AT DECEMBER 31, 1995
Cash, cash equivalents and short-term investments increased to $144.1
million at December 31, 1995 from the $43.8 million at the end of 1994 primarily
due to the $83.7 million net proceeds from the issuance of convertible
subordinated notes in the fourth quarter of 1995 (see Note 2 of Notes to
Consolidated Financial Statements). Working capital increased to $158.6 million
at December 31, 1995 from $48.8 million at the end of 1994.
C-Cube's operating activities provided cash of $30.7 million in 1995
primarily from net income and higher accounts payable and accrued liabilities,
partially offset by an increase in the accounts receivable and inventory. The
increase in receivables from December 31, 1994 reflects the significant increase
in revenues over the same period. The increase in accounts payable is primarily
due to a significant increase in production activities near the end of 1995.
C-Cube's investing activities, exclusive of the maturities and purchases of
short-term investments of $49.7 million and $29.8 million, respectively, used
cash of $12.3 million, primarily for the acquisition of Media Computer
Technologies, Inc. ("MCT") and capital expenditures.
Cash provided by financing activities was $81.1 million, consisting of the
proceeds of the convertible subordinated note offering and sales of stock
pursuant to employee stock plans partially offset by payments of debt.
C-Cube had an aggregate outstanding balance of $1.6 million under capital
lease lines at December 31, 1995. C-Cube's 65%-owned subsidiary, KCC, has yen
denominated credit lines with a group of Japanese banks guaranteed by Kubota,
the 35% minority shareholder of KCC, the outstanding balance of which was 200
million yen (or approximately $1.9 million) at December 31, 1995. In the fourth
quarter of 1995, C-Cube and Kubota recapitalized KCC by making capital
contributions of 162.5 million yen (or approximately $1.6 million at December
31, 1995) and 87.5 million yen (or approximately $.8 million at December 31,
1995), respectively.
81
<PAGE>
AT JUNE 30, 1996
Cash, cash equivalents and short-term investments were $142.1 million at
June 30, 1996 as compared to $144.1 million at the end of 1995. Working capital
decreased to $143.7 million at June 31, 1996 from $158.6 million at the end of
1995.
The Company's operating activities provided cash of $7.0 million in the
first half of 1996 primarily from net income and higher accounts payable,
accrued liabilities and income taxes payable, partially offset by an advance
payment for wafer production capacity and an increase in accounts receivable,
inventory, deferred taxes and other assets. The increase in receivables from
December 31, 1995 reflects an increase in the volume of sales of the Company's
key products. The increase in accounts payable is primarily due to a significant
increase in production activities near the end of the second quarter.
C-Cube's investing activities, exclusive of the maturities and purchases of
short-term investments of $24.3 million and $48.3 million, respectively, used
cash of $9.3 million, primarily for capital expenditures.
Cash used in financing activities was $0.1 million, consisting of payments
of debt partially offset by proceeds from sales of stock pursuant to employee
stock plans.
C-Cube had an aggregate outstanding balance of $1.2 million under capital
lease lines at June 30, 1996. The Company's 65%-owned subsidiary, KCC, has yen
denominated credit lines with a group of Japanese banks. At June 30, 1996 there
were no borrowings under this line.
In January 1996, the Company increased its available bank line of credit
from $8.5 million to $20 million. The line of credit expires November 1, 1996.
The line is collateralized by the Company's receivables, inventory and fixed
assets. The line of credit agreement requires the Company, among other things,
to maintain a tangible net worth (as defined) of $140 million, 80% of its
tangible consolidated assets within the U.S. parent company, quarterly net
income (no more than one quarterly loss per fiscal year), a quick ratio of 1.75
to 1, and a maximum debt to tangible net worth (as defined) ratio of 0.75 to 1.
In addition, this agreement prohibits the payment of cash dividends. Borrowings
bear interest at the bank's prime rate. At June 30, 1996, the Company was in
compliance with these covenants, and there were no borrowings under this line.
In the second quarter of 1996 the Company expanded and formalized its
relationship with Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC") to
provide additional wafer production capacity over the 1996 to 2001 timeframe.
The agreement with TSMC provides that TSMC will produce and ship wafers to
C-Cube at specified prices and requires C-Cube to make two advance payments
totaling $49 million. TSMC will apply this prepayment against a portion of the
wafer cost as product is delivered to C-Cube. Accordingly, the prepaid amount
will be amortized to inventory as wafers are received. The first advance payment
of $24.5 million was made in June 1996, and the final payment is due June 1997,
which is evidenced by an unsecured promissory note. At June 30, 1996, $1.4
million of the $49 million production capacity rights is included in deferred
taxes and other current assets.
Based on current plans and business conditions, C-Cube expects that its
cash, cash equivalents and short-term investments together with any amounts
generated from operations and available borrowings, if any, will be sufficient
to meet the Company's cash requirements for at least the next 12 months.
However, there can be no assurance that the Company will not be required to seek
other financing sooner or that such financing, if required, will be available on
terms satisfactory to the Company. In addition, the Company has considered and
will continue to consider various possible transactions to secure additional
foundry capacity, which could include, without limitation, equity investments
in, prepayments to, deposits with or loans to foundries in exchange for
guaranteed capacity, "take or pay" contracts that commit the Company to purchase
specified quantities of wafers over extended periods or joint ventures or other
partnership relationships with foundries.
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<PAGE>
MANAGEMENT OF C-CUBE
EXECUTIVE OFFICERS AND DIRECTORS
The following table lists the names, ages and positions of all executive
officers and directors of C-Cube as of July 31, 1996. There are no family
relationships between any director or executive officer and any other director
or executive officer of C-Cube. Executive officers serve at the discretion of
the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------------------
<S> <C> <C>
Alexandre A. Balkanski, Ph.D.............. 36 President, Chief Executive Officer and Director --
Class II, term to expire at the 1999 Annual Meeting
of Stockholders
James G. Burke............................ 53 Vice President of Finance and Administration, Chief
Financial Officer and Secretary
Didier Le Gall, Ph.D...................... 42 Vice President of Research and Development
Brian T. Connors.......................... 42 Vice President of Sales
Richard S. Rasmussen...................... 37 Vice President and General Manager
Alex Daly................................. 35 Vice President of Marketing
Sai-Wai Fu................................ 39 Vice President of Hardware Engineering
Sanjeev Renjen, Ph.D...................... 41 Vice President of Decoder Engineering
Richard Foreman........................... 42 Vice President and Chief Information Officer
Mark K. Allen............................. 41 Vice President of Operations
William J. O'Meara........................ 58 Director -- Class I, term to expire at the 1998 Annual
Meeting of Stockholders
Gregorio Reyes............................ 55 Director -- Class II, term to expire at the 1999
Annual Meeting of Stockholders
Donald T. Valentine....................... 64 Director -- Class II, term to expire at the 1999
Annual Meeting of Stockholders
Baryn S. Futa............................. 41 Director -- Class III, term to expire at the 1997
Annual Meeting of Stockholders
T.J. Rodgers.............................. 48 Director -- Class III, term to expire at the 1997
Annual Meeting of Stockholders
</TABLE>
DR. BALKANSKI co-founded C-Cube in July 1988 as Vice President and was named
Senior Vice President in August 1989. From February 1993 to February 1994 Dr.
Balkanski was Vice President of Worldwide Sales and Marketing. He served as
Executive Vice President from February 1994 to July 1995. He has served as
President and Chief Executive Officer since July 1995. He was elected to the
Board of Directors in April 1993. Prior to founding C-Cube, Dr. Balkanski was
the founder and the President of Diamond Devices Inc., a semiconductor company
which was formed to develop fast algorithms and VLSI architectures for digital
signal processing. Dr. Balkanski currently serves on the board of directors of
Sierra Semiconductor, Inc. and CKS/Group. Dr. Balkanski holds a B.A. in physics
from Harvard College and a M.S. in physics and a Ph.D. in business economics
from Harvard University.
MR. BURKE joined C-Cube in November 1992 as Vice President of Finance and
Administration, Chief Financial Officer and Secretary. From April 1992 to
October 1992, he was Chief Operating Officer and a Director of Advanced Network
Solutions Corporation, a start-up company focusing on standards-based electronic
messaging. From April 1990 to April 1992, Mr. Burke was self-employed as a
consultant to start-up businesses. He was previously the founding Chief
Financial Officer for both Insite Peripherals and Vertex Peripherals, and from
November 1986 to April 1990 served as Executive Vice President of Insite
Peripherals. He holds B.S. degrees in electrical engineering and naval science
from the University of Wisconsin and an M.B.A. from the Harvard University
Graduate School of Business Administration.
83
<PAGE>
DR. LE GALL joined C-Cube in February 1990 as Director of Research and
Development and was promoted in December 1992 to Vice President of Research and
Development. From 1985 to 1990, he served as a district manager of the Visual
Communications Group at Bell Communications Research, where he was involved with
projects in signal processing for visual communication and high definition
television ("HDTV") compression. He also served as an adjunct professor at
Columbia University from 1985 to 1989. Dr. Le Gall is currently the chairman of
the MPEG video committee. Dr. Le Gall received his M.S. and Ph.D. in electrical
engineering from the University of California, Los Angeles. He holds an M.S. in
physics and mathematics from Ecole Centrale de Lyon in France.
MR. CONNORS joined C-Cube in January 1994 as a consultant and was named Vice
President of Sales in February 1994. From December 1990 until February 1994, he
served as Vice President of North American Sales of Synopsys, Inc., an
electronic design automation software company. From August 1983 to December
1990, Mr. Connors was with LSI Logic, Inc. ("LSI Logic"), a semiconductor
company, most recently serving as Vice President, Strategic Marketing and Sales.
He holds a B.S. degree in engineering from Northern Arizona University.
MR. RASMUSSEN joined C-Cube in February 1992 and was named as Vice President
and General Manager in October 1994 after previously serving as Vice President,
Marketing and Business Development. From April 1983 to March 1992, he worked at
LSI Logic, most recently serving as general manager of the MIPS Microprocessor
Division. Mr. Rasmussen also led their efforts in standard cell and DSP
businesses. Mr. Rasmussen holds a B.S. degree with highest honors in electrical
engineering and computer sciences from the University of California, Berkeley.
MR. DALY joined C-Cube in June 1995 as Vice President of Marketing. From
1990 to 1995 he served at Intel Corporation, a semiconductor company ("Intel"),
most recently as director of marketing for the mobile computing group. He holds
a B.S. degree, cum laude, in electrical engineering from the University of Miami
and an M.B.A. from the University of Dallas.
MR. FU joined C-Cube in January 1994 as Vice President of Hardware
Engineering. From April 1992 to January 1994, he was the Director of Hardware
Engineering at Weitek Corporation, a semiconductor company. From November 1989
to April 1992, Mr. Fu was a co-founder and the President of AQuest Inc., a
systems company in the multimedia and three-dimensional graphics markets. From
June 1980 to November 1989, Mr. Fu was an engineering manager at Intel. Mr. Fu
received a B.S. degree in applied physics and an M.S. degree in electrical
engineering from the California Institute of Technology.
DR. RENJEN joined C-Cube in November 1995 as Vice President of Decoder
Engineering. From May 1993 to November 1995, he was Vice President of System
Products at Alliance Semiconductor, a semiconductor company. From February 1991
to May 1993, Dr. Renjen was co-founder and Architect of Nimbus Technology, a
semiconductor company. Dr. Renjen received an M.S. degree in electrical
engineering from the University of South Carolina, Columbia and a Ph.D. from the
University of Illinois, Urbana-Champaign.
MR. FOREMAN joined C-Cube in November 1994 as Director of Information
Technology. In January 1996 he was appointed Vice President and Chief
Information Officer. During 1994, Mr. Foreman was Vice President of the Intouch
Group and an information systems consultant to Sybase Corporation. From April
1983 to January 1994, Mr. Foreman held management positions at Cypress
Semiconductor, a semiconductor company, including Corporate Controller and
Director of Information Systems. Mr. Foreman holds a B.S., with honors, in
Mechanical Engineering from Villanova University, an M.S. in Systems Engineering
from the University of Pennsylvania and an M.B.A. from the Wharton Graduate
School.
MR. ALLEN joined C-Cube in February 1995 as Vice President of Operations.
From 1987 to 1993 he was Vice President of Worldwide Operations for Cypress
Semiconductor, a semiconductor company. From 1993 to 1995, he was a student at
the Haas School of Business at the University of California, Berkeley. Mr. Allen
holds a B.S. in electrical engineering from Purdue University.
84
<PAGE>
MR. O'MEARA joined C-Cube in September 1991 as President, Chief Executive
Officer and a director. He relinquished his position as President and Chief
Executive Officer and was appointed Vice Chairman of the Board of Directors in
July 1995. From January 1990 until December 1990 he served as President and
Chief Executive Officer, and from August 1988 until January 1990 as Chairman and
Chief Executive Officer of Headland Technology, an entity affiliated with LSI
Logic, Inc. ("LSI Logic"), a semiconductor company. Mr. O'Meara co-founded LSI
Logic in January 1981 and served as Vice President of Worldwide Sales and
Marketing until founding Headland Technology. Mr. O'Meara currently serves on
the board of directors of Sync Research. He holds a B.S. from the U.S. Military
Academy in West Point, New York. Mr. O'Meara is a limited partner of certain
entities affiliated with Sequoia Capital. See "Certain Relationships and
Transactions of C-Cube."
MR. REYES has served on the Board of Directors since July 1992. Since August
1994, Mr. Reyes has been a private investor and management consultant. From
September 1990 to August 1994, he served as Chairman and Chief Executive Officer
of Sunward Technologies, Inc., a provider of rigid disk magnetic recording head
products for the data storage industry. Since August 1994, Mr. Reyes has been on
special assignment to the office of the President of Sunward Technologies, Inc.
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 a Chairman of the Board of Sync Research. Mr. Reyes also
serves as director of Western Microtechnology and several privately-held
companies. He is a limited partner of certain entities affiliated with Sequoia
Capital. See "Certain Relationships and Transactions of C-Cube."
MR. VALENTINE has served as Chairman of the Board of Directors since
December 1992. He has been a General Partner of Sequoia Capital, a venture
capital firm, since 1974. Mr. Valentine is also a Chairman of the Board of
Elantec, Inc. and Network Appliances Corporation, and Vice Chairman of the Board
of Cisco Systems, Inc. and a director of Sierra Semiconductor, Inc.
MR. FUTA has served on the Board of Directors since February 1994. Since
September 1988, he has worked for Cable Television Laboratories, Inc., a
research and development consortium of cable television system operators where
he currently serves as Executive Vice President and Chief Operating Officer.
MR. RODGERS has served on the Board of Directors since January 1994. He
founded Cypress Semiconductor Corporation in 1983, where he currently serves as
President, Chief Executive Officer and a director. Mr. Rodgers also serves as a
director of Vitesse Semiconductor. Mr. Rodgers is a limited partner of certain
entities affiliated with Sequoia Capital. See "Certain Relationships and
Transactions of C-Cube."
There is currently one Class I Director vacancy which will remain open while
the Board of Directors considers candidates to fill such vacancy.
85
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation of
the Chief Executive Officer of C-Cube and the four other most highly compensated
executive officers of C-Cube (together, the "C-Cube Named Executive Officers")
for services rendered to C-Cube during the fiscal years ended December 31, 1995,
1994 and 1993:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- -------------
OTHER ANNUAL SECURITIES ALL OTHER
SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) OPTIONS (#) ($)(3)
- ------------------------------ ------------ --------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alexandre A. Balkanski (4) 1995 187,500 277,345 5,400 500,000 0
President and Chief Executive 1994(5) 140,000 56,316(6) 5,400 50,000 731
Officer 1993(5) 90,000 67,317(6) 5,200 0 14,107
William J. O'Meara (7) 1995 127,500 188,595 0 10,000 28,089
Former President and Chief 1994 164,769 0 0 0 36,413
Executive Officer 1993 164,769 0 0 0 0
Didier Le Gall 1995 161,500 203,607 0 28,500 12,500
Vice President of Research 1994 133,230 0 0 0 12,500
and Development 1993 122,420 0 0 112,750 12,500
Sai-Wai Fu 1995 162,917 192,784 0 0 0
Vice President of 1994 121,167 0 0 N/A 0
Hardware Engineering 1993 N/A N/A N/A N/A
James G. Burke 1995 147,250 173,067 0 25,000 0
Vice President of Finance and 1994 136,750 0 0 0 0
Administration, Chief 1993 130,000 0 0 200,000 0
Financial Officer and
Secretary
Mark Allen 1995 145,337 173,143 0 240,000 0
Vice President of Operations 1994 N/A N/A N/A N/A N/A
1993 N/A N/A N/A N/A N/A
</TABLE>
- ------------------------------
(1) The amounts shown under the Bonus column represents cash bonuses earned for
the fiscal years indicated.
(2) Consists of car allowances.
(3) Consists of amounts forgiven on notes payable to C-Cube.
(4) Dr. Balkanski has served as President and Chief Executive Officer since July
1995. Dr. Balkanski's compensation for 1995 includes compensation he
received for his service as Executive Vice President and Chief Operating
Officer until his appointment to the office of President and Chief Executive
Officer in July 1995.
(5) Reflects compensation received by Dr. Balkanski for his services as C-Cube's
Executive Vice President and Chief Operating Officer.
(6) Consists of sales commissions.
(7) Mr. O'Meara relinquished his position as President and Chief Executive
Officer and was appointed Vice Chairman of the Board of Directors in July
1995. As a consequence, Mr. O'Meara's compensation for 1995 reflects salary
through June 31, 1995, compensation as a consultant from July 1, 1995
through December 31, 1995 and a bonus based on his aggregate compensation
for the year. Mr. O'Meara did not receive any compensation for his service
as Vice Chairman of the Board of Directors other than compensation paid to
all directors for their services.
C-Cube does not have employment contracts with any of C-Cube Named Executive
Officers, or any defined benefit or actuarial plan under which benefits are
determined primarily by final compensation or average final compensation and
years of service.
86
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning the grants of options
to purchase C-Cube Common Stock to the C-Cube Named Executive Officers during
the fiscal year ended December 31, 1995:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS IN FISCAL 1995 POTENTIAL REALIZABLE
- ---------------------------------------------------------------------------------------- VALUE AT
% OF TOTAL ASSUMED ANNUAL RATES
OPTIONS OF STOCK PRICE
GRANTED TO EXERCISE APPRECIATION FOR
OPTIONS EMPLOYEES OR BASE OPTION TERM (2)
GRANTED IN FISCAL PRICE EXPIRATION ------------------------
NAME (#) YEAR ($/SH)(1) DATE 5% ($) 10% ($)
- --------------------------------------- --------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Alexandre A. Balkanski 500,000 12.85 7.50 3/23/05 2,409,258 6,057,589
William J. O'Meara 10,000 0.26 7.50 3/23/05 48,185 121,152
Didier Le Gall 28,500 0.73 7.50 3/23/05 137,328 345,283
Sai-Wai Fu 28,500 0.73 7.50 3/23/05 137,328 345,283
James G. Burke 25,000 0.64 7.50 3/23/05 120,463 302,879
Mark Allen 240,000 6.17 7.50 3/23/05 1,156,444 2,907,643
</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 Commission and do not represent C-Cube's
estimate or projection of the future Common Stock price. Actual gains, if
any, on stock option exercises are dependent on the future performance of
the Common Stock, overall market conditions and the option holders'
continued employment through the vesting period. This table does not take
into account any appreciation in the price of the Common Stock from the date
of grant to date.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the exercise of
stock options by the C-Cube Named Executive Officers during the fiscal year
ended December 31, 1995 and the number and value of securities underlying
unexercised options held by the C-Cube Named Executive Officers at of December
31, 1995:
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY
NUMBER OF UNEXERCISED OPTIONS AT 12/31/95 (2)
SHARES VALUE OPTIONS AT 12/31/95 --------------------------
ACQUIRED ON REALIZED -------------------------- EXERCISABLE UNEXERCISABLE
NAME EXERCISE ($)(1) EXERCISABLE UNEXERCISABLE ($) ($)
- ------------------------------ ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alexandre A. Balkanski 67,454 599,145 133,587 448,959 7,566,601 24,743,633
William J. O'Meara -- -- 1,667 8,333 91,685 458,315
Didier Le Gall 102,004 1,161,646 3,538 70,708 210,533 4,205,783
Sai-Wai Fu 37,500 300,000 39,125 101,875 2,358,125 6,071,875
James G. Burke -- -- 4,167 20,833 229,185 1,145,815
Mark Allen -- -- -- 240,000 -- 13,200,000
</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 $62.50 per share, which was the closing price
per share of C-Cube's Common Stock on the Nasdaq National Market on December
29, 1995, less the option exercise price payable per share.
87
<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS OF C-CUBE
During December 1992, certain agreements originally entered into in August
1988 between C-Cube and Kubota Corporation ("Kubota"), a holder of record of
more than 5% of outstanding shares of C-Cube, were amended to provide that
Kubota will continue to guarantee through March 31, 1996 a bank debt of up to
Y700,000,000 of Kubota C-Cube, Inc. ("KCC"), a joint venture formed by the
C-Cube and Kubota. Pursuant to a subsequent amendment to such agreements, Kubota
agreed to continue to guarantee decreasing amounts during the following periods:
up to Y450,000,000, Y250,000,000 and Y125,000,000 following the first, second
and third anniversaries of such closing of C-Cube's initial public offering,
respectively, with such guarantee expiring in its entirety three years and six
months after such closing. C-Cube also agreed to issue to Kubota a warrant to
acquire up to 350,000 shares of its Common Stock at a per share price of $0.70
only in the event that Kubota is required to make payments under such guarantee
and is not reimbursed by the C-Cube.
In June 1993, C-Cube granted an option to Pierre Lamond to purchase up to
50,000 shares of its Common Stock at a price per share of $1.00, which option
was subsequently exercised. The option was granted in connection with Mr. Lamond
providing certain engineering management services and assistance to C-Cube. The
shares issued upon exercise of the option vest over a period for four years, and
unvested shares are subject to repurchase by C-Cube at the original purchase
price in the event of the termination of Mr. Lamond's services to C-Cube. Mr.
Lamond is a general partner of Sequoia Capital. Entities affiliated with Sequoia
Capital hold of record more than 5% of outstanding shares of C-Cube.
In payment of the exercise price of options to purchase C-Cube's Common
Stock exercised in February 1993 and October 1993 by William J. O'Meara and
James G. Burke, respectively, C-Cube accepted promissory notes from Mr. O'Meara
and Mr. Burke in the principal amounts of $525,000 and $70,000, respectively,
with interest payable at rates of 6.22% and 5.00% per annum, respectively. As of
December 31, 1995, the balances due on such loans were approximately $44,390 and
$17,000, respectively. Such loans are payable in full in February 1997 and
October 1997, respectively. Mr. O'Meara is a director of C-Cube and Mr. Burke is
an officer of C-Cube.
C-Cube granted a nonqualified stock option to Donald T. Valentine in
February 1993, but through an oversight failed to deliver the option to Mr.
Valentine in a timely manner. As a result, Mr. Valentine incurred less favorable
tax consequences when he exercised the option than he would have incurred had
the option been timely issued by C-Cube and exercised immediately thereafter by
Mr. Valentine. C-Cube, however, gained from this oversight by receiving a tax
benefit. To rectify this matter, in June 1994 C-Cube entered into a tax
agreement with Mr. Valentine pursuant to which C-Cube (i) made payments to Mr.
Valentine of $192,267, the amount necessary to compensate him for the adverse
tax consequences, (ii) guaranteed a loan from a bank to Mr. Valentine in the
amount of $279,647 and (iii) made payments to Mr. Valentine in an amount
sufficient to compensate Mr. Valentine for the interest thereon. The results of
this arrangement have not adversely affected C-Cube's cash flow, and C-Cube
believes that the overall consequences of this arrangement to its financial
performance in any period were not significant.
88
<PAGE>
C-CUBE STOCKHOLDERS
The following table sets forth certain information, as of February 29, 1996,
with respect to the beneficial ownership of C-Cube's Common Stock by (i) each
person known to C-Cube to beneficially own 5% or more of the outstanding Common
Stock of C-Cube, (ii) each director of C-Cube, (iii) each C-Cube Named Executive
Officer and (iv) all directors and executive officers of C-Cube as a group.
Except pursuant to applicable community property laws or as otherwise noted, the
persons named in the table have sole voting and investment power with respect to
all shares indicated as being beneficially owned by them.
<TABLE>
<CAPTION>
C-CUBE COMMON STOCK
------------------------
NAME AND ADDRESS OF NUMBER OF PERCENT
BENEFICIAL HOLDER SHARES OF CLASS
----------------------- ----------- -----------
<S> <C> <C>
Kubota Corporation (1)...................................... 3,522,200 10.7%
Fuyuhiko Usui
2880 Lakeside Drive, Suite 131
Santa Clara, CA 95087
Entities affiliated with Sequoia Capital (2)................ 2,029,711 6.2%
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
OFFICERS AND DIRECTORS (3)
Donald T. Valentine (2)..................................... 2,029,711 6.2%
William J. O'Meara (4)...................................... 1,038,799 3.2%
Alexandre A. Balkanski (5).................................. 399,619 *
Sai-Wai Fu (6).............................................. 125,700 *
James G. Burke (7).......................................... 80,191 *
T.J. Rodgers (8)............................................ 105,631 *
Didier Le Gall (9).......................................... 83,730 *
Baryn S. Futa (10).......................................... 42,919 *
Gregorio Reyes (11)......................................... 22,785 *
Mark Allen (12)............................................. 11,737 *
All directors and executive officers of C-Cube as a group
(15 persons) (2)-(13)...................................... 4,283,742 12.7%
</TABLE>
- ------------------------
* Less than 1%
(1) Includes 40,000 shares subject to an option held by Fuyuhiko Usui that is
exercisable within 60 days of February 29, 1996. Mr. Usui is a consultant to
and former director of C-Cube and is a General Manager of Kubota
Corporation. As General Manager of Kubota Corporation, Mr. Usui may be
deemed to beneficially own the 3,482,200 shares owned by Kubota Corporation,
however, Mr. Usui disclaims beneficial ownership for all of such shares.
Likewise, Kubota Corporation disclaims beneficial ownership of shares
subject to the option held by Mr. Usui.
(2) Includes 974,995 shares held by Sequoia Capital Growth Fund, 805,750 shares
held by Sequoia Capital V, 51,940 shares held by Sequoia Technology Partners
III, 53,716 shares held by Sequoia Technology Partners V and 35,810 shares
held by Sequoia XXII. Sequoia Capital Growth Fund, Sequoia Capital V,
Sequoia Technology Partners III, Sequoia Technology Partners V and Sequoia
XXII are entities affiliated with Sequoia Capital. Also includes the
following held by Donald T. Valentine: (i) 79,167 shares, (ii) 20,833 shares
which remain unvested as of the date 60 days from February 29, 1996 and
subject to a right of repurchase by C-Cube which right lapses as such shares
become vested thereafter and (iii) 7,500 shares subject to an option that is
exercisable within 60 days from February 29, 1996. Mr. Valentine is a
general partner of each of such entities affiliated with Sequoia Capital
and, therefore, may be deemed to beneficially own such shares held by such
entities. However, Mr. Valentine disclaims beneficial ownership of all such
shares
89
<PAGE>
held by entities affiliated with Sequoia Capital except those shares as to
which he has a direct pecuniary interest. Likewise such entities disclaim
beneficial ownership of all shares owned by Mr. Valentine.
(3) All officers and directors of C-Cube may be contacted at the following
mailing address: C-Cube Microsystems Inc., 1778 McCarthy Boulevard,
Milpitas, California 930335.
(4) Includes 2,148 shares held of record by entities affiliated with Sequoia
Capital which are beneficially owned by Mr. O'Meara, who is a limited
partner of such entities. Also includes 2,500 shares subject to an option
that is exercisable within 60 days of February 29, 1996.
(5) Includes 162,546 shares subject to options that are exercisable within 60
days of February 29, 1996.
(6) Includes 112,500 shares subject to an option that is immediately
exercisable, 46,875 of which shares are vested as of 60 days from February
29, 1996. Also includes 7,125 shares subject to an option that is
exercisable within 60 days of February 29, 1996.
(7) Includes 29,167 shares which remain unvested as of the date 60 days from
February 29, 1996 and subject to a right of repurchase by C-Cube which right
lapses as such shares become vested thereafter. Also includes 6,250 shares
subject to an option that is exercisable within 60 days of February 29,
1996.
(8) Includes 100,000 shares subject to an option that is immediately
exercisable, 56,250 of which shares are vested as of 60 days from February
29, 1996, and 2,504 shares held of record by entities affiliated with
Sequoia Capital which are beneficially owned by Mr. Rodgers who is a limited
partner of such entities. Also includes 3,125 shares subject to an option
that is exercisable within 60 days of February 29, 1996.
(9) Includes 15,309 shares subject to options that are exercisable within 60
days of February 29, 1996 and 63,440 shares held in a trust for the benefit
of Mr. Le Gall and his wife.
(10) Includes 40,000 shares subject to an option that is immediately
exercisable, 21,667 of which shares are vested as of 60 days from February
29, 1996. Also incudes 2,917 shares subject to an option that is exercisable
within 60 days of February 29, 1996.
(11) Includes 1,324 shares held of record by entities affiliated with Sequoia
Capital which are beneficially owned by Mr. Reyes, who is a limited partner
of such entities. Also incudes 3,125 shares subject to options that are
exercisable within 60 days of February 29, 1996.
(12) Includes 10,000 shares subject to options that are exercisable within 60
days of February 29, 1996.
(13) Includes 50,000 shares which remain unvested as of the 60 days from
February 29, 1996 and subject to a right of repurchase by C-Cube which right
lapses as such shares become vested thereafter and 382,708 shares subject to
options that are immediately exercisable, 145,625 of which shares are vested
as of 60 days from February 29, 1996. Also includes 429,084 shares subject
to options that are exercisable within 60 days of February 29, 1996.
90
<PAGE>
INFORMATION CONCERNING DIVICOM
DiviCom Inc. ("DiviCom"), incorporated in Delaware in 1993, is a supplier of
MPEG 2-based systems, subsystems and components that are a part of the emerging
worldwide digital video infrastructure. DiviCom develops and integrates products
and systems that transmit and receive digital video, audio and data over
networks allowing its customers to create integrated "end-to-end" digital video
networks. DiviCom is focused on merging video and audio compression technologies
with network and communications technologies into innovative products for
producers, distributors and consumers of video and video-enhanced information.
Products include Moving Pictures Experts Group ("MPEG") audio/video encoders,
networking and decoding systems, as well as integration services through its
DiviSys Integration Group. Based on the MPEG 2, Digital Video Broadcasting
("DVB") and Asynchronous Transfer Mode ("ATM") international standards,
DiviCom's products enable digital video broadcasting over a variety of digital
video networks, including Direct Broadcast Satellite ("DBS"), wireless cable,
also known as Multichannel Multipoint Distribution Systems ("MMDS"), and wired
services, including Switched Digital Video ("SDV") services, digital cable, or
Hybrid Fiber Coax ("HFC") and copper twisted pair wiring referred to as
Asynchronous Digital Subscriber Line ("ADSL").
BACKGROUND
Historically, video and audio have been transmitted in analog form via
terrestrial broadcast, satellite and microwave transmissions as well as cable
distribution systems. This same information is now increasingly being
transmitted in digital form. Transmission of information in digital form is more
efficient, achieves better quality and is more reliable than transmission in
analog form. The greater efficiency of digital transmission is primarily due to
the fact that the digital information can be compressed by using algorithms that
maintain perceived visual and audio quality, while reducing the volume of the
data transmitted.
Companies engaged in the business of transmitting digital video data are
increasingly searching for products and tools that afford ever greater
compression capabilities. The ability to compress large quantities of digital
data is emerging as a key competitive factor for these companies because it
allows them to deliver more information to end users without increasing their
investment in additional transmission media (E.G., cable, telephone lines or
satellite transponders).
In order to compress, transmit and receive digital video data, these
companies must acquire, integrate and use a wide variety of sophisticated new
system and network technologies. Because these new technologies are diverse and
complex, many of these companies can benefit from integration services provided
by companies that are experienced with these technologies.
To meet the often conflicting goals of interoperablility, reliability and
efficiency, nearly all new systems for broadcasting digital video implement new
standards such as MPEG 2, DVB and (where applicable) ATM. In some cases,
companies that have previously provided proprietary analog-based solutions have
developed their own proprietary digital-based solutions (or created proprietary
solutions where there are no standards, such as conditional access).
Increasingly, companies that broadcast video realize that they need to foster
interoperability and competition among their equipment vendors. Accordingly,
adherence to common standards is a key requirement for suppliers in this market.
DiviCom offers open systems based on industry standards that allow these
companies to compress, transmit and receive large quantities of digital video
information. DiviCom provides "end-to-end," standards-based solutions for its
customers. This means that DiviCom's systems products allow its customers to
compress information, scramble the transmission and remultiplex (I.E., add
portions such as advertisements as well as delete portions), then assist in
transmitting the information. When the information reaches its destination,
DiviCom's decoder products assist in receiving, descrambling and decompressing
the information so that the information can be viewed.
91
<PAGE>
BUSINESS MODEL
DiviCom designs, manufactures and sells digital video networking systems, as
well as integration, maintenance and support services. DiviCom also manufactures
complete receiving units referred to as decoders for low-volume professional and
private network applications as well as license its settop decoder designs to
large consumer settop box manufacturers for high volume production.
MARKETS AND APPLICATIONS
DiviCom currently sells its products and services into several market
segments, including direct broadcast satellite, broadcast over wireless cable
systems and wired digital video networks, such as SDV, HFC and twisted pair.
DIRECT BROADCAST SATELLITE
The first full-scale digital video transmission systems were direct
broadcast satellites ("DBS") (often called Direct to Home) networks. The
advantages of DBS are that it provides a low cost per home and also requires
little or no investment or upgrading of infrastructure (rewiring). The
disadvantages are the high initial fixed cost of launching a satellite as well
as the lack of interactivity and unavailability of local programming content.
WIRELESS CABLE OR MMDS
Multichannel Multipoint Distribution Systems are beginning conversion from
analog to digital at this time. Such systems are based upon local transmitters
with direct line of sight transmission to a small receiving antenna placed on
each home. MMDS have low fixed costs and a moderate cost per home. MMDS supports
local content and has a moderate level of interactivity, such as Internet
support.
WIRED DIGITAL VIDEO NETWORKS
Wired digital video networks, which include deployments in architecture such
as SDV, HFC and twisted pair schemes such as ADSL, are currently in early
trials. Each of these are being evaluated and may be deployed by leading telecom
suppliers as well as digital cable providers. These services provide a much
higher level of interactivity as compared to either DBS or MMDS including the
potential for full two-way video communication. However, cost per home is high.
In addition to providing products and services in support of large
deployments such as DBS, wireless cable and SDV, DiviCom products are used in a
variety of other video applications. Such applications include equipment which
enables digital transmission from remote sites to a studio (contribution), from
studios to cable head ends (distribution) and the use of digital video and audio
within businesses, educational facilities and institutions (private networks).
RELEVANT STANDARDS
DiviCom believes that customers strongly prefer solutions built on standards
in order to achieve interoperability. DiviCom focused its efforts on three key
standards: MPEG 2, ATM and DVB.
MPEG 2 is a standard for audio and video compression and multiplexing
developed under the auspices of the Moving Pictures Experts Group of the
International Standards Organization. MPEG 2 was adopted at an international
conference in Singapore in 1994 with 32 nations participating in the definition
of standards for three elements of compression: video, audio and the
synchronization of audio and video. Equipment must meet the standards of all
three elements in order to be MPEG compliant (International Standards
Organization (ISO) Document Number IEC 11172).
Asynchronous Transfer Mode ("ATM") is a specification for the routing and
transmission of data over high-speed switched digital lines, typically fiber.
The protocol is being specified in many switched digital video network
deployments.
DVB is a group of government and industry representatives, based in Europe,
who have assembled a specification which is intended to promote standardization
and interoperability among the
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components required to build digital video networks. The specification calls for
the use of MPEG 2 transport streams and also specifies modulation, elements of
access control, on-screen display and other system level requirements.
PRODUCTS
DiviCom supplies products for digital video networking in the form of
systems and decoder components. System offerings consist of products that
encode, manipulate and managed digital video and audio data signals. Decoder
technology is provided as components of complete systems, licensed decoder
reference products to allow high-volume manufacturing, and settop ASICs, as well
as software and microcode. The range of products is:
- The MediaView-TM- MV20 program encoder for compressing digital video,
audio and data signals
- The MediaNode-TM- MN20 multiplexer for switching and networking
- The MediaView System Controller-TM- SC20 for network and system management
- The MediaNode Platform MP100-TM- for spooling, editing, and decoding
transport streams
- The ProView-TM- commercial integrated receiver decoder for monitoring and
distribution
- The Di2-K settop decoder manufacturing kit intended to enable OEMs to
manufacture high volumes of home settop decoder boxes
SYSTEMS PRODUCTS
Systems products offerings consist of encoders, multiplexers, system
management and insertion products. Encoders compress video and audio signals
into MPEG 2 "transport" streams to be sent out over various networks.
Multiplexers provide for the manipulation of compressed audio/video streams,
including adding and dropping streams, ensuring the timing fidelity and
synchronization of streams, extracting and inserting control information,
scrambling for conditional access, inserting related and unrelated data streams,
and monitoring signal fidelity. Management systems consist of a Simple Network
Management Protocol ("SNMP") based software system which is capable of
configuring and monitoring a network of components ranging from analog
audio/video switching to multiplexing. Insertion products are designed to insert
local and/or commercial programming material for local distribution into a
stream from a wider network broadcast. DiviCom's systems products encompass a
range of products developed by DiviCom as well as integration services to
combine these products with third party products to deliver complete digital
video networking systems.
MEDIAVIEW MV20: DiviCom's MediaView MV20 encoder offers a flexible MPEG 2
compression system in a very compact form factor. The MediaView MV20 compresses
one video signal and two or more stereo audio channels, and outputs a compressed
transport stream which is fully compliant with the MPEG 2 international
standards. The MediaView MV20 supports numerous digital and analog audio inputs,
multiple video input formats, data inputs, multiplexing, conditional access
support and output formats, including ATM. Due to its plug-and-play flexibility,
the MediaView MV20 is suited for a wide variety of applications, including
Direct-to-Home (DTH)/Direct Broadcast Satellite (DBS), business television/
private networks, cable & telco -- MMDS, switched digital and digital cable,
contribution and back-haul links, and satellite distribution to cable head-ends.
MEDIANODE MN20: The MediaNode MN20 remultiplexes and grooms MPEG 2
transport streams generated by DiviCom and other system components into the form
of a final MPEG 2 transport stream. The MediaNode MN20 is especially effective
at handling compression applications where multiple video, audio and data
signals are required, or complex multichannel audio needs must be met. It also
acts as a gateway to and from ATM networks. The MediaNode MN20 can be configured
to support a wide range of requirements including statistical multiplexing,
redundant switching, audio only encoding, scrambling for access control of the
combined MPEG 2 transport stream as well as ATM inputs and outputs. The
MediaView MV20 is used for remultiplexing MPEG 2 transport
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streams, dynamic rate optimization, add/drop multiplexing, cascaded
multiplexing, redundant switching, audio-only encoding, data-only multiplexing,
conditional access, scrambling and data insertion into the MPEG 2 transport
stream, ATM input, dejittering, formatting and output.
MEDIAVIEW SYSTEM CONTROLLER SC20: The MediaView System Controller SC20
utilizes Windows NT-TM- and HP OpenView-TM- SNMP management software with
DiviCom's applications to configure and monitor any collection of DiviCom
networked components. The SC20 offers an easy-to-use graphical user interface
which includes status, interconnection maps, and context sensitive help. The
MediaView SC20 is used for system configuration, encoding and multiplexing
control, system backup control, monitoring and control at system, component, and
module levels and detection, display, and logging of system faults.
MEDIANODE PLATFORM MP100: The MediaNode Platform MP100 is a Windows
NT-based, real-time insertion and decoding system. It allows a user to decode,
record and playback MPEG 2 transport streams through a graphical interface. The
MP100 comes pre-installed with an MPEG 2 decoder card and media spooler control
software.
DECODER PRODUCTS AND TECHNOLOGY
DiviCom offers system, software and ASIC solutions for commercial decoders
as well as high volume settop boxes. These settop boxes, similar to today's
cable box, decompress video, audio and data signals, enabling consumers to
receive many more stations of programming than most traditional cable
programmers can offer as well as receive advanced services such as home
shopping, video on demand, interactive games and Internet access.
PROVIEW PV 1110/1120/1130 COMMERCIAL DECODER PRODUCTS: DiviCom's ProView
family of commercial Integrated Receiver Decoders ("IRDs") are designed to
provide high quality, secured video, audio, and data services for program
distribution. The PV series also offers flexibility in both hardware and
software for easy customization and fast feature upgrades. The PV series
consists of a digital satellite receiver and MPEG 2 decoder integrated into a
compact chassis intended for rackmount applications. The receiver provides
connection with wideband communications channels. The decoder provides
descrambling, demultiplexing, video/audio decoding, and data services.
DI2-K SETTOP REFERENCE PRODUCT: DiviCom's family of settop designs provide
the flexibility to customize basic designs for individual customer needs while
using industry accepted standards. The Di2-K design is a digital settop for
deployment in various high-volume network configurations.
DIVICOM ASIC PRODUCTS
In addition to settop designs, DiviCom offers settop ASIC components. These
ASICs are designed to enable manufacturers to implement highly integrated
decoder-based products. These ASICs are offered through exclusive licensing from
DiviCom. One exception is the CL9110 Transport Demultiplexer, which is available
from C-Cube under license from DiviCom.
DIVICOM SOFTWARE PRODUCTS
DiviCom has developed a number of extensions and enhancements to Microware's
DAVID OS/9 environment that DiviCom plans to augment and market as DiviCom
software. The type of software DiviCom would market would include FLASH trap
handle, smartcard access, conditional access control query interface,
application downloading support and certain DVB extensions. In addition, there
are many application modules and unique driver features which DiviCom provides
that do not involve an API for other applications.
PROFESSIONAL SERVICES AND CUSTOMER SUPPORT
DIVISYS-TM-. In order to provide its customers the help they need piecing
together complex digital broadcast television systems, DiviCom launched DiviSys,
a technology integration group whose mission is to provide a whole product
solution to DiviCom customers for applications such as satellite uplinks,
satellite downlinks, MMDS, ATM networks for content distribution and automation
and control systems. DiviSys provides all of the consulting and implementation
services required to build a digital broadcast system, including program
management, budget analysis for various types of networks, building and site
preparation, technical design and planning, parts inventory and management,
equipment installation, signal reception and transmission integration and
end-to-end system
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testing. DiviSys utilizes DiviCom's expertise in the areas of TV broadcast,
networking, and compression technology to define, integrate, and install
complete operational systems. The group combines DiviCom products with
third-party products and services to satisfy the specific system requirements of
each customer.
DIVITEC-TM-. DiviTec is DiviCom's comprehensive service-on-demand support
program. The DiviTec Service Agreement is a cost effective combination of
services, training and software designed to meet each customer's particular
maintenance and upgrade needs. There are three distinct service options
available to DiviCom customers through the DiviTec plan. Each plan provides the
customer with varying levels of service and support designed to match the size
and scope of the customer's operation.
CUSTOMERS
DiviCom sells the majority of its products under contracts to large,
established telecommunications, entertainment, and direct-to-home satellite
companies, consortia and joint ventures in North America and Europe. Bell
Atlantic, EchoStar and certain SAGEM Entities, which are two DiviCom customers
and one of its distributor accounted for 42%, 25% and 15% of net revenues,
respectively, in 1995 and 39%, 31% and 13% of net revenues, respectively, in
1994. During 1993, no individual customer represented 10% or more of net
revenues. The following table includes a representative list of customers based
on revenues and market segment:
<TABLE>
<CAPTION>
INDUSTRY DIRECT CUSTOMER DEPLOYMENT
<S> <C> <C>
Direct Broadcast EchoStar Communications EchoStar
Satellite
Wireless Cable Thomson Consumer Electronics TeleTV
Switched Digital Bell Atlantic Network Services Bell Atlantic Video Dial
Tone
Other Applications ComStream Reuters
Direct Broadcast SAGEM Various European Deployments
Satellite
</TABLE>
There can be no assurance that such customers will continue to account for a
significant percentage of revenues in the future. The loss of any such customers
could have a material adverse effect on business and results of operations.
MARKETING AND SALES
DiviCom markets and sells its products in the United States through a direct
sales force with sales and support offices in several cities around the country.
In Europe, DiviCom has traditionally sold its products through Groupe SAGEM,
which is based in France. DiviCom is establishing distributors in Norway,
Germany and South Africa. In Asia-Pacific, DiviCom sells its products both
through a direct sales force and through distributors based in Korea, Hong Kong,
Taiwan, Australia, New Zealand and India.
DiviCom promotes its products to potential customers through participation
in major industry trade shows, through articles in key industry publications,
through other public relations programs and through advertising.
During 1995 international revenues accounted for approximately 18% of
Divicom's net revenues and DiviCom believes that international revenues will
continue to account for a significant portion of net revenues. DiviCom's success
will depend in part upon its ability to manage international marketing and sales
operations and manufacturing relationships. In addition, DiviCom purchases a
substantial proportion of its raw materials and certain key components from
foreign suppliers. DiviCom's international manufacturing and sales are subject
to changes in foreign political and economic conditions and to other risks
including currency exchange rate fluctuations or export/import controls and
changes in tax laws, tariffs and freight rates. Certain foreign countries
comprise substantial markets for consumer electronics products and as a
consequence, any political or economic instability in such
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countries could significantly reduce demand for products from certain of the
DiviCom's major customers. DiviCom's purchases and sales of goods 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
DiviCom's products relative to competitive products priced in the local
currency.
MANUFACTURING
DiviCom's manufacturing strategy is focused on the rapid transition of
products from engineering development to production. DiviCom makes extensive use
of the services of electronic component suppliers, referred to as manufacturing
distributors, and subcontract assembly houses in order to minimize inventory
risks, gain competitive pricing and increase supply flexibility.
DiviCom's manufacturing group establishes relationships with key supply and
subcontract partners. Electronic component distributors are responsible for the
procurement and "kitting" of components in preparation for contract assembly.
Once a product or subsystem has demonstrated design stability, it is
transitioned from the DiviCom engineering group to full turnkey assembly and
managed by the manufacturing distributor. The manufacturing distributor
purchases components to DiviCom specifications, contracts with the assembly
facility to perform product builds and ships completed subsystems to DiviCom.
DiviCom conducts final integration, system testing, reliability and quality
assurance testing and configuration per customer requirements.
DiviCom's reliance on subcontractors to manufacture, assemble and test 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 DiviCom's intellectual
property. DiviCom obtains manufacturing capacity through forecasts that are
generated in advance of expected delivery dates and are binding on DiviCom.
Although DiviCom has not experienced material disruptions in supply to date,
there can be no assurance that manufacturing or assembly problems will not occur
in the future or that any such disruptions will not have a material adverse
effect upon DiviCom's results of operations. Further, there can be no assurance
that suppliers who have committed to provide product will do so, or that DiviCom
will meet all conditions imposed by such suppliers. Failure to obtain an
adequate supply of products on a timely basis would delay product delivery to
DiviCom's customers, which would have a material adverse effect on DiviCom's
business and results of operations. In addition, DiviCom's business could also
be materially and adversely affected if the operations of any supplier are
interrupted for a substantial period of time, or if DiviCom is required, as a
result of capacity constraints in its industry or otherwise, to increase the
proportion of goods purchased from higher cost suppliers in order to obtain
adequate product volumes.
The markets into which DiviCom sells its products are characterized by
extreme price competition, and DiviCom expects the average selling prices of its
products will decrease over the life of each product. In order to partially
offset declines in the selling price of its products, DiviCom will need to
reduce the cost of its products by implementing cost reduction design changes,
obtaining cost reductions as and if volumes increase and successfully managing
manufacturing and subcontracting relationships. Since DiviCom does not operate
its own manufacturing facilities and must make binding commitments to purchase
products, it may not be able to reduce its costs as rapidly as companies that
operate their own manufacturing facilities. The failure of DiviCom to design and
introduce lower cost versions of DiviCom's products in a timely manner or to
successfully manage its manufacturing relationships would have a material
adverse effect on DiviCom's business and results of operations.
RESEARCH AND DEVELOPMENT
During fiscal 1993, 1994, and 1995, research and development expenses were
$1.4 million, $8.5 million and $13.5 million, respectively. DiviCom anticipates
that it will continue to commit substantial resources to research and
development in the future. As of June 30, 1996, DiviCom had over 89 employees
engaged in research and development.
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DiviCom's current research and development efforts focus on continued
development of its MPEG 2 encoders, MPEG 2 digital networking products, system
control and management software, and settop box design. The goal is to provide
essential building blocks to address key market segment needs.
DiviCom's encoder system is based on a C-Cube encoder chip set with
DiviCom's pre-processing capability. DiviCom expects to continue to enhance the
video quality and compression efficiency of its encoder system. For the MPEG 2
digital networking products, DiviCom plans to enhance its capability to support
multiple broadcasting networks such as DBS, SDV, HFC, and ADSL. For system
control and management software, the focus is on ease of management, redundancy
support and integration with multiple conditional access systems. The settop box
designs include ASIC designs and interactive TV software development.
COMPETITION
In its compression and networking business, DiviCom competes with vertically
integrated system suppliers including General Instrument, Scientific Atlanta and
Philips, as well as more specialized suppliers including the DMV division of
News Corp., Nuko and the TV/COM subsidiary of Hyundai. DiviCom believes that it
competes favorably based on its expertise and focus in the area of digital video
network systems and its constituent components such as digital video
compression, digital network and transmission technology. In addition, DiviCom
possesses the practical knowledge and experience required to design,
manufacture, integrate and support such systems in real-world deployments.
Several of these competitors, including General Instruments, Scientific
Atlanta, TV/COM, DMV (formerly NTL), Philips and Wegener have been established
in the analog technology market for many years. Others, such as Compression
Labs, Nuko, Tadiran/Scopus, and Tiernan, have come into the market in recent
years as the early stages of digital technology emerged. The only competitor to
emerge early with an MPEG 2 product with a discrete design was DMV.
DiviCom and DiviCom's consumer settop box technology licensees compete with
traditional cable industry settop box suppliers, such as General Instrument and
Scientific Atlanta, as well as consumer electronics companies (which may choose
to license DiviCom technology or compete with DiviCom and its licensees) such as
Thomson Consumer Electronics, Philips, Sony, Matsushita, Mitsubishi, Zenith,
Hyundai, and Samsung. DiviCom competes by providing chips, software, and system
designs that provide more advanced features more economically than are typically
available elsewhere.
DiviCom expects that successful companies in this industry will be those
that provide the deployable, affordable end-to-end solutions that support
open-standard, industry-accepted architectures. Delivering a low cost digital
settop or other highly integrated solution as well as the broadcast video, audio
and data systems, is a key factor for successful participation in the digital
television revolution.
The markets in which DiviCom competes are intensely competitive and are
characterized by declining average selling prices and rapid technology change.
DiviCom believes that the principal factors of competition in its markets are
product definition, product design, system cost, functionality, time-to-market,
reliability and reputation. DiviCom believes it competes favorably with respect
to most of these factors. DiviCom competes with major domestic and international
companies, most of which have substantially greater financial and other
resources than DiviCom with which to pursue engineering, manufacturing,
marketing and distribution of their products. Some of these companies own
proprietary video compression technology competitive with DiviCom's
standards-based systems. DiviCom may also face increased competition in the
future from new entrants into its markets. In particular, as the markets for
DiviCom's products develop, competition from large companies may increase
significantly. The ability of DiviCom to compete successfully in the rapidly
evolving markets for high performance audio/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 DiviCom products
by effective utilization of intellectual property laws, product quality,
reliability, price and the efficiency of
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production, the pace at which customers incorporate DiviCom's products into
their products, success of competitors' products and general economic
conditions. There can be no assurance that DiviCom will be able to compete
successfully in the future.
PROPRIETARY RIGHTS
DiviCom uses various means to protect its proprietary and intellectual
property including non-disclosure agreements, patents, trademarks, copyrights,
license agreements, contractual agreements and trade secrets.
The DiviCom encoder products are complex custom programmed devices, embedded
software and multi-layer boards, which makes reverse engineering difficult. The
decoder products contain ASICs which are even more difficult to copy. There are,
however, no assurances that they will not be copied. The encoder and decoder
products also incorporate technology that is the subject of seven patent
applications filed in the United States. DiviCom has not filed for patents
outside the United States. DiviCom's software, documentation and other written
materials have only limited protection under copyright and trademark laws. These
products contain licensed third party content. These products also contain
technology (such as required to meet MPEG standards) for which licenses may be
needed under terms yet to be determined.
There can be no assurance that DiviCom's means of protecting its proprietary
rights will be adequate or that DiviCom's competitors will not independently
develop similar technology. There can be no assurance that third parties will
not assert claims against DiviCom with respect to existing or future products or
that licenses will be available on reasonable terms, or at all, with respect to
any third-party technology including third-party technology which is or may be
embodied in standards. In the event of litigation to determine the validity of
any third-party claims, such litigation could result in significant expense to
DiviCom and divert the efforts of DiviCom's technical and management personnel,
whether or not such litigation is determined in favor of DiviCom. In the event
of an adverse result in any such litigation, DiviCom could be required to pay
substantial amounts in damages and to cease selling the infringing product
unless and until DiviCom is able to develop non-infringing technology or to
obtain licenses to the technology which was the subject of the litigation. There
can be no assurance that DiviCom would be successful in such development or that
such licenses would be available, and any such development or license could
require expenditure of substantial time and other resources.
DiviCom believes that the rapid pace of innovation within its industry and
the skills of its personnel afford more protection of its proprietary rights
than the various legal means.
EMPLOYEES
As of June 30, 1996, DiviCom had a total of 184 employees, of whom 89 were
engaged in research and development, 22 in sales and marketing, 22 in
professional services and technical support, 30 in operations and 21 in
administration, finance, MIS and facilities. DiviCom's future success depends in
significant part upon the continued service of its key technical and senior
management personnel and its continuing ability to attract, train and retain
highly qualified technical and managerial personnel. Competition for such
personnel in the video networking industry is intense and there can be no
assurance that DiviCom can attract, train or retain other highly qualified
technical and managerial personnel in the future. None of DiviCom's employees
are represented by a labor union. DiviCom has not experienced any work stoppages
and considers its relations with its employees to be good.
FACILITIES
DiviCom's corporate headquarters occupy an aggregate of approximately 46,000
square feet in Milpitas, California, under a lease that expires in February
1999. DiviCom's Development, Administrative, Sales, Marketing, and Customer
Support functions are located at this location. DiviCom's Operations
organization is located in a 20,800 square foot facility, in Milpitas, under a
lease that expires in December 1997. DiviCom has an additional engineering
development facility that occupies 1,640 square feet in Boulder, Colorado, under
a lease that expires in June 1997. DiviCom's U.S. East
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Coast Sales Office is located in McLean, Virginia, and occupies 2,267 square
feet, under a lease that expires in December 1997. DiviCom believes that its
existing facilities are adequate for its current needs and that additional space
will be available at commercially reasonable terms as needed.
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SELECTED CONSOLIDATED FINANCIAL DATA OF DIVICOM
The following selected consolidated financial data with respect to DiviCom's
statement of operations for the years ended December 31, 1993, 1994 and 1995 and
with respect to DiviCom's balance sheets as of December 31, 1995 and 1994 have
been derived from DiviCom's audited financial statements, which appear elsewhere
in this Proxy Statement/Prospectus. This information should be read in
conjunction with those financial statements and the notes thereto. The following
selected financial data as of June 30, 1996 and 1995 and for the six month
periods ended June 30, 1996 and 1995 have been derived from the unaudited
financial statements of DiviCom and in the opinion of management, include all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the financial statements for the periods indicated. The results
of operations for the six month period ended June 30, 1996 are not necessarily
indicative of the results to be expected for the full year.
<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS ENDED
ENDED YEARS ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, (UNAUDITED)
------------ --------------------- ----------------------
1993 1994 1995 1995 1996
------------ ---------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net revenues...................................... $ -- $ 319 $ 34,119 $ 13,177 $ 22,545
Costs and expenses:
Cost of revenues................................ -- 156 16,451 7,272 9,954
Research and development........................ 1,407 8,460 13,572 7,016 6,809
Selling, general and administrative............. 539 2,615 5,275 2,136 4,575
------------ ---------- --------- --------- -----------
Total......................................... 1,946 11,231 35,298 16,424 21,338
------------ ---------- --------- --------- -----------
Operating income (loss)........................... (1,946) (10,912) (1,179) (3,247) 1,207
Interest income, net.............................. 39 104 163 48 149
------------ ---------- --------- --------- -----------
Income (loss) before provision for income taxes... (1,907) (10,808) (1,016) (3,199) 1,356
Income tax expense (benefit)...................... -- -- (169) -- 624
------------ ---------- --------- --------- -----------
Net income (loss)................................. $ (1,907) $ (10,808) $ (847) $ (3,199) $ 732
------------ ---------- --------- --------- -----------
------------ ---------- --------- --------- -----------
Net income (loss) per share....................... $ (2.78) $ (5.83) $ (0.11) $ (0.44) $ 0.02
------------ ---------- --------- --------- -----------
------------ ---------- --------- --------- -----------
Shares used in computation........................ 686 1,854 7,670 7,215 34,873
------------ ---------- --------- --------- -----------
------------ ---------- --------- --------- -----------
BALANCE SHEET DATA:
Cash and short-term investments................... $ 2,426 $ 4,064 $ 7,387 $ 4,090 $ 10,782
Working capital................................... 2,236 161 10,639 5,242 11,073
Total assets...................................... 3,661 10,440 26,364 15,245 55,282
Stockholders' equity.............................. 3,260 2,893 14,557 8,674 16,400
</TABLE>
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DIVICOM MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
DiviCom was founded on April 20, 1993. Through December 1994, DiviCom was a
development-stage company, principally engaged in developing MPEG 2-based
systems, subsystems and components intended to enable the emerging worldwide
digital video infrastructure. Beginning in January 1995 and continuing through
the first six months of 1996, DiviCom generated revenues primarily from the sale
of MPEG 2 real time encoder systems. Product shipments comprise the majority of
DiviCom's revenues, however DiviCom also earns maintenance contract and other
services revenues, and royalty revenues on technology, including advanced MPEG 2
technology for settop box and consumer product applications. In January 1996,
DiviCom launched DiviSys, a technology integration group that provides
installation and integration services for customer applications such as
satellite up links, satellite down links, Multichannel Multipoint Distribution
Systems, ATM networks for content distribution, and automation and control
systems.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of net
revenues for the year ended December 31, 1995 and the six month periods ended
June 1995 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------- ----------------------------
1995 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net revenues.......................................................... 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenues 48.2 55.2 44.2
Research and development............................................ 39.8 53.2 30.2
Selling, general and administrative................................. 15.5 16.2 20.3
----- ----- -----
Total............................................................. 103.5 124.6 94.7
----- ----- -----
Operating Income (loss)............................................... (3.5) (24.6) 5.3
Interest income (expense), net........................................ 0.5 0.3 0.7
----- ----- -----
Income (loss) before provision for income taxes....................... (3.0) (24.3) 6.0
Income tax expense (benefit).......................................... (0.5) -- 2.8
----- ----- -----
Net income (loss)..................................................... (2.5)% (24.3)% 3.2%
----- ----- -----
----- ----- -----
</TABLE>
YEAR TO YEAR COMPARISONS
NET REVENUES
Net revenues increased to $34.1 million in 1995 compared to $0.3 million in
1994. Revenues in 1994 consisted primarily of MPEG digital settop revenue and
ASIC design royalty revenue. Revenues in 1995 expanded to include sales of
DiviCom's family of digital video networking products including MPEG 2/DVB
encoders, MediaNode MN20 remultiplexers and MediaView System Controllers. In
1993, DiviCom generated no revenues from operations. International revenues
accounted for 18% of net revenue in 1995. During 1995, Bell Atlantic, Echostar
Communications and the SAGEM Entities accounted for 42%, 25% and 15% of net
revenues, respectively. During 1994, C-Cube, Bell Atlantic and one of the SAGEM
Entities accounted for 39%, 31% and 13% of net revenues, respectively.
GROSS MARGIN
Gross margin as a percentage of net revenues was 51.8% and 51.1% in 1995 and
1994, respectively. In the event that DiviCom is not able to reduce costs
sufficiently, gross margin as a percentage of net revenues may decline in the
future as a result of lower average selling prices on new or existing products
in response to potential competitive pressures, and increases in the proportion
of net revenues derived from indirect sales channels and lower-margin
professional services.
101
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expenses were $13.6 million in 1995, compared to
$8.5 million in 1994 and $1.4 million in 1993. The increase was primarily
attributable to increased staffing and related expenses over the same periods
and engineering charges, such as non-recurring engineering charges, project
materials and consulting services, of $5.4 million in 1995 and $4.1 million in
1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $5.3 million in 1995,
compared to $2.6 million in 1994 and $0.5 million in 1993. Selling, general and
administrative expenses increased each year due to increased staffing and
related expenses, participation in domestic and international trade shows,
higher sales commissions associated with increased net revenues and advertising
and public relations expenses.
INTEREST INCOME (EXPENSE), NET
Interest income was $163,000, $104,000 and $39,000 in 1995, 1994 and 1993,
respectively. The increase is primarily due to a corresponding increase in cash
and investments over the same period, partially offset in 1995 by interest
expense on a bank line of credit.
INCOME TAX EXPENSE (BENEFIT)
DiviCom recognized an income tax benefit in 1995 and no income tax provision
or benefit in 1994 and 1993, as DiviCom was in a loss position through 1995.
DiviCom expects to pay taxes at or above the statutory tax rate in the
future due to permanent differences relating to the treatment of development
funding. Due to these differences, DiviCom does not have any loss carryforwards.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1995 AND JUNE 30, 1996
NET REVENUES
Net Revenues increased 71% to $22.5 million for the first six months of 1996
as compared to $13.2 million for the first six months of 1995 due to increased
shipments of DiviCom's encoder products. For the six months ending June 30,
1996, Thomson/Tele-TV and Echostar accounted for 38% and 19% of net revenues,
respectively.
GROSS MARGIN
Gross margin as a percentage of net revenues was 56% and 45% for the six
months ending June 30, 1996 and June 30, 1995, respectively. The increase was
due to increased sales without a corresponding increase in expenses and greater
manufacturing efficiencies.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased to $6.8 million for the first
six months of 1996 as compared to $7 million for the same period last year. The
level of expenditures decreased slightly over these two periods despite
increased staffing required to develop new products and enhance existing
products, due to the inclusion in research and development costs in 1995 of
certain costs related to the use of a number of MPEG 2 encoders in development,
as well as costs of relocating to new development facilities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $4.6 million in the first
six months of 1996 compared to $2.1 million in the first six months of 1995.
Selling, general and administrative expenses increased due to increased staffing
and related expenses and higher sales commissions associated with increased net
revenues and an increase in professional services fees.
102
<PAGE>
INTEREST INCOME (EXPENSE), NET
Interest income increased to $149,000 for the first six months of 1996
compared to $48,000 for the first six months of 1995. The increase is primarily
due to a corresponding increase in cash and investments over the same period.
INCOME TAX EXPENSE (BENEFIT)
DiviCom's effective tax rate for the first six months of 1996 was 46%.
DiviCom's provision for taxes was higher than the statutory rate due to
permanent differences relating to the treatment of development expenses. DiviCom
expects to pay taxes at or above the statutory tax rate through 1996 due to
permanent differences relating to the treatment of development funding.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, DiviCom has financed its operations and met its capital
expenditure requirements primarily from development funding from the SAGEM
Entities and from the proceeds of private sales of equity securities. Through
June 30, 1996, DiviCom had received $17.1 million from development funding and
$12.1 million from the sale of equity securities. At June 30, 1996, DiviCom's
current sources of liquidity included cash and cash equivalents of $10.8 million
and a bank line of credit in the amount of $15 million. Working capital
increased to $11.2 million at June 30, 1996 from $10.6 million at December 31,
1995 principally as a result of the first six months cash from operations, and
second quarter cash drawn from the bank line of credit.
DiviCom's operating activities used cash of $6.6 million in 1995, $6.1
million in 1994, and $1.3 million in 1993. The use of cash in 1995 was primarily
from higher accounts receivable, deferred taxes and inventory, partially offset
by an increase in deferred revenue, inventory reserves, and depreciation. The
use of cash from operating activities in 1994 was due to the large net loss and
increased inventory levels, partially offset by higher accounts payable and
deferred revenue. DiviCom's operating activities used cash of $1.2 million in
the first six months of 1996 primarily from increased accounts receivable and
inventory partially offset by increased accounts payable and deferred revenue.
DiviCom's investing activities used cash of $2.3 million in 1995, $2.4
million in 1994, and $0.9 million in 1993, primarily to purchase property and
equipment. The use of cash in 1993 was principally due to investment in the
development of its technology. DiviCom's investing activities used cash of $2.5
million in the first six months of 1996 primarily to purchase property and
equipment. DiviCom's financing activities provided cash of $7.1 million
primarily from bank line of credit and development funds from a stockholder.
In February 1996, DiviCom increased its line of credit from $5 million to
$15 million. The line will expire in February 1997, and currently bears interest
at the lender's published prime rate plus 1%, which rate will be reduced to the
prime rate upon DiviCom's obtaining $8 million in additional equity. Advances
under the line of credit are limited to 80% of eligible accounts receivable and
50% of inventory. Under the line of credit, DiviCom is subject to various
financial and other covenants. The line is collateralized by DiviCom accounts
receivable and inventory. As of June 30, 1996 DiviCom had utilized $6 million of
its line of credit for working capital purposes.
103
<PAGE>
MANAGEMENT OF DIVICOM
EXECUTIVE OFFICERS AND SENIOR MANAGEMENT
The following individuals are current executive officers of DiviCom or
expected to serve as executive officers of C-Cube or the Surviving Corporation
following the Merger. Their current positions at DiviCom and their ages as of
May 31, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------- --- -----------------------------------------------------
<S> <C> <C>
Nolan Daines 36 President, Chief Financial Officer, Chief Executive
Officer and Director
Nai-Ting Hsu 47 Vice President, Engineering
Brian Johnson 43 Vice President, Advanced Technology
Thomas Lookabaugh 34 Vice President, Marketing
Robert Natwick 53 Vice President, Sales
</TABLE>
NOLAN DAINES has been the President, Chief Executive Officer and a director
of DiviCom since its inception in April 1993. Prior to founding DiviCom, Mr.
Daines served for nearly two years as Executive Director of Engineering and
System Architecture at Compression Labs, Inc., a company specializing in digital
compressed video for broadcast and videoconferencing. Before joining Compression
Labs, Inc., Mr. Daines co-founded Tidewater Associates where he spent ten years
developing a wide range of computer products from workstations to local area
networks.
NAI-TING HSU joined DiviCom as its Vice President of Engineering in April
1995 and has served in that capacity since that date. Prior to joining DiviCom,
Dr. Hsu served as Vice President of Engineering at MasPar, a manufacturer of
massively parallel computers, for four years, and Director of Engineering,
System Software Division at Silicon Graphics, Inc., a work station company for
five years. Dr. Hsu received a Ph.D. and an M.S. in Computer Sciences from the
University of Wisconsin at Madison in 1976 and 1972, respectively, and a B.S. in
Electronic Engineering from the National Chiao Tung University, Taiwan, Republic
of China.
BRIAN JOHNSON joined DiviCom in May 1993 and now serves as its Vice
President of Advanced Technology. In the seven years prior to joining DiviCom,
Mr. Johnson managed development of an addressable cable TV settop converter at
Magnavox CATV, and led the development of a high definition decoder and a
compressed digital video system for cable and consumer applications at Philips'
Laboratories in Briarcliff Manor. Prior to joining Philips, Mr. Johnson worked
at General Electric for seven years where he led several engineering projects.
Mr. Johnson holds an M.S. in Electrical Engineering from Syracuse University and
a B.S. in Electrical Engineering from Renselear Polytechnic Institute.
THOMAS LOOKABAUGH joined DiviCom as its Vice President of Research and
Business Development in June 1993 and served in that capacity until becoming
DiviCom's Vice President of Marketing in February 1996. Prior to joining
DiviCom, Dr. Lookabaugh spent five years with Compression Labs, Inc., where he
assumed project management responsibility on the development of an MPEG 1
decoder for video on demand, and was Executive Director of Research and New
Business Technology. Dr. Lookabaugh received a Ph.D. in Electrical Engineering,
an M.S. in Statistics, an M.S. in Engineering Management, and an M.S. in
Electrical Engineering from Stanford University and a B.S. in Engineering
Physics from the Colorado School of Mines.
ROBERT NATWICK joined DiviCom in April 1994 and now serves as its Vice
President of Sales. Prior to joining DiviCom, Mr. Natwick worked for six years
as a member of the Grass Valley Group, a manufacturer of broadcast television
production equipment, where he was Vice President of Sales, Americas. Prior to
joining the Grass Valley Group, Mr. Natwick worked for nine years with Ampex
Corporation, a maker of video tape recording equipment, and became its National
Sales Manager. Mr. Natwick holds a B.A. in Political Science from Washington
College in Chestertown, Maryland.
There is no family relationship between any director or executive officer of
DiviCom. The Board of Directors of C-Cube will determine the titles, if any, of
the above-named officers in its sole discretion.
104
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
received by the Chief Executive Officer of DiviCom and the next four most highly
compensated executive officers of DiviCom (together, the "DiviCom Named
Executive Officers") for services rendered to DiviCom during the fiscal years
ended December 31, 1995, 1994 and 1993:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
--------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($)(1) BONUS ($) OPTIONS (#) COMPENSATION ($)(2)
- ---------------------------------- --------- ------------ ------------- ------------- --------------------
<S> <C> <C> <C> <C> <C>
Nolan Daines 1995 167,799 37,886 -- 8,564(6)
President, Chief Financial 1994 159,809 182,852(3) 986,842 4,590
Officer, Chief Executive Officer 1993 98,077 -- 2,400,000 2,610
and Director
Nai-Ting Hsu 1995 91,346 30,000 350,000 4,028(7)
Vice President, Engineering 1994 -- -- -- --
1993 -- -- -- --
Brian Johnson 1995 111,824 3,000 -- 6,133(8)
Vice President, Advanced 1994 101,347 35,824(3) 411,184 4,851
Technology 1993 64,616 33,784 1,000,000 2,610
Thomas Lookabaugh 1995 133,125 6,000 -- 4,903(9)
Vice President, Marketing 1994 118,423 102,315(3) 493,421 1,197
1993 66,478 18,840 1,200,000 385
Robert Natwick 1995 127,404 14,545(4) -- 4,871
Vice President, Sales 1994 84,135 22,121(5) 282,237 3,363
1993 -- -- -- --
</TABLE>
- ------------------------
(1) Includes compensation that was accrued but deferred, if any, at the election
of each DiviCom Named Executive Officer pursuant to DiviCom's 401(k) plan.
(2) Includes the employer-paid portion of group term life insurance premiums for
coverage above $50,000 and either additional insurance coverage paid by
DiviCom or a $1,000 cash payment made in lieu of such coverage if the
individual waived such coverage.
(3) This bonus represents an amount paid to these individuals by DiviCom that
was used to exercise a portion of their options.
(4) Includes $3,030 paid as a commission on sales.
(5) Includes $4,709 paid as a commission on sales.
(6) Includes $3,696 as a discretionary matching contribution to DiviCom's 401(k)
plan.
(7) Includes $2,153 as a discretionary matching contribution to DiviCom's 401(k)
plan.
(8) Includes $1,282 as a discretionary matching contribution to DiviCom's 401(k)
plan.
(9) Includes $3,696 as a discretionary matching contribution to DiviCom's 401(k)
plan.
105
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning the grants of options
to purchase DiviCom Common Stock to the DiviCom Named Executive Officers during
the fiscal year ended December 31, 1995:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENTAGE OF ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM (2)
OPTIONS EMPLOYEES IN EXERCISE OR BASE EXPIRATION ------------------------
NAME GRANTED (#)(1) GRANTED (#)(1) PRICE DATE 5% ($) 10% ($)
- -------------------------- -------------- --------------- ----------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Nolan Daines.............. -- -- -- -- -- --
Nai-Ting Hsu.............. 350,000 13.4% $ 0.10 4/10/05 22,011 55,781
Brian Johnson............. -- -- -- -- -- --
Thomas Lookabaugh......... -- -- -- -- -- --
Robert Natwick............ -- -- -- -- -- --
</TABLE>
- ------------------------
(1) These options vest over a period of four years with one quarter of the
original grant vesting after one year and 1/48th of the original grant
vesting each month thereafter for the next three years. The total number of
options granted to all employees during the fiscal year ended December 31,
1995 was 2,612,438.
(2) The potential realizable value is based on the term of the option at its
time of grant. The value is calculated by assuming that the stock price on
the date of grant appreciates at the indicated annual rates compounded
annually for the entire term of the option and that the option is exercised
and the underlying shares are sold on the last day of its term for such
appreciated stock price. The assumed 5% and 10% rates of annual compounded
stock appreciation over the full ten-year term of the options are mandated
by the rules of the Commission and do not represent DiviCom's estimate or
projection of future Common Stock prices. Using this specified method, no
gain to the optionee is possible unless the stock price increases over the
option term, which will benefit all stockholders.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the exercise of
stock options by the DiviCom Named Executive Officers during the fiscal year
ended December 31, 1995 and the number and value of securities underlying
unexercised options held by the DiviCom Named Executive Officers at December 31,
1995:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTIONS AT
ACQUIRED ON VALUE FISCAL YEAR-END (#) FISCAL YEAR-END ($)(1)
NAME EXERCISE (#) REALIZED ($) VESTED/UNVESTED (2) VESTED/UNVESTED (2)
- ------------------------------------ ----------- ------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Nolan Daines........................ -- -- 0/0 0/0
Nai-Ting Hsu........................ 150,000(3) 45,000 0/200,000 0/60,000
Brian Johnson....................... -- -- 443,935/261,657 164,815/97,142
Thomas Lookabaugh................... -- -- 0/0 0/0
Robert Natwick...................... -- -- 117,599/164,638 41,160/57,623
</TABLE>
- ------------------------
(1) The value of unexercised in-the-money options is the fair market value of
DiviCom's Common Stock at December 31, 1995 less the exercise price of the
options, multiplied by the number of shares underlying such options.
106
<PAGE>
(2) At December 31, 1995, stock options granted to employees could be exercised
prior to vesting in exchange for shares of Common Stock subject to
repurchase at original cost by DiviCom until vested under the same schedule
of terms and restrictions imposed on the original option grants.
(3) All 150,000 shares received are restricted and subject to the repurchase at
original cost by DiviCom as the options were not yet vested as of the end of
the year.
CERTAIN TRANSACTIONS OF DIVICOM
Other than the compensation arrangements set forth above, DiviCom has
entered into the following affiliate transactions:
Nolan Daines has an employment agreement with DiviCom, dated as of April 20,
1993, which provides, among other things, that he is entitled to one year's
salary if terminated without cause prior to the expiration of such agreement on
April 20, 1998. This agreement will be terminated at the Effective Time.
Thomas Lookabaugh has an employment agreement with DiviCom that provides,
among other things, that if he is terminated for other than cause by DiviCom
prior to June 30, 1996, DiviCom shall pay Dr. Lookabaugh three months of base
salary.
DiviCom has forgiven the non-interest bearing obligation of Nolan Daines and
Thomas Lookabaugh to repay $73,342.10 and $48,671.05, respectively, that would
otherwise be due from them under certain Executive Compensation Agreements.
The SAGEM Entities have entered into a number of Agreements with DiviCom,
all of which will be superseded by the Transition Agreement. See "Approval of
the Merger -- Transition Agreement."
Certain DiviCom employees, including each of the DiviCom Named Executive
Officers, hold restricted stock and/or have been granted options that vest in
installments based upon the achievement of specified milestones to the
satisfaction of the SAGEM Entities. The Transition Agreement provides that all
such milestones have been met and that all such option shares and restricted
stock are fully vested. In addition, the Transition Agreement provides that any
repurchase rights any party thereto may have or control with respect to certain
shares of DiviCom Common Stock held by Nolan Daines are terminated.
107
<PAGE>
DIVICOM STOCKHOLDERS
The following sets forth certain information as to the number of shares of
DiviCom Common Stock and DiviCom Preferred Stock beneficially owned at July 31,
1996 and the number of shares of C-Cube Common Stock to be beneficially owned
immediately upon consummation of the Merger by (i) each person who is known to
DiviCom to beneficially own 5% or more of the outstanding shares of any class of
DiviCom Capital Stock, (ii) each director of DiviCom, (iii) each DiviCom Named
Executive Officer and (iv) all directors and executive officers of DiviCom as a
group. Except pursuant to applicable community property laws or as otherwise
noted, the persons named in the table have sole voting and investment power with
respect to all shares indicated as being beneficially owned by them.
<TABLE>
<CAPTION>
DIVICOM DIVICOM TOTAL SHARES
COMMON STOCK PREFERRED STOCK OF DIVICOM PERCENT OF
------------------ ------------------- CAPITAL ALL
PERCENT PERCENT STOCK DIVICOM
NAME AND ADDRESS OF NUMBER OF OF NUMBER OF OF BENEFICIALLY CAPITAL
BENEFICIAL HOLDER SHARES CLASS SHARES CLASS OWNED STOCK
- ------------------------- --------- ------- ---------- ------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
SAGEM Entities (1)(4) 2,375,493 21.60% 20,723,855 97.35% 23,099,348 71.54%
Nolan Daines (2)(5) 1,877,895 17.07% -- -- 1,877,895 5.82%
C-Cube Microsystems Inc.
(3)(6) 1,372,000 12.47% 564,145 2.65% 1,936,145 6.00%
Thomas Lookabaugh (2)(7) 1,128,948 10.26% -- -- 1,128,948 3.50%
Brian Johnson (2)(8) 1,049,822 9.54% -- -- 1,049,822 3.25%
Michael Perkins (2)(9) 958,430 8.71% -- -- 958,430 2.96%
Nai-Ting Hsu (2)(10) 350,000 3.18% -- -- 350,000 1.08%
Robert Natwick (2) 141,119 1.27% -- -- 141,119 *
Patrice Fallevoz (1)(11) -- -- -- -- -- --
Francis Galliard (1)(11) -- -- -- -- -- --
Michel Toussan (1)(11) -- -- -- -- -- --
Gabriel Matter (1)(11) -- -- -- -- -- --
All directors and
executive officers of
DiviCom as a group (nine
persons) 4,547,784 41.32% -- -- 4,547,784 13.65%
</TABLE>
- ------------------------------
* Less than 1%.
(1) Mailing address: c/o SAGEM S.A.; 6, Avenue d'Iena; 75783 Paris; Cedex 16,
France.
(2) Mailing address: DiviCom Inc., 1708 McCarthy Boulevard, Milpitas,
California 93035.
(3) Mailing address: C-Cube Microsystems Inc., 1778 McCarthy Boulevard,
Milpitas, California 93035.
(4) All 2,375,493 shares of Common Stock are held by SAGEM International. Of
the 20,723,855 shares of Preferred Stock, 7,037,131 shares are held by SAGEM
International, 7,864,356 are held by SAGEM S.A., 2,822,368 shares are held
by Tregor Electronique S.A. and 3,000,000 shares are held by Iena
International. Each of these companies is a member of the affiliated group
of SAGEM Entities.
(5) Includes 62,500 shares held by the children of Nolan Daines.
(6) Of the 1,372,000 shares of Common Stock, 1,172,000 shares are held by
C-Cube, 100,000 shares are held by Dr. Didier LeGall, the Chief Technical
Officer and Vice President, Research and Development, of C-Cube, and 100,000
shares are held by Dr. Alexandre Balkanski, the President, CEO and member of
C-Cube's board of directors. In addition, Poitevin Investments Limited,
nominee for the Scali Family Settlement Trust, owns 350,000 shares of Common
Stock and is controlled by Dr. Balkanski's mother. Dr. Balkanski disclaims
all control and beneficial ownership of such shares.
(7) Includes 52,919 unvested shares of Common Stock subject to repurchase at
original cost by DiviCom.
(8) Includes 698,739 shares represented by options that vest within 60 days.
(9) Includes 173,458 shares represented by options that vest within 60 days.
(10) Includes 226,042 unvested shares of Common Stock subject to repurchase at
original cost by DiviCom.
(11) Messrs. Fallevoz, Galliard, Matter and Toussan are each members of the
board of directors of DiviCom and employees of the SAGEM Entities. Each
disclaims any ownership in shares held by SAGEM International or its
affiliates.
108
<PAGE>
COMPARISON OF CAPITAL STOCK
DESCRIPTION OF C-CUBE CAPITAL STOCK
The authorized capital stock of C-Cube consists of 150,000,000 shares of
Common Stock, $0.001 par value, and 5,000,000 shares of Preferred Stock, $0.001
par value.
COMMON STOCK. As of May 31, 1996, there were approximately 33,086,488
shares of C-Cube Common Stock outstanding and held of record by approximately
622 stockholders. C-Cube Common Stock is listed on Nasdaq under the symbol
"CUBE". Holders of C-Cube Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. The stockholders do not have a
right to take action by written consent nor may they cumulate votes in
connection with the election of Directors. Special meetings of stockholders may
be called only by a majority of the Board of Directors or by holders of not less
than ten percent of the shares entitled to cast votes at such special meeting.
Any amendment by the stockholders of the Bylaws of C-Cube and the amendment by
the stockholders of various provisions of the Restated Certificate of
Incorporation, including the provisions concerning stockholder voting and
stockholder written consents, requires the affirmative vote of the holders of
two-thirds of the outstanding capital stock of C-Cube voting together as a
single class in addition to any other vote required by law or by the Certificate
of Incorporation of C-Cube. The holders of C-Cube Common Stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the Board of Directors out of funds legally available therefor. In the event of
a liquidation, dissolution or winding up of C-Cube, the holders of C-Cube Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities. The C-Cube Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the C-Cube Common Stock. All outstanding shares of C-Cube Common
Stock are fully paid and non-assessable, and the shares of C-Cube Common Stock
to be outstanding upon completion of the Merger will be fully paid and
non-assessable.
PREFERRED STOCK. C-Cube has 5,000,000 shares of Preferred Stock authorized,
none of which are outstanding. The Board of Directors has the authority to issue
the shares of Preferred Stock in one or more series, to determine, alter or
eliminate any or all of the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued series of Preferred Stock, to fix
the number of shares constituting any series and the designations of such series
and to provide for the rights and terms of redemption or conversion of the
shares of any such series, without any further vote or action by the
stockholders. Although it presently has no intention to do so, the Board of
Directors, without stockholder approval, can issue Preferred Stock with voting
and conversion rights which could adversely affect the voting power or other
rights of the holders of C-Cube Common Stock. The issuance of Preferred Stock
may have the effect of delaying, deferring or preventing a change in control of
C-Cube.
TRANSFER AGENT AND REGISTRAR. The Transfer Agent and Registrar for the
C-Cube Common Stock is Boston Equiserve, L.P., Investor Relations, P.O. 644,
Boston, MA 02102.
DESCRIPTION OF DIVICOM CAPITAL STOCK
The authorized capital stock of DiviCom consists of 35,950,000 shares of
Common Stock, $0.001 par value, and 21,288,000 shares of Preferred Stock, $0.001
par value, 15,788,000 shares of which are designated as Series A Preferred and
5,500,000 shares of which are designated Series B Preferred.
COMMON STOCK. As of the DiviCom Record Date, there were 10,999,791 shares
of DiviCom Common Stock outstanding and held of record by approximately 131
stockholders. Holders of DiviCom Common Stock have no right to convert DiviCom
Common Stock into any other securities. All outstanding shares of DiviCom Common
Stock are validly issued, fully paid and nonassessable.
PREFERRED STOCK. As of the DiviCom Record Date, there were issued and
outstanding 15,788,000 shares of Series A Preferred and 5,500,000 shares of
Series B Preferred held of record by 5 stockholders. The principal rights,
privileges and preferences of the issued and outstanding shares of DiviCom
Preferred Shares are as set forth below.
109
<PAGE>
DIVIDENDS. No dividends may be paid on any shares of DiviCom's Common Stock
unless a dividend is paid with respect to all outstanding shares of DiviCom's
Preferred Stock in an amount for each share of DiviCom's Preferred Stock equal
to or greater than the aggregate amount of such dividends for all shares of
DiviCom's Common Stock into which each such share of DiviCom's Preferred Stock
could then be converted.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
DiviCom (which, as defined in DiviCom's Certificate of Incorporation, would
include the Merger) holders of the Series A Preferred and Series B Preferred are
entitled to receive, prior and in preference to any distribution of any assets
of DiviCom to the holders of DiviCom Common Stock, $0.40 and $1.00 per share,
respectively. After the holders of the DiviCom Preferred Stock have received the
full amount of their liquidation preferences, the holders of the DiviCom Common
Stock and the DiviCom Preferred Stock are entitled to receive all remaining
assets of DiviCom available for distribution on a pro rata basis as if all
shares of the DiviCom Preferred Stock were converted into shares of DiviCom
Common Stock. If the Certificate Amendment is approved, the Merger will not be
treated as a liquidation and the holders of Preferred Stock will not be entitled
to a liquidation preference in the Merger.
CONVERSION. Each share of Series A Preferred and Series B Preferred is
presently convertible into one share of DiviCom Common Stock subject to certain
anti-dilution adjustment provisions.
CERTAIN PROTECTIVE PROVISIONS. So long as any shares of DiviCom Preferred
Stock remain outstanding, approval of the holders of at least two-thirds of such
shares is required to amend the DiviCom Certificate of Incorporation, issue
Common Stock if the number of remaining unissued shares is less than the number
of shares Common Stock into which the Preferred Stock could then be converted,
effect the reclassification, recapitalization or other change of any stock or
effect the sale, lease, assignment, transfer or other conveyance of all or
substantially all of the assets of the DiviCom including any consolidation or
merger involving DiviCom (which, as defined in DiviCom's Certificate of
Incorporation, would include the Merger.) In addition, the holders of shares of
Series A Preferred have rights to purchase certain DiviCom product technology
for $1 and all other assets at fair market value upon an election to dissolve
DiviCom. If the Certificate Amendment is approved, the rights of the holders of
Series A Preferred to purchase such assets on dissolution shall be deleted.
PREEMPTIVE RIGHTS. Each stockholder who owns shares representing more than
five percent of the outstanding shares of DiviCom possesses a right of first
refusal to purchase a pro rata share of any issuance of new securities (as such
term is defined in DiviCom's Certificate of Incorporation) offered for sale by
DiviCom. For purposes of determining a stockholder's percentage of ownership and
pro rata share, the number of shares of DiviCom Common Stock to be used in the
calculation assumes the full conversion of all Preferred Stock and the exercise
of all options. If the Certificate Amendment is approved, the preemptive rights
provision shall be deleted.
VOTING RIGHTS. Subject to the protective provisions described above, and
except as otherwise required by law, the holders of the Series A Preferred,
Series B Preferred and DiviCom Common Stock are entitled to notice of any
stockholders' meeting and to vote together as one class upon any matter
submitted to the stockholders for a vote on the following basis:
(a) COMMON VOTE. Each share of DiviCom Common Stock issued and
outstanding has one vote.
(b) PREFERRED VOTE. Each share of Series A Preferred and Series B
Preferred issued and outstanding has that number of votes equal to the
number of shares of DiviCom Common Stock into which such DiviCom Preferred
Stock could be converted rounded to the nearest whole share.
Notwithstanding the normal voting provisions described above, each DiviCom
stockholder may cumulate such holder's votes at all elections of directors. The
total number of votes in the election of directors to which each stockholder is
entitled is the number of shares of DiviCom Common Stock held
110
<PAGE>
by such stockholder, including the conversion of all Preferred Shares,
multiplied by the number of directors to be elected. Each stockholder may cast
all such votes for a single director or may distribute them among any number of
the directors to be elected in any manner that such stockholder sees fit.
COMPARISON OF RIGHTS OF HOLDERS OF C-CUBE
COMMON STOCK AND HOLDERS OF DIVICOM CAPITAL STOCK
Upon consummation of the Merger, the holders of shares of DiviCom Capital
Stock will receive cash and shares of C-Cube Common Stock in exchange for their
shares of DiviCom Capital Stock. As of the Effective Time, holders of DiviCom
Capital Stock will no longer be entitled to certain rights and privileges
previously provided for in DiviCom's Certificate of Incorporation. Such rights
include the preemptive right granted to all DiviCom stockholders holding more
than five percent of DiviCom's Capital Stock to purchase a pro rata share of any
issuance of new securities and the right of all stockholders to cumulative
voting in the election of directors. Such rights also include those separately
granted to the holders of DiviCom's Preferred Stock including (i) a liquidation
preference in the amounts described above, (ii) a protection provision ensuring
dividends of at least an equal amount paid to any holders of DiviCom Common
Stock as described above, (iii) certain anti-dilution adjustments upon dilutive
issuances of DiviCom Capital Stock, and (iv) a right to vote as a separate class
requiring an approval of at least two-thirds of such share concerning certain
corporate transactions including the Merger. Under Delaware law, dissenters'
rights will be available to stockholders of DiviCom with respect to the Merger.
See "Approval of the Merger and Related Transactions -- Appraisal and
Dissenters' Rights."
In addition, certain other rights and privileges of DiviCom stockholders
will also change as a result of the Merger. Upon completion of the Merger, each
former DiviCom stockholder will have a substantially smaller percentage
ownership of C-Cube than such stockholder's current percentage ownership of
DiviCom. Accordingly, former DiviCom stockholders will have a significantly
smaller voting influence on a percentage basis over the affairs of C-Cube than
currently enjoyed over the affairs of DiviCom.
EXPERTS
The consolidated financial statements and the related financial statement
schedule of C-Cube Microsystems Inc. in this Prospectus/Proxy Statement have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein, and are included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
The balance sheets of DiviCom as of December 31, 1994 and 1995 and
statements of operations, stockholders' equity and cashflows for the years ended
December 31, 1994 and 1995 and the nine month period ended December 31, 1993
included in this Prospectus/Proxy Statement, have been so included in reliance
on the report of Coopers & Lybrand L.L.P., independent accoutants, given on the
authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the C-Cube Common Stock issuable pursuant to the Merger will
be passed on by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Fenwick & West LLP, Palo Alto, California, is acting as
counsel for DiviCom in connection with certain legal matters relating to the
Merger and the transactions contemplated thereby.
111
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
C-CUBE MICROSYSTEMS INC.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets at December 31, 1995 and 1994............... F-3
Consolidated Statements of Operations for the years ended December 31,
1995, 1994 and 1993.................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993....................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Independent Auditors Reports............................................ F-18
Valuation and Qualifying Accounts and Reserves.......................... F-19
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets,
June 30, 1996 and December 31, 1995.................................... F-20
Condensed Consolidated Statements of Operations for the
Six Months and the Quarters ended June 30, 1996 and 1995............... F-21
Condensed Consolidated Statements of Cash Flows for the
Six Months ended June, 1996 and 1995................................... F-22
Notes to Unaudited Condensed Consolidated Financial Statements.......... F-23
DIVICOM INC.
FINANCIAL STATEMENTS:
Report of Independent Accountants....................................... F-24
Balance Sheets, December 31, 1994 and 1995.............................. F-25
Statements of Operations for the Nine Month Period Ended December 31,
1993 and the Years Ended December 31, 1994 and 1995.................... F-26
Statements of Stockholders' Equity for the Nine Month Period Ended
December 31, 1993 and the Years Ended December 31, 1994 and 1995....... F-27
Statements of Cash Flows for the Nine Month Period Ended December 31,
1993 and the Years Ended December 31, 1994 and 1995.................... F-28
Notes to Financial Statements........................................... F-29
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheet, June 30, 1996..................... F-37
Condensed Consolidated Statements of Operations for the Six Month and
Three Month Periods Ended June 30, 1995 and 1996....................... F-38
Condensed Consolidated Statements of Cash Flows for the Six Month
Periods Ended June 30, 1995 and 1996................................... F-39
Notes to Condensed Consolidated Financial Statements.................... F-40
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
C-Cube Microsystems Inc.:
We have audited the accompanying consolidated balance sheets of C-Cube
Microsystems Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
January 17, 1996
F-2
<PAGE>
C-CUBE MICROSYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Current assets:
Cash and equivalents............................................................... $ 133,414 $ 13,674
Short-term investments............................................................. 10,675 30,159
Receivables, net of allowance: 1995 -- $2,787, 1994 -- $1,291...................... 24,421 10,755
Inventories........................................................................ 11,871 4,547
Deferred taxes and other current assets............................................ 5,882 1,909
------------ ------------
Total current assets............................................................. 186,263 61,044
Property and equipment -- net...................................................... 7,222 4,104
Distribution rights -- net......................................................... 1,977 2,141
Purchased technology -- net........................................................ 3,095 --
Other assets....................................................................... 4,969 573
------------ ------------
Total............................................................................ $ 203,526 $ 67,862
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks............................................................. $ 1,934 $ 5,422
Accounts payable................................................................... 10,704 3,303
Accrued compensation and benefits.................................................. 4,253 495
Other accrued liabilities.......................................................... 3,987 1,562
Income taxes payable............................................................... 5,649 25
Current portion of long-term obligations........................................... 1,159 1,486
------------ ------------
Total current liabilities........................................................ 27,686 12,293
Long-term obligations.............................................................. 88,010 2,081
------------ ------------
Total liabilities................................................................ 115,696 14,374
------------ ------------
Minority interest in subsidiary...................................................... 295 --
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000 shares authorized......................... -- --
Common stock, $0.001 par value, 50,000 shares authorized; shares outstanding: 1995
-- 32,363, 1994 -- 30,792......................................................... 87,124 78,482
Deferred stock compensation........................................................ (635) (1,065)
Notes receivable from stockholders................................................. (459) (506)
Accumulated translation adjustments................................................ (860) (826)
Unrealized loss on investments..................................................... (14) (81)
Retained earnings (deficit)........................................................ 2,379 (22,516)
------------ ------------
Total stockholders' equity....................................................... 87,535 53,488
------------ ------------
Total............................................................................ $ 203,526 $ 67,862
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
C-CUBE MICROSYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
----------- --------- ---------
<S> <C> <C> <C>
Net revenues:
Product..................................................................... $ 123,190 $ 42,026 $ 20,411
Development contracts....................................................... 1,412 2,993 3,328
----------- --------- ---------
Total..................................................................... 124,602 45,019 23,739
----------- --------- ---------
Costs and expenses:
Cost of product revenues.................................................... 59,253 19,574 8,304
Research and development.................................................... 14,342 9,774 7,372
Selling, general and administrative......................................... 19,227 11,283 8,217
Purchased in-process technology............................................. 3,800 -- --
----------- --------- ---------
Total..................................................................... 96,622 40,631 23,893
----------- --------- ---------
Income (loss) from operations................................................. 27,980 4,388 (154)
Other income (expense):
Interest income and other................................................... 3,637 1,643 294
Interest expense and other.................................................. (1,578) (954) (551)
----------- --------- ---------
Total..................................................................... 2,059 689 (257)
----------- --------- ---------
Income (loss) before income taxes and minority interest....................... 30,039 5,077 (411)
Income tax expense............................................................ 4,933 69 71
----------- --------- ---------
Income (loss) before minority interest........................................ 25,106 5,008 (482)
Minority interest in net income of subsidiary................................. 211 -- --
----------- --------- ---------
Net income (loss)............................................................. $ 24,895 $ 5,008 $ (482)
----------- --------- ---------
----------- --------- ---------
Net income (loss) per share................................................... $ 0.72 $ 0.16 $ (0.02)
----------- --------- ---------
----------- --------- ---------
Shares used in computation.................................................... 34,651 31,764 25,406
----------- --------- ---------
----------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
C-CUBE MICROSYSTEMS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK COMMON STOCK DEFERRED NOTES ACCUMULATED
---------------------- -------------------- STOCK RECEIVABLE FROM TRANSLATION
SHARES AMOUNT SHARES AMOUNT COMPENSATION STOCKHOLDERS ADJUSTMENTS
----------- --------- --------- --------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1993....... 7,494 $ 37,064 5,746 $ 950 $ -- $ (179) $ --
Common stock issued under stock
plans.......................... 2,730 813 (595)
Deferred stock compensation..... 980 (980)
Amortization of deferred stock
compensation................... 87
Collection of notes receivable
from stockholders.............. 160
Accumulated translation
adjustments.................... (331)
Net loss........................
----------- --------- --------- --------- ------------- ------ ------
BALANCES, DECEMBER 31, 1993..... 7,494 37,064 8,476 2,743 (893) (614) (331)
Common stock issued under stock
plans.......................... 1,808 863
Conversion of convertible
preferred stock into common
stock.......................... (7,494) (37,064) 14,988 37,064
Sale of common stock net of
issuance costs of $1,111....... 5,520 37,391
Deferred stock compensation..... 421 (615)
Amortization of deferred stock
compensation................... 443
Collection of notes receivable
from stockholders.............. 108
Accumulated translation
adjustments.................... (495)
Unrealized loss on
investments....................
Net income......................
----------- --------- --------- --------- ------------- ------ ------
BALANCES, DECEMBER 31, 1994..... -- -- 30,792 78,482 (1,065) (506) (826)
Common stock issued under stock
plans.......................... 1,571 1,967
Tax benefit from employee stock
transactions................... 5,907
Amortization of deferred stock
compensation................... 430
Collection of notes receivable
from stockholders.............. 47
Accumulated translation
adjustments.................... (34)
Unrealized loss on
investments....................
Capital activity of
subsidiary..................... 768
Net income......................
----------- --------- --------- --------- ------------- ------ ------
BALANCES, DECEMBER 31, 1995..... -- $ -- 32,363 $ 87,124 $ (635) $ (459) $ (860)
----------- --------- --------- --------- ------------- ------ ------
----------- --------- --------- --------- ------------- ------ ------
<CAPTION>
UNREALIZED RETAINED TOTAL
LOSS ON EARNINGS STOCKHOLDERS'
INVESTMENTS (DEFICIT) EQUITY
----------- ----------- -------------
<S> <C> <C> <C>
BALANCES, JANUARY 1, 1993....... $ -- $ (27,042) $ 10,793
Common stock issued under stock
plans.......................... 218
Deferred stock compensation..... --
Amortization of deferred stock
compensation................... 87
Collection of notes receivable
from stockholders.............. 160
Accumulated translation
adjustments.................... (331)
Net loss........................ (482) (482)
----------- ----------- -------------
BALANCES, DECEMBER 31, 1993..... -- (27,524) 10,445
Common stock issued under stock
plans.......................... 863
Conversion of convertible
preferred stock into common
stock.......................... --
Sale of common stock net of
issuance costs of $1,111....... 37,391
Deferred stock compensation..... (194)
Amortization of deferred stock
compensation................... 443
Collection of notes receivable
from stockholders.............. 108
Accumulated translation
adjustments.................... (495)
Unrealized loss on
investments.................... (81) (81)
Net income...................... 5,008 5,008
----------- ----------- -------------
BALANCES, DECEMBER 31, 1994..... (81) (22,516) 53,488
Common stock issued under stock
plans.......................... 1,967
Tax benefit from employee stock
transactions................... 5,907
Amortization of deferred stock
compensation................... 430
Collection of notes receivable
from stockholders.............. 47
Accumulated translation
adjustments.................... (34)
Unrealized loss on
investments.................... 67 67
Capital activity of
subsidiary..................... 768
Net income...................... 24,895 24,895
----------- ----------- -------------
BALANCES, DECEMBER 31, 1995..... $ (14) $ 2,379 $ 87,535
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
C-CUBE MICROSYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1995 1994 1993
----------- ---------- ---------
Cash flows from operating activities:
Net income (loss).......................................................... $ 24,895 $ 5,008 $ (482)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Equity in net loss and write-off of joint ventures and investments....... -- 200 --
Minority interest in subsidiary.......................................... 295 -- --
Depreciation and amortization............................................ 3,073 2,079 1,539
Purchased in-process technology.......................................... 3,800 -- --
Changes in assets and liabilities:
Receivables............................................................ (13,627) (4,539) (128)
Inventories............................................................ (7,138) (1,602) (1,318)
Deferred taxes and other assets........................................ (3,658) (1,342) (280)
Accounts payable....................................................... 7,312 504 745
Accrued liabilities.................................................... 15,707 88 (1,006)
----------- ---------- ---------
Net cash provided by (used in) operating activities........................ 30,659 396 (930)
----------- ---------- ---------
Cash flows from investing activities:
Maturities of short-term investments....................................... 49,700 18,914 --
Purchases of short-term investments........................................ (29,758) (44,860) (3,998)
Capital expenditures....................................................... (5,389) (1,493) (1,471)
Acquisition of business.................................................... (4,818) -- --
Other assets............................................................... (2,074) (558) 683
----------- ---------- ---------
Net cash provided by (used in) investing activities........................ 7,661 (27,997) (4,786)
----------- ---------- ---------
Cash flows from financing activities:
Bank term loan borrowings (repayments) -- net.............................. (694) (306) 1,000
Notes payable to banks -- net.............................................. (3,596) 98 (425)
Repayments of capital lease obligations.................................... (1,078) (1,444) (1,595)
Issuance of convertible subordinated notes................................. 83,662 -- --
Sale of common stock, net of notes receivable.............................. 2,735 38,254 218
Collection of stockholder notes receivable................................. 47 108 160
----------- ---------- ---------
Net cash provided by (used in) financing activities........................ 81,076 36,710 (642)
----------- ---------- ---------
Exchange rate impact on cash and equivalents................................. 344 (45) 61
----------- ---------- ---------
Net increase (decrease) in cash and equivalents.............................. 119,740 9,064 (6,297)
Cash and equivalents, beginning of period.................................... 13,674 4,610 10,907
----------- ---------- ---------
Cash and equivalents, end of period.......................................... $ 133,414 $ 13,674 $ 4,610
----------- ---------- ---------
----------- ---------- ---------
Supplemental schedule of noncash investing and financing activities:
Computer and office equipment acquired under capital lease arrangements.... $ -- $ 994 $ 952
Notes receivable for issuance of common stock.............................. -- -- 595
Deferred stock compensation................................................ -- 615 980
Unrealized loss on investments............................................. (67) 81 --
Supplemental disclosure of cash flow information --
Cash paid during the period for:
Interest................................................................. $ 519 $ 571 $ 551
Income taxes............................................................. 133 69 71
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
C-Cube Microsystems Inc. (the "Company") was founded in July 1988. The
Company is a leading provider of powerful, highly integrated standards-based
digital video compression solutions. The Company's innovative encoder, decoder
and codec products enable high-quality full-motion video and still images to be
cost-effectively provided by a broad range of end user systems.
CONSOLIDATION
The consolidated financial statements include the Company, its wholly owned
subsidiaries and Kubota C-Cube, Inc. (a 65% owned Japanese subsidiary) after
elimination of intercompany accounts and transactions.
CASH AND EQUIVALENTS AND SHORT-TERM INVESTMENTS
All highly liquid debt instruments purchased with an original maturity of
three months or less are classified as cash equivalents.
Management determines the classification of debt and equity securities at
the time of purchase and reevaluates the classification at each balance sheet
date. Debt securities 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. 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 mature within 12 months and are
classified as current assets.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
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 or the lease term, generally three years. The
Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" effective January 1, 1995.
The adoption of this statement had no effect on the Company's financial
condition or results of operations.
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.
REVENUE RECOGNITION
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 are provided at the time sales are recorded and for price
protection when the Company reduces its published list prices.
Revenue from product development agreements is recognized using the
percentage of completion method. Estimates are reviewed and revised periodically
throughout the lives of the contracts. Any revisions are recorded in the
accounting period in which the revisions are made.
F-7
<PAGE>
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development expenses include costs and expenses associated with
the development of the Company's design methodology and the design and
development of new products, including initial nonrecurring engineering and
product verification charges from foundries. Research and development is
expensed as incurred.
INCOME TAXES
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, which requires an asset and liability approach to
account for income taxes 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. Significant estimates
include the allowance for doubtful accounts, provisions for stock rotation,
price protection and warranty as well as realization of intangible assets.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments include cash equivalents, short-term investments 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 estimated by obtaining quoted market prices adjusted
through interpolation where necessary for maturity differences.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-term
investments and trade accounts receivable. By policy, the Company places its
investments only with financial institutions meeting its credit guidelines and,
other than U.S. Government Treasury instruments, limits the amounts invested in
any one institution or in any type of instrument. Almost all of the Company's
trade accounts receivable are derived from sales to manufacturers 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.
PRODUCT AND GEOGRAPHIC RISKS
Beginning in the second quarter of 1995, sales of the Company's CL480 have
represented an increasingly significant percentage of the Company's total net
revenues. The Company expects that revenues from its CL480 will account for a
significant portion of its product revenues in 1996. Declines in demand for this
product, whether as a result of competition, technological change or otherwise,
would have a material adverse effect on the Company's business and results of
operations.
The Asian consumer electronics market comprises a substantial market for
products utilizing the Company's CL480, such as Video CD players. As a
consequence, any political, economic or other instability in the region could
significantly reduce demand for products from certain of the Company's major
customers.
F-8
<PAGE>
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The functional currency of Kubota C-Cube is the Japanese yen. Accordingly
all assets and liabilities of Kubota C-Cube 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 translation
are recorded directly into a separate component of stockholders' equity. Foreign
currency transaction gains and losses were immaterial in 1995, 1994, and 1993.
AMORTIZATION OF DISTRIBUTION RIGHTS
As a result of the Company increasing its ownership interest in KCC to 65%
at December 31, 1992, an additional $1,236,000 equity in loss of joint venture
was recorded to reflect the Company's additional losses attributable to its
previously held 35% interest through December 31, 1992. The Company capitalized
$2,471,000 as distribution rights and will amortize this intangible asset over
its expected useful life of 15 years. Accumulated amortization was $494,000 and
$330,000 at December 31, 1995 and 1994, respectively. The Company evaluates the
recoverability of this asset based on estimated future undiscounted cash flows.
During 1995, the Company and Kubota contributed additional equity to KCC and
the Company recorded a $768,000 adjustment to paid-in capital to reflect
subsidiary losses previously recognized.
RECENTLY ISSUED ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation." The new standard defines a
fair value method of accounting for stock options and other equity instruments,
such as stock purchase plans. Under this method, compensation cost is measured
based on the fair value of the stock award when granted and is recognized as an
expense over the service period, which is usually the vesting period. This
standard will be effective for the Company beginning in 1996, and requires
measurement of awards made beginning in 1995.
The new standard permits companies to continue to account for equity
transactions with employees under existing accounting rules, but requires
disclosure in a note to the financial statements of the pro forma net income and
earnings per share as if the company had applied the new method of accounting.
The Company intends to follow these disclosure requirements for its employee
stock plans. As a result, adoption of the new standard will not impact the
Company's results of operations.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number of
common and dilutive common equivalent shares (convertible preferred stock and
common stock options) outstanding during 1995 and 1994. Pursuant to rules of the
Securities and Exchange Commission Staff, all common shares issued and options
to purchase shares of common stock granted by the Company at a price less than
the initial public offering price during the twelve months preceding the
offering date (using the treasury stock until shares are issued) have been
included in the computation of common and common equivalent shares outstanding
for periods prior to the April 1994 initial public offering.
NOTE 2. ACQUISITIONS
On November 17, 1995, the Company acquired all of the outstanding capital
stock of Media Computer Technologies, Inc. ("MCT"), a fabless semiconductor
company marketing video based products, for cash of $6.35 million, including
$100,000 of acquisition costs. The Company withheld $1,125,000 of the purchase
price which is included in long-term obligations as of December 31, 1995.
Results of MCT since the acquisition have been included in the Company's
results. The acquisition
F-9
<PAGE>
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 2. ACQUISITIONS (CONTINUED)
was accounted for using the purchase method of accounting. Accordingly, the
purchase price was allocated on the basis of the estimated fair value of the
assets acquired and liabilities assumed as follows (in thousands):
<TABLE>
<S> <C>
Fair value of tangible assets acquired (including cash of $407).... $ 1,387
Purchased technology............................................... 1,700
In-process research and development................................ 3,800
Goodwill........................................................... 1,576
Liabilities assumed (including deferred tax liabilities of
$1,507)........................................................... (2,113)
---------
Purchase consideration............................................. $ 6,350
---------
---------
</TABLE>
The purchased technology and goodwill are each being amortized over 5 years.
The $3,800,000 allocated to in-process research and development was expensed at
the time of the acquisition.
The Company also entered into agreements with former employees of MCT
providing for additional incentive payments of up to $1.125 million, payable
over a 3 year period upon the achievement of performance milestones and
contingent upon continued employment with the Company.
The following unaudited pro forma information presents the consolidated
results of operations as if the acquisition had occurred on January 1, 1994
excluding the write-off of in-process research and development and after giving
effect to certain adjustments including amortization of identifiable intangible
assets and goodwill, reduction in investment income for utilization of the
Company's cash and investments to finance the acquisition, and related tax
effects. The pro forma results have been prepared for information purposes only
and do not purport to be indicative of what would have occurred had the
acquisition occurred on January 1, 1994 or of results which may occur in the
future.
Pro forma information (unaudited, in thousands except per share amounts):
<TABLE>
<CAPTION>
1995 1994
----------- ---------
<S> <C> <C>
Net sales............................................................ $ 130,720 $ 47,822
Net income........................................................... 28,606 4,325
Net income per share................................................. $ 0.83 $ 0.14
</TABLE>
NOTE 3. INVESTMENTS
Investments include the following debt securities as of December 31, 1995
and 1994:
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
AMORTIZED MARKET HOLDING HOLDING
COST VALUE GAINS LOSSES
----------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-sale corporate debt securities:
December 31, 1995.......................... $ 10,689 $ 10,675 $ 11 $ 25
----------- --------- ----------- -----------
----------- --------- ----------- -----------
December 31, 1994.......................... $ 30,240 $ 30,159 $ 99 $ 180
----------- --------- ----------- -----------
----------- --------- ----------- -----------
</TABLE>
There were no gains or losses on the sale of investments in 1995 or 1994.
F-10
<PAGE>
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 4. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Finished goods............................................ $ 7,572 $ 867
Work-in-process........................................... 1,667 1,170
Raw materials............................................. 2,632 2,510
--------- ---------
Total................................................. $ 11,871 $ 4,547
--------- ---------
--------- ---------
</TABLE>
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Equipment under capital lease........................... $ 3,814 $ 5,993
Machinery and equipment -- principally computers........ 11,821 5,158
Furniture and fixtures.................................. 1,417 424
Leasehold improvements.................................. 512 412
--------- ---------
Total............................................... 17,564 11,987
Accumulated depreciation and amortization............... (10,342) (7,883)
--------- ---------
Property and equipment -- net........................... $ 7,222 $ 4,104
--------- ---------
--------- ---------
</TABLE>
NOTE 6. LINE OF CREDIT AND NOTES PAYABLE TO BANKS
At December 31, 1995, the Company had an available bank line of credit of
$8,500,000 which expires August 1, 1996. Borrowings bear interest at the bank's
prime rate (8.5% at December 31, 1995). The line of credit required the Company
to comply with certain financial covenants, and the Company was in compliance
with all of the covenants at December 31, 1995. There were no borrowings under
this line at December 31, 1995. In January 1996, the line of credit was
increased to $20,000,000. This line is collateralized by the Company's
receivables, inventory and fixed assets. The new agreement requires the Company,
among other things, to maintain a tangible net worth, as defined and including
convertible subordinated debt, of $152,534,000, 80% of its tangible consolidated
assets within the U.S. parent company, quarterly net income (no more than one
quarterly loss per fiscal year), a quick ratio of 1.75 to 1, and a maximum debt
to tangible net worth (as defined) ratio of .75 to 1. In addition, the bank
agreement prohibits the payment of cash dividends.
Notes payable to banks of $1,934,000 ($5,422,000 at December 31, 1994)
represent yen denominated borrowings of Y200,000,000 (Y540,000,000 at December
31, 1994) by the Company's Japanese subsidiary, Kubota C-Cube, with a weighted
average interest rate of 3% at December 31, 1995. The notes expire on various
dates through 1996; however, the minority shareholder in Kubota C-Cube, Kubota
Corporation, agreed to continue to guarantee decreasing amounts during the
following periods: up to Y450,000,000, Y250,000,000 and Y125,000,000 following
the first, second and third anniversaries of the closing of the Company's
initial public offering of common stock (April 28, 1994), respectively, with
such guarantee expiring three years and six months after such closing. If Kubota
Corporation is required to make a payment under the loan guarantee, and the
Company has not reimbursed such payment by March 31, 1996, the Company will
issue to Kubota Corporation a
F-11
<PAGE>
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 6. LINE OF CREDIT AND NOTES PAYABLE TO BANKS (CONTINUED)
warrant to purchase shares of the Company's common stock at $.70 per share. The
number of shares of such warrant shall be for the amount of the guarantee
payment in yen divided by 2,000, or a maximum of 450,000 shares at anytime on or
after December 31, 1994.
NOTE 7. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Convertible notes (see below).................... $ 86,250 $ --
Purchase consideration........................... 1,125 --
Capital lease obligations (see Note 8)........... 1,633 2,858
Other long-term obligations...................... 161 709
--------- ---------
89,169 3,567
Current portion.................................. (1,159) (1,486)
--------- ---------
Long-term portion................................ $ 88,010 $ 2,081
--------- ---------
--------- ---------
</TABLE>
In November 1995, the Company completed a public debt offering of
$86,250,000 aggregate principal amount of convertible subordinated notes. The
notes mature in 2005. Interest is payable semi-annually at 5.875% per annum. The
notes are convertible at the option of the note holders into the Company's
common stock at an initial conversion price of $30.70 per share, subject to
adjustment. Beginning in November, 1997, the notes are redeemable at the option
of the Company at an initial redemption price of 104.7% of the principal amount.
The Company has reserved 2,809,446 shares of common stock for the conversion of
these notes. Offering costs of $2,853,000 are included in other assets and are
amortized on a straight-line basis as an adjustment to interest expense over the
term of the notes.
NOTE 8. LEASE COMMITMENTS
Equipment with a cost and accumulated amortization of $3,814,000 and
$3,050,000 at December 31, 1995 ($5,993,000 and $4,343,000 at December 31, 1994)
has been leased under capital leases. In addition, the Company rents office and
research facilities under operating lease agreements which expire through April
2005.
F-12
<PAGE>
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 8. LEASE COMMITMENTS (CONTINUED)
Future minimum annual operating and capital lease commitments at December
31, 1995 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
1996.......................................................... $ 1,121 $ 863
1997.......................................................... 1,135 734
1998.......................................................... 703 240
1999.......................................................... 703 --
2000.......................................................... 705 --
Thereafter.................................................... 3,108 --
----------- ---------
Total minimum lease payments.................................. $ 7,475 1,837
-----------
-----------
Amount representing interest.................................. (204)
---------
Present value of minimum lease payments....................... 1,633
Current portion............................................... (671)
---------
Long-term portion............................................. $ 962
---------
---------
</TABLE>
Rent expense for operating leases was approximately $857,000, $593,000 and
$694,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
NOTE 9. STOCKHOLDERS' EQUITY
COMMON STOCK OFFERING
In April 1994, the Company completed an initial public offering of 4,800,000
shares of common stock at a price of $7.50 per share. In May 1994, upon the
exercise of the Underwriter's overallotment option, 720,000 additional shares of
common stock were sold at $7.50 per share. Concurrent with the Company's initial
public offering, each of the 1,910,000 shares of Series A, each of the 2,700,000
shares of Series B and each of the 2,883,738 shares of Series C convertible
preferred stock outstanding were converted into two shares of common stock. The
proceeds, net of commissions and certain expenses, to the Company from the
offering were approximately $37.4 million.
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, 1995, no shares of preferred stock had been issued.
COMMON STOCK
The Company's common stock was split two-for-one (effected as a 1 for 1
stock dividend) on December 19, 1995 for shareholders of record on December 1,
1995. All applicable share and per share data in these financial statements have
been restated to give effect to this stock split.
The Company has authorized 16,177,922 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. One officer has issued a note for the acquisition of common stock
which bears interest at 6.2% with interest and principal due in 1997.
F-13
<PAGE>
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 9. STOCKHOLDERS' EQUITY (CONTINUED)
EMPLOYEE STOCK OPTION PLANS
The Company's stock option plans (the "Plans") authorize the issuance of
13,328,922 shares of common stock (included in the 16,177,922 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 four years
and expire up to 10 years from the grant date. Option activity under the Plans
was as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE TOTAL
---------- ------------- -----------
<S> <C> <C> <C> <C>
Outstanding, January 1, 1993.... 6,109,104 $ .05 - $ .35 $ 1,765,600
Granted......................... 1,740,000 .35 - 1.50 1,193,715
Exercised....................... (2,708,376) .05 - .50 (804,112)
Canceled........................ (578,250) .06 - .35 (199,288)
---------- ------------- -----------
Outstanding, December 31,
1993........................... 4,562,478 .05 - 1.50 1,955,915
Granted......................... 1,179,160 3.00 - 11.38 7,515,728
Exercised....................... (1,771,384) .05 - 6.75 (624,369)
Canceled........................ (200,074) .25 - 11.25 (529,143)
---------- ------------- -----------
Outstanding, December 31,
1994........................... 3,770,180 .05 - 11.38 8,318,131
Granted......................... 3,985,106 7.50 - 58.25 68,348,396
Exercised....................... (1,432,941) .05 - 13.00 (1,112,805)
Canceled........................ (308,527) .35 - 17.88 (2,111,099)
---------- ------------- -----------
Outstanding, December 31,
1995........................... 6,013,818 $ .05 - $58.25 $73,442,623
---------- ------------- -----------
---------- ------------- -----------
</TABLE>
At December 31, 1995, 1,316,523 options were exercisable and 689,841 shares
were available for future grants.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an employee stock purchase plan, under which eligible
employees may authorize payroll deductions of up to 10% of their compensation
(as defined) to purchase common stock at a price equal to 85% of the lower of
the fair market values as of the beginning or the end of the offering period.
During 1995, 138,000 shares of common stock were issued under this plan. At
December 31, 1995, 225,000 shares of common stock were available for issuance
under this plan.
DEFERRED STOCK COMPENSATION
In connection with the grant of certain stock options to employees in 1993,
the Company recorded deferred stock compensation of $980,000 for the difference
between the deemed fair value for accounting purposes and the option price as
determined by the Board at the date of grant. Such amount is presented as a
reduction of stockholders' equity and is amortized over the 48-month vesting
period of the related stock options. In connection with the grant of stock
options to employees in the first quarter of 1994, the Company recorded
additional deferred stock compensation of $615,000 which will be amortized over
the 48-month vesting period of such options.
F-14
<PAGE>
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 10. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
--------------
(IN THOUSANDS)
<S> <C>
Current:
Federal........................................... $ 8,779
State............................................. 1,636
Foreign........................................... --
--------------
Total........................................... 10,415
Deferred:
Federal........................................... (4,606)
State............................................. (876)
Foreign........................................... --
--------------
Total........................................... (5,482)
--------------
Total............................................... $ 4,933
--------------
--------------
</TABLE>
Income tax expense in 1994 and 1993 relates to foreign withholding taxes on
certain license and development fees, and alternative minimum taxes. Otherwise,
the Company was not required to pay income taxes for those years due to its loss
carryforwards.
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,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax computed at federal statutory rate.... $ 10,514 $ 1,726 $ (164)
State income taxes, net of federal
effect................................... 947 312 (29)
Foreign withholding taxes................. 88 4 71
Research & development tax credit......... (892) (499) --
Change in valuation allowance............. (2,149) (1,716) 193
Other..................................... (3,575) 242 --
--------- --------- ---------
Income tax expense...................... $ 4,933 $ 69 $ 71
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of the net deferred tax asset as of December 31 were as
follows:
<TABLE>
<CAPTION>
1995 1994
--------- ----------
<S> <C> <C>
(IN THOUSANDS)
Accruals and reserves recognized in different periods....... $ 3,672 $ 1,469
Net operating loss carryforwards............................ 2,476 9,730
Capitalized research & development.......................... 1,182 2,165
Tax basis depreciation...................................... 542 662
Other....................................................... 86 591
Research & development credits.............................. -- 1,485
Valuation allowance......................................... (2,476) (16,102)
--------- ----------
Total..................................................... $ 5,482 $ --
--------- ----------
--------- ----------
</TABLE>
F-15
<PAGE>
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 10. INCOME TAXES (CONTINUED)
At December 31, 1995, the Company has foreign net operating loss
carryforwards of approximately $4,600,000 which expire through 1998.
The reduction in the valuation allowance from 1994 to 1995 of $13,626,000
recognized the tax benefit of net operating losses utilized by the Company's
earnings. The remaining valuation allowance relates to foreign net operating
losses which the Company believes may not be realized.
NOTE 11. 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 has not contributed to the plan to
date.
NOTE 12. RELATED PARTIES
The Company has agreed with a stockholder who had guaranteed capital lease
obligations to the extent of $3 million and who held a security interest in all
of the Company's intangible assets to substitute a security interest in a
separate bank account established and funded in an amount equal to the remaining
related lease payments (approximately $0.5 million) in exchange for terminating
its security interest in the Company's intangible assets. Restricted cash is
included with other current assets and other assets in the 1995 balance sheet.
A director and officer of the Company was also a director of a company with
which the Company has entered into a development agreement providing, among
other things, for the development of certain products to be used in the other
party's products and the licensing of certain of the Company's technology to the
other party for its use in developing its products. In addition, in 1994 and
1993, the Company acquired approximately a 7% interest in this company for a
total of $237,000. The Company subleased office space to this company in 1994
and 1993 and received income of approximately $34,000 and $118,000,
respectively.
NOTE 13. DEVELOPMENT AGREEMENTS
The Company enters into development agreements with other companies for
which it receives development fees with certain payments contingent upon
attaining contract milestones. The Company generally retains ownership of the
products developed under the agreements; however, some agreements limit the
product markets in which the Company may sell the developed product. In
addition, under certain of the agreements, the Company is required to pay
royalties based on a percentage of the net sales of the products developed under
the agreements. Royalty expense was $574,000 in 1995, $1,377,000 in 1994 and
$622,000 in 1993.
NOTE 14. GEOGRAPHIC AND CUSTOMER INFORMATION
Information concerning the Company's operations by geographic area as of and
for the years ended December 31, is as follows:
GEOGRAPHIC REGION INFORMATION
<TABLE>
<CAPTION>
1995 1994 1993
----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues from unaffiliated customers by
geographic region:
United States................................. $ 107,341 $ 37,691 $ 18,700
Japan......................................... 17,261 7,328 5,039
----------- --------- ---------
</TABLE>
F-16
<PAGE>
C-CUBE MICROSYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 14. GEOGRAPHIC AND CUSTOMER INFORMATION (CONTINUED)
<TABLE>
<S> <C> <C> <C>
Net revenues.................................... $ 124,602 $ 45,019 $ 23,739
----------- --------- ---------
----------- --------- ---------
Revenues from affiliates (eliminated in
consolidation) by geographic region:
United States................................. $ 13,406 $ 4,979 $ 3,567
Japan......................................... -- 112 358
----------- --------- ---------
Total revenues from affiliates.................. $ 13,406 $ 5,091 $ 3,925
----------- --------- ---------
----------- --------- ---------
Operating income:
United States................................. $ 26,574 $ 4,121 $ 185
Japan......................................... 2,048 424 (162)
Transfers between geographic areas............ (642) (157) (177)
----------- --------- ---------
Operating income................................ $ 27,980 $ 4,388 $ (154)
----------- --------- ---------
----------- --------- ---------
Identifiable assets:
United States................................. $ 202,862 $ 66,184 $ 20,374
Japan......................................... 6,614 3,660 5,002
Eliminations.................................. (5,950) (1,982) (1,451)
----------- --------- ---------
Total assets.................................... $ 203,526 $ 67,862 $ 23,925
----------- --------- ---------
----------- --------- ---------
</TABLE>
The Company sells its products primarily in Asia, the U.S. and Western
Europe. Export revenues as a percentage of net revenues for the years ended
December 31, consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Europe....................................................... 4% 8% 6%
Japan and Asia............................................... 51 13 9
-- -- --
55% 21% 15%
-- -- --
-- -- --
</TABLE>
International revenues as a percentage of net revenues were 70% in 1995, 38%
in 1994 and 37% in 1993. During 1995, two customers accounted for 14% and 10% of
net revenues, respectively. During 1994 and 1993, no single customer accounted
for more than 10% of net revenues. At December 31, 1995, one customer
represented 25% of accounts receivable. At December 31, 1994, three customers
represented 15%, 14% and 11% of accounts receivable.
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
C-Cube Microsystems Inc.:
We have audited the consolidated financial statements of C-Cube Microsystems
Inc. as of December 31, 1995 and 1994, and for each of the three years in the
period ended December 31, 1995, and have issued our report thereon dated January
17, 1996. Our audits also included the consolidated financial statement schedule
of C-Cube Microsystems Inc., listed in the Index at Item 14. 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.
DELOITTE & TOUCHE LLP
San Jose, California
January 17, 1996
F-18
<PAGE>
SCHEDULE II
C-CUBE MICROSYSTEMS INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND FROM END OF
OF PERIOD EXPENSES RESERVES PERIOD
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Sales returns allowance......................................... $ 848 $ 2,846 $ 1,894 $ 1,800
Allowance for doubtful accounts................................. 443 574 30 987
Warranty........................................................ 238 889 560 567
YEAR ENDED DECEMBER 31, 1994:
Sales returns allowance......................................... $ 308 $ 1,257 $ 717 $ 848
Allowance for doubtful accounts................................. 190 286 33 443
Warranty........................................................ 90 733 585 238
YEAR ENDED DECEMBER 31, 1993:
Sales returns allowance......................................... $ 198 $ 325 $ 215 $ 308
Allowance for doubtful accounts................................. 40 602 452 190
Warranty........................................................ 84 254 248 90
</TABLE>
F-19
<PAGE>
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
JUNE 30, 1996 ---------------
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 107,115 $ 133,414
Short-term investments.................................... 35,003 10,675
Receivables............................................... 35,940 24,421
Inventories............................................... 23,249 11,871
Deferred taxes and other current assets................... 13,030 5,882
------------- ---------------
Total current assets.................................. 214,337 186,263
Property and equipment -- net............................. 14,553 7,222
Production capacity rights................................ 47,600 --
Distribution rights -- net................................ 1,895 1,977
Purchased technology -- net............................... 2,839 3,095
Other assets.............................................. 4,442 4,969
------------- ---------------
Total................................................. $ 285,666 $ 203,526
------------- ---------------
------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 24,500 $ 1,934
Accounts payable.......................................... 26,558 10,704
Accrued liabilities....................................... 8,049 8,240
Income taxes payable...................................... 10,541 5,649
Current portion of long-term obligations.................. 969 1,159
------------- ---------------
Total current liabilities............................. 70,617 27,686
Long-term obligations..................................... 87,816 88,010
------------- ---------------
Total liabilities......................................... 158,433 115,696
------------- ---------------
Minority interest in subsidiary............................. 976 295
Stockholders' equity:
Common stock, $0.001 par value, 50,000 shares authorized;
shares outstanding: June 30, 1996 -- 33,156, December 31,
1995 -- 32,363........................................... 98,391 87,124
Deferred stock compensation................................. (448) (635)
Notes receivable from stockholders.......................... (368) (459)
Accumulated translation adjustments......................... (1,050) (860)
Unrealized loss on investments.............................. (74) (14)
Retained earnings........................................... 29,806 2,379
------------- ---------------
Total stockholders' equity............................ 126,257 87,535
------------- ---------------
Total................................................. $ 285,666 $ 203,526
------------- ---------------
------------- ---------------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-20
<PAGE>
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE SIX MONTHS ENDED JUNE
30, 30,
-------------------- ----------------------
1996 1995 1996 1995
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues:
Product......................................................... $ 72,958 $ 21,054 $ 140,858 $ 37,515
Development contracts........................................... -- 560 200 1,212
--------- --------- ----------- ---------
Total....................................................... 72,958 21,614 141,058 38,727
--------- --------- ----------- ---------
Costs and expenses:
Cost of product revenues........................................ 33,561 10,480 65,540 18,273
Research and development........................................ 9,363 3,007 16,213 5,753
Selling, general and administrative............................. 8,294 4,235 16,094 7,988
--------- --------- ----------- ---------
Total....................................................... 51,218 17,722 97,847 32,014
--------- --------- ----------- ---------
Income from operations............................................ 21,740 3,892 43,211 6,713
Other income (expense), net....................................... 237 528 708 1,005
--------- --------- ----------- ---------
Income before income taxes and minority interest.................. 21,977 4,420 43,919 7,718
Income tax expense................................................ 8,131 285 15,811 389
--------- --------- ----------- ---------
Income before minority interest................................... 13,846 4,135 28,108 7,329
Minority interest in net income of subsidiary..................... -- -- 681 --
--------- --------- ----------- ---------
Net income........................................................ $ 13,846 $ 4,135 $ 27,427 $ 7,329
--------- --------- ----------- ---------
--------- --------- ----------- ---------
Net income per share.............................................. $ 0.39 $ 0.12 $ 0.76 $ 0.21
--------- --------- ----------- ---------
--------- --------- ----------- ---------
Shares used in computation........................................ 35,697 34,332 35,869 34,176
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-21
<PAGE>
C-CUBE MICROSYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
-----------------------
1996 1995
----------- ----------
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................................. $ 27,427 $ 7,329
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest in subsidiary...................................................... 681 --
Depreciation and amortization.......................................................... 2,803 1,340
Changes in assets and liabilities:
Receivables........................................................................ (11,947) (2,686)
Inventories........................................................................ (11,407) (1,437)
Production capacity rights......................................................... (24,500) --
Deferred taxes and other assets.................................................... (5,903) (628)
Accounts payable................................................................... 15,860 3,176
Accrued liabilities................................................................ 9,054 1,081
Income taxes payable............................................................... 4,892 337
----------- ----------
Net cash provided by operating activities.............................................. 6,960 8,512
----------- ----------
Cash flows from investing activities:
Maturities of short-term investments................................................... 24,301 28,900
Purchases of short-term investments.................................................... (48,297) (19,613)
Capital expenditures................................................................... (9,868) (2,615)
Other assets........................................................................... 519 188
----------- ----------
Net cash provided by (used in) investing activities.................................... (33,345) 6,860
----------- ----------
Cash flows from financing activities:
Bank term loan repayment............................................................... -- (194)
Notes payable to banks -- net.......................................................... (1,879) 116
Repayments of capital lease obligations................................................ (381) (670)
Sale of common stock, net of notes receivable.......................................... 2,047 1,070
Collection of stockholder notes receivable............................................. 91 38
----------- ----------
Net cash provided by (used in) financing activities.................................... (122) 360
----------- ----------
Exchange rate impact on cash and equivalents............................................. 208 (137)
Net increase (decrease) in cash and equivalents.......................................... (26,299) 15,595
Cash and equivalents, beginning of period................................................ 133,414 13,674
----------- ----------
Cash and equivalents, end of period...................................................... $ 107,115 $ 29,269
----------- ----------
----------- ----------
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on investments.................................................. $ (60) $ 117
Purchase of production capacity rights for note payable................................ $ (24,500) $ --
Supplemental disclosure of cash flow information --
Cash paid during the period for:
Interest............................................................................. $ 2,997 $ 285
Income taxes......................................................................... 6,924 56
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-22
<PAGE>
C-CUBE MICROSYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of management, these unaudited condensed consolidated
financial statements include all adjustments, consisting only of normal
recurring adjustments and accruals, C-Cube Microsystems Inc. ("C-Cube" or the
"Company") considers necessary for a fair presentation of the Company's
financial position as of June 30, 1996, and the results of operations and cash
flows for the quarters and six months ended June 30, 1996 and 1995. This
unaudited quarterly information should be read in conjunction with the audited
consolidated financial statements of C-Cube and the notes thereto included in
the Company's Annual Report to Stockholders for the year ended December 31,
1995.
The growth in revenues and operating income experienced by the Company in
recent quarters is not necessarily indicative of future results. In addition, in
view of the significant growth in recent years, C-Cube believes that
period-to-period comparisons of its financial results should not be relied upon
as an indication of future performance.
IMPAIRMENT REVIEW
At least annually, the Company conducts an impairment review of its
investment in property and equipment and of all its tangible and intangible
noncurrent assets. The Company reviews its inventory purchasing requirements
throughout any given reporting period, and may perform an impairment review of
its production capacity rights based upon the individual foundry's performance.
2. INVENTORIES CONSIST OF:
<TABLE>
<CAPTION>
JUNE 30,
1996
-------------
(IN
THOUSANDS)
<S> <C>
Finished goods....................................................... $ 17,260
Work-in-process...................................................... 3,764
Raw materials........................................................ 2,225
-------------
Total.......................................................... $ 23,249
-------------
-------------
</TABLE>
3. WAFER SUPPLY AGREEMENT
In the second quarter of 1996 the Company expanded and formalized it
relationship with Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC") to
provide additional wafer production capacity over the 1996 to 2001 timeframe.
The agreement with TSMC provides that TSMC will produce and ship wafers to the
Company at specified prices and requires C-Cube to make two advance payments
totaling $49 million. TSMC will apply this prepayment against a portion of the
wafer cost as product is delivered to the Company. Accordingly, the prepaid
amount will be amortized to inventory as wafers are received. The first advance
payment of $24.5 million was made in June 1996, and the final payment is due
June 1997, which is evidenced by an unsecured promissory note. At June 30, 1996,
$1.4 million of the $49 million production capacity rights is included in
deferred taxes and other current assets.
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
DiviCom Inc.:
We have audited the accompanying balance sheets of DiviCom Inc. as of
December 31, 1994 and 1995, and the related statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1995 and the nine month period ended December 31, 1993. 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 audits 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, the financial statements referred to above present fairly,
in all material respects, the financial position of DiviCom Inc. as of December
31, 1994 and 1995, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1995 and the nine month period
ended December 31, 1993 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
February 12, 1996, except for Note 10, as to which
the date is May 7, 1996
F-24
<PAGE>
DIVICOM INC.
BALANCE SHEETS, DECEMBER 31, 1994 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................ $ 4,064 $ 7,387
Accounts receivable, net of allowance for doubtful accounts of none in 1994 and $333 in
1995.................................................................................... 51 3,766
Accounts receivable -- stockholders...................................................... 194 3,073
Inventory................................................................................ 3,155 4,636
Prepaid expenses and other current assets................................................ 244 1,794
Deferred taxes........................................................................... 1,790
---------- ----------
Total current assets................................................................. 7,708 22,446
Property and equipment, net................................................................ 2,600 3,339
Other assets, net.......................................................................... 132 579
---------- ----------
Total assets....................................................................... $ 10,440 $ 26,364
---------- ----------
---------- ----------
LIABILITIES
Current liabilities:
Accounts payable......................................................................... $ 3,148 $ 2,008
Accounts payable -- stockholders......................................................... 989 497
Accrued expenses......................................................................... 410 1,354
Warranty reserve......................................................................... 1,040
Deferred revenue......................................................................... 3,000 6,908
---------- ----------
Total current liabilities............................................................ 7,547 11,807
---------- ----------
Commitments (Note 4)
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.001:
Authorized: 15,788 shares in 1994 and 21,288 shares in 1995;
Issued and outstanding: 12,422 shares in 1994 and 21,288 shares in 1995................ 12 21
(Liquidation preference: $4,969 in 1994 and $11,815 in 1995)...........................
Common stock, par value $0.001:
Authorized: 29,250 shares in 1994 and 35,750 shares in 1995;
Issued and outstanding: 7,158 shares in 1994 and 10,045 shares in 1995................... 7 10
Additional paid-in capital................................................................. 13,139 29,188
Receivable from stockholder................................................................ (550) (1,100)
Subscribed stock........................................................................... 3,000
Accumulated deficit........................................................................ (12,715) (13,562)
---------- ----------
Total stockholders' equity........................................................... 2,893 14,557
---------- ----------
Total liabilities and stockholders' equity......................................... $ 10,440 $ 26,364
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
DIVICOM INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
DECEMBER 31, ----------------------
1993 1994 1995
------------ ---------- ----------
<S> <C> <C> <C>
Revenues.................................................................. $ 319 $ 34,119
Cost of revenues.......................................................... 156 16,451
---------- ----------
Gross profit.......................................................... 163 17,668
Operating expenses:
Research and development................................................ $ (1,407) (8,460) (13,572)
Selling, general and administrative..................................... (539) (2,615) (5,275)
------------ ---------- ----------
Operating loss........................................................ (1,946) (10,912) (1,179)
Interest and other income................................................. 39 104 163
------------ ---------- ----------
Loss before benefit from income taxes................................. (1,907) (10,808) (1,016)
Benefit from income taxes........................................... 169
------------ ---------- ----------
Net loss.......................................................... $ (1,907) $ (10,808) $ (847)
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
DIVICOM INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL PAID-IN CAPITAL
-------------------------------------
PREFERRED STOCK COMMON STOCK RESEARCH
-------------------- -------------------- PREFERRED COMMON AND
SHARES AMOUNT SHARES AMOUNT STOCK STOCK DEVELOPMENT
--------- --------- --------- --------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Series A preferred stock
at $.40 per share for cash........... 3,156 $ 3 $ 1,247
Issuance of Series A preferred stock
at $.40 per share in exchange for
intellectual property rights......... 680 1 269
Issuance of common stock at $.01 per
share in exchange for intellectual
property rights...................... 686 $ 1 $ 6
Funding by stockholder for research
and development...................... $ 4,240
Receivable from stockholder...........
Net loss..............................
--------- --------- --------- --------- ----------- --------- -------------
Balances, December 31, 1993............. 3,836 4 686 1 1,516 6 4,240
Issuance of Series A preferred stock
at $.40 per share for cash........... 7,926 7 3,152
Issuance of Series A preferred stock
at $.40 per share in exchange for
intellectual property rights......... 660 1 261
Issuance of common stock at $.025 per
share for cash....................... 5,786 5 137
Issuance of common stock at $.01 per
share in exchange for intellectual
property rights...................... 686 1 7
Funding by stockholder for research
and development...................... 3,820
Repayment of receivable from
stockholder..........................
Subscribed stock......................
Net loss..............................
--------- --------- --------- --------- ----------- --------- -------------
Balances, December 31, 1994............. 12,422 12 7,158 7 4,929 150 8,060
Issuance of Series A preferred stock
at $.40 per share for cash........... 2,706 2 1,070
Issuance of Series A preferred stock
at $.40 per share in exchange for
intellectual property rights......... 660 1 261
Issuance of Series B preferred stock
at $1.00 per share for cash and
redemption of subscribed stock....... 5,500 6 5,494
Issuance of common stock under option
plan................................. 2,887 3 164
Funding by stockholder for research
and development...................... 9,060
Receivable from stockholder...........
Net loss..............................
--------- --------- --------- --------- ----------- --------- -------------
Balances, December 31, 1995............. 21,288 $ 21 10,045 $ 10 $ 11,754 $ 314 $ 17,120
--------- --------- --------- --------- ----------- --------- -------------
--------- --------- --------- --------- ----------- --------- -------------
<CAPTION>
RECEIVABLE TOTAL
FROM SUBSCRIBED ACCUMULATED STOCKHOLDERS'
STOCKHOLDER STOCK DEFICIT EQUITY
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Issuance of Series A preferred stock
at $.40 per share for cash........... $ 1,250
Issuance of Series A preferred stock
at $.40 per share in exchange for
intellectual property rights......... 270
Issuance of common stock at $.01 per
share in exchange for intellectual
property rights...................... 7
Funding by stockholder for research
and development...................... 4,240
Receivable from stockholder........... $ (600) (600)
Net loss.............................. $ (1,907) (1,907)
----------- ------------ ------------
Balances, December 31, 1993............. (600) (1,907) 3,260
Issuance of Series A preferred stock
at $.40 per share for cash........... 3,159
Issuance of Series A preferred stock
at $.40 per share in exchange for
intellectual property rights......... 262
Issuance of common stock at $.025 per
share for cash....................... 142
Issuance of common stock at $.01 per
share in exchange for intellectual
property rights...................... 8
Funding by stockholder for research
and development...................... 3,820
Repayment of receivable from
stockholder.......................... 50 50
Subscribed stock...................... $ 3,000 3,000
Net loss.............................. (10,808) (10,808)
----------- ----------- ------------ ------------
Balances, December 31, 1994............. (550) 3,000 (12,715) 2,893
Issuance of Series A preferred stock
at $.40 per share for cash........... 1,072
Issuance of Series A preferred stock
at $.40 per share in exchange for
intellectual property rights......... 262
Issuance of Series B preferred stock
at $1.00 per share for cash and
redemption of subscribed stock....... (3,000) 2,500
Issuance of common stock under option
plan................................. 167
Funding by stockholder for research
and development...................... 9,060
Receivable from stockholder........... (550) (550)
Net loss.............................. (847) (847)
----------- ----------- ------------ ------------
Balances, December 31, 1995............. $ (1,100) $ -- $ (13,562) $ 14,557
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
DIVICOM INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
DECEMBER 31, ---------------------
1993 1994 1995
------------ ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................................. $ (1,907) $ (10,808) $ (847)
Adjustments to reconcile net loss to net cash used in operating
activities:
Deferred taxes......................................................... (2,321)
Depreciation and amortization.......................................... 144 691 1,595
Intellectual property rights issued in exchange for common and
preferred stock and expensed.......................................... 276 269 262
Loss on disposal of property and equipment............................. 28
Provision for doubtful accounts........................................ 333
Provision for excess and obsolete inventories.......................... 311 2,031
Changes in operating assets and liabilities:
Accounts receivable.................................................. (44) (200) (6,927)
Inventory............................................................ (3,466) (3,512)
Prepaid expenses and other current assets............................ (167) (78) (1,550)
Accounts payable..................................................... 331 3,806 (1,632)
Accrued expenses..................................................... 70 339 944
Warranty reserve..................................................... 1,040
Deferred revenue..................................................... 3,000 3,908
------------ ---------- ---------
Net cash used in operating activities.............................. (1,297) (6,136) (6,648)
------------ ---------- ---------
Cash flows from investing activities:
Purchases of property and equipment...................................... (918) (2,398) (2,299)
Increase in other assets................................................. (250)
Proceeds from sale of property and equipment............................. 21
------------ ---------- ---------
Net cash used in investing activities.............................. (1,168) (2,398) (2,278)
------------ ---------- ---------
Cash flows from financing activities:
Proceeds from issuance of preferred stock................................ 1,251 3,160 3,572
Proceeds from issuance of common stock................................... 142 167
Funding by stockholder for research and development...................... 4,240 3,820 9,060
Issuance (repayment) of receivable to stockholders....................... (600) 50 (550)
Proceeds from subscribed stock........................................... 3,000
Proceeds from borrowing under line of credit............................. 2,020
Repayment of amounts borrowed under line of credit....................... (2,020)
------------ ---------- ---------
Net cash provided by financing activities.......................... 4,891 10,172 12,249
------------ ---------- ---------
Net increase in cash and cash equivalents.................................. 2,426 1,638 3,323
Cash and cash equivalents, beginning of period............................. 2,426 4,064
------------ ---------- ---------
Cash and cash equivalents, end of period................................... $ 2,426 $ 4,064 $ 7,387
------------ ---------- ---------
------------ ---------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Common stock issued in exchange for intellectual property rights......... $ 7 $ 8
Preferred stock issued in exchange for stock subscription................ $ 3,000
Taxes paid............................................................... $ 1,670
Interest paid............................................................ $ 21
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
DIVICOM INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. FORMATION AND BUSINESS OF THE COMPANY:
DiviCom, Inc. (the Company) was incorporated on April 20, 1993 to develop,
manufacture and market communications products which merge the technologies of
video and audio compression with digital communication. Through December 31,
1994, the Company had been primarily engaged in developing its initial product
technology, recruiting personnel and raising capital.
The Company has several product families for video networking applications
including: MediaView, a high performance MPEG 2 encoder; MediaNode, a video
networking platform and control system; and ProView, a MPEG 2 commercial decoder
family.
Product shipments comprise the majority of the Company's revenues, however
the Company also earns maintenance contract and royalty revenues on services and
technology, including DiVA, advanced MPEG 2 technology for settop box and
consumer product applications. The Company's products are marketed in North and
South America, Europe and Asia Pacific.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Substantially all the
Company's cash and cash equivalents are held at one financial institution.
REVENUE RECOGNITION:
Revenue from product sales is recognized upon delivery, net of an allowance
for returns, provided no significant obligations remain and collection of the
receivable is deemed probable.
CONCENTRATION OF CREDIT RISK:
The Company sells the majority of its products under contracts to large,
established telecommunications, entertainment, and direct-to-home satellite
companies, consortia and joint ventures in North America and Europe. Two
customers and one distributor accounted for 42%, 25% and 15% of net revenues,
respectively, in 1995, with one customer accounting for 40% of total accounts
receivable at December 31, 1995.
WARRANTY RESERVE:
The Company has estimated and accrued costs related to the warranty offered
on its product lines. The stated warranty period is one year for components, and
90 days for labor. Due to the fact that the technology is relatively new, it is
undergoing certain modifications and modifications based on field performance.
The Company does not have significant historical data with which to estimate
warranty costs because the products were only introduced within the last year.
Although the warranty reserve is considered adequate in the Company's best
judgment, it is reasonably possible that the cost of upgrade and modification to
systems in the field could exceed the estimated warranty reserve, and that
additional expense could result.
F-29
<PAGE>
DIVICOM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVENTORY:
Inventory is stated at the lower of cost (determined on a first-in,
first-out basis) or market.
PROPERTY AND EQUIPMENT AND ORGANIZATION COSTS:
Property and equipment and organization costs are stated at cost and are
depreciated on a straight line basis over their estimated useful lives of three
years.
RESEARCH AND DEVELOPMENT:
Research and development costs and software development costs are charged to
operations as incurred. Intellectual property rights are expensed on acquisition
due to uncertainty regarding their useful lives.
INCOME TAXES:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards, No. 109 (SFAS 109), "Accounting for Income
Taxes." Under SFAS 109, deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to affect taxable income.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123) in October 1995. This accounting standard permits the use of either a
fair value based method or the current Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" (APB 25) when accounting for stock-
based compensation arrangements. Companies that do not follow the new fair value
based method will be required to disclose pro forma net income computed as if
the fair value based method had been applied. The disclosure provisions of SFAS
No. 123 are effective for fiscal years beginning after December 15, 1995.
Management has not determined if it will adopt the fair value based method of
accounting for stock-based compensation arrangements nor the impact of SFAS No.
123 on the Company's consolidated financial statements.
3. BALANCE SHEET DETAIL:
INVENTORY:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Raw materials........................... $ 1,841 $ 1,968
Work in process......................... 1,314 1,186
Finished goods.......................... 1,482
--------- ---------
$ 3,155 $ 4,636
--------- ---------
--------- ---------
</TABLE>
F-30
<PAGE>
DIVICOM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BALANCE SHEET DETAIL: (CONTINUED)
PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Furniture and fixtures................................................... $ 116 $ 270
Machinery and equipment.................................................. 649 1,199
Computer equipment....................................................... 1,440 2,540
Computer software........................................................ 1,049 1,241
Leasehold improvements................................................... 63 241
--------- ---------
3,317 5,491
Less accumulated depreciation and amortization........................... (717) (2,152)
--------- ---------
$ 2,600 $ 3,339
--------- ---------
--------- ---------
</TABLE>
4. COMMITMENTS:
The Company rents office facilities and equipment under several operating
leases which expire at various times through December 1999. Rent expense charged
to operations was $25, $121 and $349 and for the nine months ended 1993 and for
the years ended December 31, 1994 and 1995, respectively.
Minimum lease payments under noncancelable operating leases are as follows:
<TABLE>
<S> <C>
1996............................................................... $ 582
1997............................................................... 617
1998............................................................... 418
1999............................................................... 89
---------
Total commitments.................................................. $ 1,706
---------
---------
</TABLE>
5. STOCKHOLDERS' EQUITY:
AUTHORIZED CAPITAL STOCK:
The Company's authorized capital stock consists of 35,750 shares of common
stock, 15,788 shares of Series A preferred stock and 5,500 shares of Series B
preferred stock.
CONVERTIBLE PREFERRED STOCK:
Preferred shares are convertible to common shares at a rate determined by
dividing $0.40 and $1.00 for Series A and Series B preferred stock,
respectively, by the conversion price applicable to such shares upon surrender
of certificate for conversion. Conversion is either at the preferred
stockholders' option or automatic upon (1) an underwritten public offering of
the Company's common stock for a public offering price of not less than $2.80
per share and $10,000 in aggregate or (2) written request of the holders of at
least two-thirds of the preferred stock then outstanding. At December 31, 1994
and 1995, 15,788 and 21,288 shares of the Company's common stock had been
reserved for conversion of preferred stock.
The Company's preferred stock has voting rights equal to the number of
common shares into which they convert on the record date for the vote. In
addition, holders of preferred stock are entitled to elect directors with
respect to their shares of stock multiplied by the number of directors to be
elected.
F-31
<PAGE>
DIVICOM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
5. STOCKHOLDERS' EQUITY: (CONTINUED)
CONVERTIBLE PREFERRED STOCK: (CONTINUED)
The holders of the preferred stock are entitled to receive dividends which
are cumulative and in preference to any common stock dividends, whenever funds
are legally available and when declared by the Board of Directors. As of
December 31, 1995, no dividends had been declared. The holders of the preferred
stock also have the right of first refusal to purchase a portion of any "new
securities," as defined in the stock purchase agreements, that may be issued by
the Company. In addition, the preferred stockholders have a liquidation
preference equal to $0.40 and $1.00 per share for Series A and Series B
preferred stock, respectively, plus all declared and unpaid dividends. After
payment of the liquidation preference to the preferred stockholders, the
remaining assets of the Company will be distributed equally to the preferred and
common stockholder group as if all shares of preferred stock had been converted
into common stock. If the funds available for distribution are not adequate to
cover the preferred stock liquidation preference, all funds available for
distribution are to be distributed to the preferred stockholder ratably.
STOCK OPTION PLAN:
In April 1993, the Company authorized the 1993 Stock Option Plan (the Plan)
under which the Board of Directors may issue incentive stock options and stock
bonuses to employees and consultants of the Company. The Board of Directors has
the authority to determine to whom options and bonuses will be granted, the
number of shares, the term and the exercise price. Options granted under the
Plan generally vest over a four year period at the rate of 25% on the first
anniversary of employment and 1/48th each month thereafter. In November 1995,
the Board amended the Plan such that options granted under the Plan are
immediately exercisable. Unvested stock issued through option exercise are
subject to the Company's right of repurchase at the original exercise price. The
Company's right of repurchase decreases as the options vest. The right of
exercise generally expires ten years from the date of grant and the Company
holds the right of first refusal with respect to shares issued pursuant to the
exercise of options.
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
SHARES ----------------------------------------
AVAILABLE NUMBER OF AGGREGATE
FOR GRANT SHARES EXERCISE PRICE PRICE
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Options reserved at Plan inception............................... 7,840
Options granted................................................. (5,505) 5,505 $0.01-0.03 $ 87
----------- ----------- -------------- -----------
Balances, December 31, 1993....................................... 2,335 5,505 $0.01-0.03 87
Options reserved................................................ 4,250
Options granted................................................. (4,412) 4,412 $0.05 221
Options exercised............................................... (5,786) $0.01-0.05 (142)
Options canceled................................................ 114 (114) $0.02-0.05 (5)
----------- ----------- -------------- -----------
Balances, December 31, 1994....................................... 2,287 4,017 $0.01-0.05 161
Options reserved................................................ 1,000
Options granted................................................. (2,612) 2,612 $0.01-$0.40 316
Options exercised............................................... (2,887) $0.02-$0.40 (167)
Options canceled................................................ 245 (245) $0.01-$0.40 (31)
----------- ----------- -------------- -----------
Balances, December 31, 1995....................................... 920 3,497 $0.01-$0.40 $ 279
----------- ----------- -------------- -----------
----------- ----------- -------------- -----------
</TABLE>
F-32
<PAGE>
DIVICOM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
5. STOCKHOLDERS' EQUITY: (CONTINUED)
STOCK OPTION PLAN: (CONTINUED)
At December 31, 1995, 2,118 shares outstanding were subject to repurchase,
and approximately 2,442 outstanding options would be subject to repurchase by
the Company if exercised.
6. RELATED PARTIES:
In connection with its incorporation, the Company entered into a Business
Agreement with three of its shareholders, EURODEC, SAGEM and SAT (collectively
referred to as the Parties). Under the terms of the agreement, EURODEC and SAGEM
have the option to develop, manufacture and sell products developed by the
Company.
Provided that all applicable critical performance milestones have been
satisfied, SAGEM is required to pay the Company for the development of products
not to exceed the amount set forth in the budget agreed upon by the Parties.
During 1994 and 1995, the Company recognized $3,820 and $9,060 respectively, as
a result of this agreement. Amounts recognized have been accounted for as
additional paid-in capital in the period that funding is due according to the
agreement. At December 31, 1994 and 1995, $550 and $1,100 was due under the
agreement but had not received and was recognized as a "receivable from
shareholder" within shareholders' equity.
In addition, EURODEC and SAGEM are required to pay the Company a royalty fee
for each decoder sold which incorporates a licensed product. The royalty fee
will be paid semiannually and based on the lesser of: 1.5% of the component and
direct manufacturing costs of EURODEC or SAGEM for the licensed product or two
dollars for each of the first 5,000 decoders sold and one dollar for each
decoder sold in excess of the first 5,000. The term of the Business Agreement is
for ten years unless terminated by either party upon failure of the other party
to fulfill any of its obligations by issuance of a written notice.
The Company and C-Cube, a stockholder, entered into a Development and
Requirements Agreement. Following this agreement between the Company and C-Cube,
in connection with the issuance of common stock to C-Cube, C-Cube is required to
provide the Company with intellectual property rights including source codes
which will allow the Company to develop products using C-Cube integrated
circuits. The Company has committed to the purchase of designated integrated
circuits primarily from C-Cube under agreed upon requirements including C-Cube's
commitment to meet certain critical performance milestones and competitive
prices. In addition, the Company has the right to repurchase the common shares
in the event that C-Cube fails to meet these milestones The initial term of the
agreement between the Company and C-Cube is for five years with provisions to
consider revisions to the agreement after the third year of the signing of the
agreement. The agreement may be terminated by either party upon failure of the
other party to fulfill any of its obligations by issuance of a written notice.
The Company entered into a Marketing Development Agreement with C-Cube
whereby the Company assisted C-Cube in the development and marketing an MPEG
Remultiplexer chip. Under this agreement C-Cube paid the Company a nonrecurring
engineering fee and will also pay a royalty for each chip delivered to C-Cube
customers. Royalties in the amount of none and $15 were earned in 1994 and 1995,
respectively.
F-33
<PAGE>
DIVICOM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
6. RELATED PARTIES: (CONTINUED)
Following is a summary of the transactions and related balances between the
Company and its stockholders:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
DECEMBER 31, --------------------
1993 1994 1995
--------------- --------- ---------
<S> <C> <C> <C>
Sales:
SAGEM.................................................... $ 5,248
EURODEC.................................................. $ 42 269
C-Cube................................................... 125 437
Non-recurring engineering from C-Cube.................... 200
Purchases:
SAGEM.................................................... 1
EURODEC.................................................. 104 25
C-Cube................................................... 1,098 3,299
SAT...................................................... 43
Reimbursement of expenses:
SAGEM.................................................... 39
EURODEC.................................................. $ 44 27 26
C-Cube................................................... 179
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Accounts receivable:
SAGEM..................................................................... $ 3,021
EURODEC................................................................... $ 69
C-Cube.................................................................... 125 52
Accounts payable:
SAGEM..................................................................... 490
EURODEC................................................................... 104
C-Cube.................................................................... 885
SAT....................................................................... 7
</TABLE>
F-34
<PAGE>
DIVICOM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
7. INCOME TAXES:
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Deferred tax asset:
Current:
Warranty reserve..................................................... $ 418
Inventory reserves................................................... $ 125 940
Accrued liabilities.................................................. 47 432
--------- ---------
Total current deferred tax asset................................... 172 1,790
Valuation allowance.................................................... (172)
--------- ---------
Net deferred tax asset, current.................................. $ -- $ 1,790
--------- ---------
--------- ---------
Noncurrent:
Research and development credit (federal & California)............... $ 77
Loss carryforward (federal & California)............................. 1,191
Amortization......................................................... 14
Depreciation......................................................... 168 $ 531
--------- ---------
Total noncurrent deferred tax asset................................ 1,450 531
Valuation allowance.................................................... (1,450)
--------- ---------
Net deferred tax asset, noncurrent............................... $ -- $ 531
--------- ---------
--------- ---------
</TABLE>
The Company considers that the realizability of the deferred tax asset is
more likely than not based on the Company's future prospects, and the potential
to carryback any future losses.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. If the Company should have an ownership change, as
defined in the Internal Revenue Code, utilization of the carryforwards could be
restricted.
The benefit from income taxes is as follows for the year ended December 31,
1995.
<TABLE>
<S> <C>
Current:
Federal.......................................................... $ 1,885
State............................................................ 267
---------
2,152
---------
Deferred:
Federal.......................................................... (1,861)
State............................................................ (460)
---------
(2,321)
---------
Total benefit...................................................... $ (169)
---------
---------
</TABLE>
The difference between the Company's effective income tax rate and the
federal statutory rate is due to permanent differences relating to the treatment
of development funding.
F-35
<PAGE>
DIVICOM INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
8. EMPLOYEE BENEFIT PLAN:
The Company maintains a 401(k) profit-sharing plan to provide retirement
benefits through tax deferred salary deductions for all eligible employees
meeting certain age and service requirements. The Company may make discretionary
matching contributions on behalf of employees. All employee contributions are
100% vested. The Company contributed $168 in 1995. No contributions were made in
1994.
9. LINE OF CREDIT:
In January 1995, the Company entered into a revolving line of credit
agreement with a bank in the amount of $5,000, expiring in January 1996. Under
the terms of the agreement, advances are limited to 75% of eligible accounts
receivable; and the Company must comply with several financial and other
restrictive covenants. The line bears interest at a rate of prime plus 1% (a
total of 8.5% at December 31, 1995), and is collateralized by various tangible
and intangible present and future assets held by the Company. There were no
amounts due on the line of credit as of December 31, 1995.
10. SUBSEQUENT EVENT:
In February 1996, the Company renewed its line of credit (see note 9 above)
in the amount of $15,000. The line will expire in February 1997, and bears
interest in the amount of prime plus 1%, with the option of a reduction to prime
upon the Company's obtaining $8,000 in additional equity. The limit on advances
is based on 80% of eligible accounts receivable and 50% of inventory. As with
the previous line, the Company will be subject to various financial and other
covenants; and the balance on the line will be collateralized by various assets
held by the Company.
In May 1996, the Board of Directors approved the 1996 Stock Plan (the "Stock
Plan"). The Stock Plan provides for the issuance of up to a maximum of 200,000
shares of common stock pursuant to awards under the Stock Plan. The Company has
reserved 200,000 shares of common stock for issuance under the Stock Plan.
F-36
<PAGE>
DIVICOM INC.
CONDENSED CONSOLIDATED BALANCE SHEET, JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash and cash equivalents...................................................... $ 10,782
Accounts receivable, trade net of allowance for doubtful accounts of $507...... 12,081
Accounts receivable -- stockholder............................................. 4,754
Inventory...................................................................... 17,932
Deferred taxes, prepaid expenses and other current assets...................... 4,406
---------
Total current assets....................................................... 49,955
Property & equipment, net...................................................... 4,789
Other assets, net.............................................................. 538
---------
Total assets........................................................... $ 55,282
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................................... $ 10,107
Deferred revenue............................................................... 19,747
Bank line of credit............................................................ 6,000
Accrued liabilities............................................................ 3,028
---------
Total current liabilities.................................................. 38,882
---------
Stockholders' Equity:
Preferred stock, $0.001 par value; 21,288 authorized shares; 21,288 issued and
outstanding................................................................... 21
Common stock, $0.001 par value; 35,750 authorized shares; 11,057 issued and
outstanding................................................................... 11
Additional paid-in capital..................................................... 12,138
Additional paid-in capital development funding................................. 17,120
Receivable from stockholder.................................................... (60)
Accumulated deficit............................................................ (12,830)
---------
Total stockholders' equity..................................................... 16,400
---------
Total liabilities and stockholders' equity............................. $ 55,282
---------
---------
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
F-37
<PAGE>
DIVICOM INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1995 1996 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues....................................................... $ 13,177 $ 22,545 $ 5,418 $ 12,394
Costs and expenses:
Cost of revenues................................................. 7,272 9,954 2,877 5,076
Research and development......................................... 7,016 6,809 3,685 3,709
Selling, general and administrative.............................. 2,136 4,575 1,167 2,726
--------- --------- --------- ---------
Total........................................................ 16,424 21,338 7,729 11,511
--------- --------- --------- ---------
Operating income (loss)............................................ (3,247) 1,207 (2,311) 883
Interest income, net............................................... 48 149 23 58
--------- --------- --------- ---------
Income (loss) before income taxes.................................. (3,199) 1,356 (2,288) 941
Income tax expense................................................. -- 624 -- 433
--------- --------- --------- ---------
Net (loss) income.................................................. $ (3,199) $ 732 $ (2,288) $ 508
--------- --------- --------- ---------
--------- --------- --------- ---------
Net (loss) income per share........................................ $ (0.44) $ 0.02 $ (0.32) $ 0.01
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computation......................................... 7,215 34,873 7,157 34,449
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
F-38
<PAGE>
DIVICOM INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................................. $ (3,199) $ 732
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................... 724 1,094
Intellectual property rights issued in exchange for preferred stock and expensed....... 262 --
Changes in operating assets and liabilities:
Accounts receivable -- trade and stockholder....................................... (1,712) (9,996)
Deferred taxes, prepaid expenses and other current assets.......................... 38 (822)
Inventory.......................................................................... (2,405) (13,296)
Accounts payable................................................................... 180 7,602
Accrued liabilities................................................................ 217 634
Deferred revenue................................................................... (1,373) 12,839
---------- ----------
Net cash provided by (used in) operating activities.................................... (7,268) (1,213)
---------- ----------
Net cash used in investing activities -- capital expenditures.......................... (1,424) (2,503)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock................................................. -- 71
Proceeds from issuance of Preferred Stock.............................................. 3,578 --
Funding by stockholder for research and development.................................... 7,120 --
Proceeds from borrowings under lines of credit......................................... -- 6,000
Issuance (repayment) of receivable from stockholder.................................... (1,980) 1,040
---------- ----------
Net cash provided by financing activities.............................................. 8,718 7,111
---------- ----------
Net increase in cash and cash equivalents................................................ 26 3,395
Cash and cash equivalents at beginning of period......................................... 4,064 7,387
---------- ----------
Cash and cash equivalents at end of period............................................... $ 4,090 $ 10,782
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
F-39
<PAGE>
DIVICOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION
In the opinion of management of DiviCom, the unaudited condensed financial
statements include all adjustments, consisting only of normal recurring
adjustments and accruals DiviCom (the "Company") considered necessary for a fair
presentation of the Company's financial position as of June 30, 1996, and the
results of operations for the quarters and six month periods ended June 30, 1996
and 1995, and cash flows for the six month periods ended June 30, 1996 and 1995.
This unaudited interim information should be read in conjunction with the
audited consolidated financial statements and the notes thereto included
elsewhere in this Prospectus/Proxy Statement.
2. INVENTORIES CONSIST OF:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
--------- -------------
IN THOUSANDS
<S> <C> <C>
Finished goods...................................................... $ 11,808 $ 1,482
Work-in-process..................................................... 3,630 1,186
Raw materials....................................................... 2,494 1,968
--------- -------------
Total........................................................... $ 17,932 $ 4,636
--------- -------------
--------- -------------
</TABLE>
3. STOCK OPTION PLAN
During May and June 1996, the Company granted an aggregate of 343 options to
purchase common stock at $2.00 per share. Compensation expense aggregating
approximately $1,146 will be recognized in the Statements of Operations over the
four year vesting term of those options. Compensation expense for the three and
six month periods ending June 30, 1996 was immaterial.
On July 25, 1996, the Company granted options to purchase 169 shares of
common stock at 2.69 per share. Compensation expense aggregating approximately
$196 will be recognized in the Statements of Operations over the four year
vesting term.
F-40
<PAGE>
ANNEX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
AMONG
C-CUBE MICROSYSTEMS INC.
C-CUBE ACQUISITION CORP.
DIVICOM INC.
SAGEM S.A.
SAGEM INTERNATIONAL
TREGOR ELECTRONIQUE S.A.
AND
IENA INTERNATIONAL S.A.
DATED AS OF MAY 28, 1996, AS AMENDED
ON JULY 25, 1996
AND ON JULY 26, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
ARTICLE I
THE MERGER
1.1 The Merger............................................................ A-1
1.2 Effective Time........................................................ A-1
1.3 Effect of the Merger.................................................. A-1
1.4 Certificate of Incorporation; Bylaws.................................. A-2
1.5 Directors and Officers................................................ A-2
1.6 Merger Consideration; Effect on Capital Stock......................... A-2
1.7 Dissenting Shares..................................................... A-4
1.8 Surrender of Certificates............................................. A-5
1.9 No Further Ownership Rights in Company Common Stock................... A-6
1.10 Lost, Stolen or Destroyed Certificates................................ A-6
1.11 Tax Consequences...................................................... A-7
1.12 Taking of Necessary Action; Further Action............................ A-7
1.13 Amendment of Company Charter.......................................... A-7
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
2.1 Organization of the Company........................................... A-7
2.2 Company Capital Structure............................................. A-7
2.3 Subsidiaries.......................................................... A-8
2.4 Authority............................................................. A-8
2.5 Company Financial Statements.......................................... A-9
2.6 No Undisclosed Liabilities............................................ A-9
2.7 No Changes............................................................ A-9
2.8 Tax and Other Returns and Reports..................................... A-10
2.9 Restrictions on Business Activities................................... A-12
2.10 Title to Properties; Absence of Liens and Encumbrances................ A-12
2.11 Intellectual Property................................................. A-12
2.12 Agreements, Contracts and Commitments................................. A-13
2.13 Interested Party Transactions......................................... A-15
2.14 Compliance with Laws.................................................. A-15
2.15 Litigation............................................................ A-15
2.16 Insurance............................................................. A-15
2.17 Minute Books.......................................................... A-15
2.18 Environmental Matters................................................. A-15
2.19 Brokers' and Finders' Fees............................................ A-16
2.20 Employee Matters and Benefit Plans.................................... A-16
2.21 Complete Copies of Materials.......................................... A-19
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
3.1 Organization, Standing and Power...................................... A-19
3.2 Authority............................................................. A-19
3.3 Capital Structure..................................................... A-19
3.4 Cash Consideration.................................................... A-20
3.5 SEC Documents; Parent Financial Statements............................ A-20
3.6 No Material Adverse Change............................................ A-20
</TABLE>
(i)
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
3.7 Litigation............................................................ A-20
3.8 Registration Statement on Form S-4.................................... A-20
3.9 Compliance with Laws.................................................. A-21
3.10 Brokers' and Finders' Fees; Third Party Expenses...................... A-21
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of the Company.................................... A-21
4.2 No Solicitation....................................................... A-22
4.3 Strategic Agreements.................................................. A-23
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Registration Statement; Company Stockholder Approval.................. A-23
5.2 Access to Information................................................. A-24
5.3 HSR Filings; Permits and Consents..................................... A-24
5.4 Confidentiality....................................................... A-24
5.5 Expenses.............................................................. A-24
5.6 Public Disclosure..................................................... A-24
5.7 Consents.............................................................. A-24
5.8 FIRPTA Compliance..................................................... A-25
5.9 Diligent Efforts...................................................... A-25
5.10 Notification of Certain Matters....................................... A-25
5.11 Affiliate Agreements.................................................. A-25
5.12 Additional Documents and Further Assurances........................... A-25
5.13 Form S-8.............................................................. A-25
5.14 Nasdaq Listing........................................................ A-26
5.15 Voting and Non-Competition Agreements................................. A-26
5.16 Blue Sky Laws......................................................... A-26
5.17 Transition Agreement.................................................. A-26
5.18 Continuity of Interest................................................ A-26
5.19 Certain Agreements.................................................... A-26
5.20 Indemnification....................................................... A-26
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger.......... A-26
6.2 Additional Conditions to Obligations of Seller and the Company........ A-27
6.3 Additional Conditions to the Obligations of Parent and Merger Sub..... A-28
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW
7.1 Survival of Representations and Warranties............................ A-29
7.2 Escrow Arrangements................................................... A-29
</TABLE>
(ii)
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination........................................................... A-34
8.2 Effect of Termination................................................. A-35
8.3 Amendment............................................................. A-35
8.4 Extension; Waiver..................................................... A-35
8.5 Notice of Termination................................................. A-35
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices............................................................... A-35
9.2 Interpretation........................................................ A-37
9.3 Counterparts.......................................................... A-37
9.4 Entire Agreement; Assignment.......................................... A-37
9.5 Severability.......................................................... A-37
9.6 Other Remedies........................................................ A-38
9.7 Governing Law; Venue.................................................. A-38
9.8 Rules of Construction................................................. A-38
9.9 Specific Performance.................................................. A-38
</TABLE>
(iii)
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- -------------- --------------------------------------------------------------------------------------------------
<S> <C>
Exhibit A-1 Form of Company Affiliate Agreement for the Seller
Exhibit A-2 Form of Company Affiliate Agreement for 1% Stockholders and Key Employees of the Company
Exhibit B Form of Voting Agreement
Exhibit C Form of Noncompetition Agreement: List of Parties Thereto
Exhibit D Transition Agreement
Exhibit E Form of Registration Rights Agreement
Exhibit F Significant Stockholders
</TABLE>
(iv)
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION (this
"AGREEMENT") was made and entered into as of May 28, 1996 and amended on July
25, 1996 and on July 26, 1996 among C-Cube Microsystems Inc., a Delaware
corporation ("PARENT"), C-Cube Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of Parent ("MERGER SUB") DiviCom Inc., a Delaware
corporation (the "COMPANY") and Sagem S.A., Sagem International and Tregor
Electronique S.A., each a company organized under the laws of France, and Iena
International S.A., a company organized under the laws of Luxembourg
(collectively, "SELLER").
RECITALS
A. The Boards of Directors of each of the Company, Parent and Merger Sub
believe it is in the best interests of each company and their respective
stockholders that Parent acquire the Company through the statutory merger of the
Company with and into Merger Sub (the "MERGER") and, in furtherance thereof,
have approved the Merger.
B. Pursuant to the Merger, among other things, and subject to the terms and
conditions of this Agreement, all of the issued and outstanding shares of
capital stock of the Company ("COMPANY CAPITAL STOCK") and all outstanding
options and other rights to acquire or receive shares of Company Capital Stock
shall be converted into the right to receive an amount of cash from Parent and a
number of shares of Common Stock of Parent ("PARENT COMMON STOCK").
C. A portion of the number of the shares of Parent Common Stock otherwise
issuable by Parent to Significant Stockholders (as defined below) in connection
with the Merger shall be placed in escrow by Parent, the release of which amount
shall be contingent upon certain events and conditions.
D. The Company, Parent, Merger Sub and Seller desire to make certain
representations and warranties and other agreements in connection with the
Merger.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
intending to be legally bound hereby, the parties agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. At the Effective Time (as defined in Section 1.2) and
subject toand upon the terms and conditions of this Agreement and the applicable
provisions of the Delaware General Corporation Law ("DELAWARE LAW"), the Company
shall be merged with and into Merger Sub, the separate corporate existence of
the Company shall cease and Merger Sub shall continue as the surviving
corporation and as a wholly-owned subsidiary of Parent. Merger Sub as the
surviving corporation after the Merger is hereinafter sometimes referred to as
the "SURVIVING CORPORATION."
1.2 EFFECTIVE TIME. Unless this Agreement is earlier terminated pursuant
to Section 8.1, the closing of the Merger (the "CLOSING") will take place as
promptly as practicable, but no later than five (5) business days, following the
satisfaction or waiver of the conditions set forth in Article VI, at the offices
of Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill
Road, Palo Alto, California, unless another place or time is agreed to by
Parent, Seller and the Company. The date upon which the Closing actually occurs
is herein referred to as the "CLOSING DATE." On the Closing Date, the
appropriate parties hereto shall cause the Merger to be consummated by filing a
Certificate of Merger (or like instrument) with the Secretary of State of the
State of Delaware (the "CERTIFICATE OF MERGER") in accordance with the relevant
provisions of applicable law (the time of acceptance by the Secretary of State
of Delaware of such filing being referred to herein as the "EFFECTIVE TIME").
A-1
<PAGE>
1.3 EFFECT OF THE MERGER. At the Effective Time, the effect of the Merger
shall be as provided in the applicable provisions of Delaware Law. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time, all the property, rights, privileges, powers and franchises of the Company
and Merger Sub shall vest in the Surviving Corporation, and all debts,
liabilities, obligations and duties of the Company and Merger Sub shall become
the debts, liabilities, obligations and duties of the Surviving Corporation.
1.4 CERTIFICATE OF INCORPORATION; BYLAWS.
(a) Unless otherwise determined by Parent prior to the Effective Time,
at the Effective Time, the Certificate of Incorporation of Merger Sub shall
be the Certificate of Incorporation of the Surviving Corporation until
thereafter amended as provided by law and such Certificate of Incorporation;
provided, however, that Article I of the Certificate of Incorporation of the
Surviving Corporation shall be amended to read as follows: "The name of the
corporation is Divicom Inc."
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
1.5 DIRECTORS AND OFFICERS. The directors of Merger Sub immediately prior
to the Effective Time shall be the initial directors of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation. The officers of the
Company immediately prior to the Effective Time shall be the initial officers of
the Surviving Corporation, each to hold office in accordance with the Bylaws of
the Surviving Corporation.
1.6 MERGER CONSIDERATION; EFFECT ON CAPITAL STOCK. The consideration to be
paid by Parent (including Parent Common Stock to be reserved for issuance upon
exercise of any of the Company's options to be assumed by Parent) in exchange
for the acquisition by Parent of all outstanding Company Capital Stock and all
unexpired and unexercised options and warrants or any other rights to acquire
Company Capital Stock shall not exceed the Aggregate Cash Amount, as defined
below, plus the Aggregate Share Number, as defined below. No adjustment shall be
made in the aggregate consideration to be paid in the Merger as a result of any
cash proceeds received by the Company from the date hereof to the Closing Date
pursuant to the exercise of options or warrants to acquire Company Capital
Stock. Subject to the terms and conditions of this Agreement, as of the
Effective Time, by virtue of the Merger and without any action on the part of
Merger Sub, the Company or the holder of any shares of the Company Capital
Stock, the following shall occur:
(a) CONSIDERATION FOR COMPANY CAPITAL STOCK. Upon the terms and
subject to the conditions set forth below and throughout this Agreement,
including, without limitation, the escrow provisions set forth in Article
VII hereof, each share of Company Capital Stock issued and outstanding
immediately prior to the Effective Time other than any Dissenting Shares (as
defined and to the extent provided in Section 1.7(a)) will be canceled and
extinguished and be converted automatically into the right to receive upon
surrender of the certificate representing such share of Company Capital
Stock in the manner provided in Section 1.8, without interest:
(i) for each share of Company Capital Stock that is not subject to a
right of repurchase at original purchase price (a "VESTED SHARE", with
the opposite: being referred to herein as an "UNVESTED SHARE"), that
number of shares of Parent Common Stock equal to the Vested Exchange
Ratio, as defined below, and cash in the amount of the Per-Share Cash
Payment, as defined below; or
(ii) for each unvested share of Company Capital Stock, that number of
shares of Parent Common Stock equal to the Unvested Exchange Ratio, as
defined below.
(b) TREATMENT OF STOCK OPTIONS.
(i) At the Effective Time, each option to purchase shares of Company
Common Stock (each, a "COMPANY OPTION") then outstanding under the
Company's 1993 Stock Option Plan
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or the Company's 1996 Stock Option Plan (collectively, the "OPTION
PLANS"), to the extent such Company Option is unvested, shall be, in
connection with the Merger, assumed by Parent. Each Company Option so
assumed by Parent under this Agreement shall continue to have, and be
subject to, the same terms and conditions set forth in the related Option
Plan and/or as provided in the respective option agreements governing
such Company Option immediately prior to the Effective Time, except that
(A) such Company Option shall be exercisable for that number of whole
shares of Parent Common Stock equal to the product of the number of
shares of Company Common Stock that were issuable upon exercise of such
Company Option immediately prior to the Effective Time multiplied by the
Unvested Exchange Ratio, rounded to the nearest whole number of shares of
Parent Common Stock and (B) the per share exercise price for the shares
of Parent Common Stock issuable upon exercise of such assumed Company
Option shall be equal to the quotient determined by dividing the exercise
price per share of Company Common Stock at which such Company Option was
exercisable immediately prior to the Effective Time by the Unvested
Exchange Ratio, rounded down to the nearest whole cent.
(ii) Parent is not assuming Company Options that are vested as of the
Effective Time, nor is Parent substituting its options for such vested
Company Options. As a result, each such vested Option shall terminate and
cease to be outstanding as of the Effective Time to the extent such
option is not exercised on or before the Effective Time.
(iii) It is the intention of the parties that the Company Options
assumed by Parent qualify following the Effective Time as incentive stock
options as defined in Section 422 of the Code to the extent the Company
Options qualified as incentive stock options immediately prior to the
Effective Time.
(iv) Promptly following the Effective Time, Parent will issue to each
holder of an outstanding unvested Company Option a document evidencing
the foregoing assumption of the unvested portion of such Company Option
by Parent.
(c) CAPITAL STOCK OF MERGER SUB. Each share of Common Stock of Merger
Sub issued and outstanding immediately prior to the Effective Time shall
remain one validly issued, fully paid and nonassessable share of Common
Stock of the Surviving Corporation and each stock certificate of Merger Sub
shall evidence ownership of such shares of capital stock of the Surviving
Corporation.
(d) ADJUSTMENTS TO EXCHANGE RATIOS. The Unvested Exchange Ratio and
the Vested Exchange Ratio (collectively, the "EXCHANGE RATIOS"), shall be
adjusted proportionally to reflect fully the effect of any stock split,
reverse split, stock dividend (including any dividend or distribution of
securities convertible into Parent Common Stock or Company Capital Stock),
reorganization, recapitalization or other like change with respect to Parent
Common Stock or Company Capital Stock occurring after the date hereof and
prior to the Effective Time.
(e) FRACTIONAL SHARES. No fraction of a share of Parent Common Stock
will be issued, but in lieu thereof, each holder of shares of Company
Capital Stock who would otherwise be entitled to a fraction of a share of
Parent Common Stock (after aggregating all fractional shares of Parent
Common Stock to be received by such holder) shall be entitled to receive
from Parent an amount of cash (rounded to the nearest whole cent) equal to
the product of (i) such fraction, multiplied by the Average Price, as
defined below.
(f) DEFINITIONS.
(i) "AGGREGATE CASH AMOUNT" means $70,000,000.
(ii) "AGGREGATE SHARE NUMBER" means (a) if the closing price of
C-Cube Common Stock on the day before the closing is greater than $21.37,
the quotient (rounded to the nearest share) obtained by dividing (i)
$130,000,000 by (ii) the lesser of (x) $53.89 (which would
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result in a quotient of 2,412,321 shares) and (y) the average of the
closing prices of a share of Parent Common Stock on the Nasdaq National
Market, or the national securities exchange on which Parent's Common
Stock is then traded, for the twelve (12) trading days immediately
preceding the date of the Company's stockholder meeting (the "Company
Meeting") at which the Merger and the other transactions contemplated by
this Agreement are submitted for approval (the "Average Price");
provided, however, that if the quotient obtained thereby is greater than
2,680,412, the quotient shall be deemed to be 2,680,412 or (b) if the
Closing Price of C-Cube Common Stock on the day before the closing (the
"Closing Price") is greater than $18.00 and less than or equal to $21.37,
the quotient (rounded to the nearest share) obtained by dividing
$57,272,727 by such Closing Price. Notwithstanding anything herein to the
contrary, additional shares of Parent Common Stock shall be issuable in
connection with payments to holders of unvested Company Options and
unvested Company Common Stock pursuant to the Unvested Exchange Ratio.
(iii) "PER-SHARE CASH AMOUNT" means the quotient obtained by dividing
the Aggregate Cash Amount by the number of vested shares of Company
Capital Stock outstanding immediately prior to the Effective Time that
are held by "Non-Electing Stockholders" (as defined below). To determine
cash paid to a particular stockholder, the Per Share Cash Amount shall be
multiplied by the number of Vested Shares held by a Non-Electing
Stockholder and then rounded to the nearest whole cent.
(iv) "PRICE PER DIVICOM SHARE" means the quotient obtained by dividing
(a) the sum of (i) the Aggregate Cash Amount and (ii) the product of the
Aggregate Share Number multiplied by the Average Price, by (b)
35,750,000.
(v) "STOCK PORTION OF PRICE" means the amount obtained by
substracting the Per Share Cash Amount from the Price Per DiviCom Share.
(vi) "VESTED EXCHANGE RATIO" means the quotient obtained by dividing
the Stock Portion of Price by the Average Price.
(vii) "UNVESTED EXCHANGE RATIO" means the quotient obtained by
dividing the Price Per DiviCom Share by the Average Price.
(viii) "NON-ELECTING STOCKHOLDERS" are those Company stockholders
holding vested shares of Company stock who did not submit to the Company,
on or before the Company Meeting, their written election to receive the
Unvested Exchange Ratio with respect to those Vested Shares. Holders may
elect to receive the Unvested Exchange Ratio solely with respect to
Vested Shares of DiviCom Common Stock.
1.7 DISSENTING SHARES.
(a) Notwithstanding any provision of this Agreement to the contrary, any
shares of Company Capital Stock held by a holder who has demanded and
perfected appraisal or dissenters' rights for such shares in accordance with
Delaware Law and who, as of the Effective Time, has not effectively
withdrawn or lost such appraisal or dissenters' rights ("DISSENTING
SHARES"), shall not be converted into or represent a right to receive the
Merger consideration pursuant to Section 1.6, but the holder thereof shall
only be entitled to such rights as are granted by Delaware Law.
(b) Notwithstanding the provisions of subsection (a), if any holder of
shares of Company Capital Stock who demands appraisal of such shares under
Delaware Law shall effectively withdraw or lose (through failure to perfect
or otherwise) the right to appraisal, then, as of the later of the Effective
Time and the occurrence of such event, such holder's shares shall
automatically be converted into and represent only the right to receive the
Merger consideration as provided in Section 1.6, without interest thereon,
upon surrender of the certificate representing such shares.
(c) The Company shall give Parent (i) prompt notice of any written
demands for appraisal of any shares of Company Capital Stock, withdrawals of
such demands, and any other instruments
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served pursuant to Delaware Law and received by the Company and (ii) the
opportunity to participate in all negotiations and proceedings with respect
to such demands for appraisal. The Company shall not, except with the prior
written consent of Parent, voluntarily make any payment with respect to any
demands for appraisal of capital stock of the Company or offer to settle or
settle any such demands.
(d) The Company shall be solely responsible for all payments made in
respect of Dissenting Shares and all related expenses, including attorneys'
fees, and such liability will be automatically assumed by the Surviving
Corporation.
1.8 SURRENDER OF CERTIFICATES.
(a) EXCHANGE AGENT. Prior to the Effective Time, Parent shall
designate Boston Equiserve to act as exchange agent or appoint an employee
or employees of the Parent to act in the capacity of the exchange agent and
escrow agent (as applicable, the "EXCHANGE AGENT" and the "ESCROW AGENT") in
the Merger.
(b) PARENT TO PROVIDE MERGER CONSIDERATION. On the business day in
which the Effective Time occurs as to the cash portion of the Merger
consideration, and promptly after the Effective Time as to the non-cash
portion of the Merger consideration, Parent shall make available to the
Exchange Agent for exchange in accordance with this Article I, the aggregate
Merger consideration payable pursuant to Section 1.6 in exchange for
outstanding shares of Company Capital Stock; provided that, on behalf of the
Significant Stockholders, Parent shall withhold and deposit into an escrow
account a number of shares of Parent Common Stock equal to 10% of the
aggregate number of shares of Parent Common Stock otherwise payable to
holders of at least 1% of the total number of shares of Company Capital
Stock outstanding immediately prior to the Effective Time on a fully
diluted, as if converted to Common Stock basis with respect to all options
to acquire such stock (collectively, the "ESCROW AMOUNT"). Parent will
deduct and deposit with the Escrow Agent the Escrow Amount solely from the
aggregate Merger consideration payable to such stockholders (the
"SIGNIFICANT STOCKHOLDERS"). The portion of the Escrow Amount withheld and
deposited into escrow on behalf of a Significant Stockholder shall be equal
to 10% of the number of shares that such Significant Stockholder would
otherwise be entitled to receive under Section 1.6. No portion of the Escrow
Amount shall be contributed in respect of any Company Options or on behalf
of any holder of Company Capital Stock that is not a Significant
Stockholder.
(c) EXCHANGE PROCEDURES.
(i) Prior to the Effective Time, Parent shall cause to be delivered
to each holder of record of a Certificate (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss
and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have
such other provisions as Parent may reasonably specify), and (ii)
instructions for use in effecting the surrender of such holder's
certificate or certificates (the "CERTIFICATES") which immediately prior
to the Effective Time represented outstanding shares of Company Capital
Stock in exchange for the Merger consideration. Upon surrender of a
Certificate for cancellation to the Exchange Agent or to such other agent
or agents as may be appointed by Parent, together with such letter of
transmittal, duly completed and validly executed in accordance with the
instructions thereto, at the Closing, the holder of such Certificate
shall be entitled to receive in exchange therefor, the cash portion of
the Merger consideration at the Closing and the non-cash portion of the
Merger consideration promptly thereafter (subject to the escrow
provisions set forth in Article VII hereof), plus cash in lieu of
fractional shares in accordance with Section 1.6, to which such holder is
entitled pursuant to Section 1.6, and the Certificate so surrendered
shall forthwith be canceled. Payments of cash to Seller and the
Significant Stockholders pursuant to this Section 1.8(c)(i) shall be made
by wire transfer of same day funds to accounts notified by them to Parent
not less than 2 business days prior to the Effective Time.
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(ii) As soon as practicable after the Effective Time, and subject to
and in accordance with the provisions of Article VII hereof, Parent shall
cause to be distributed to the Escrow Agent (as defined in Article VII)
that portion of the Merger consideration equal to the Escrow Amount. Any
shares of Parent Common Stock held by the Escrow Agent shall be
registered in the name of the Escrow Agent and such shares shall be
beneficially owned by the holders on whose behalf such shares were
deposited in the Escrow Fund and shall be available to compensate Parent
as provided in Article VII. Until so surrendered, each outstanding
Certificate that, prior to the Effective Time, represented shares of
Company Capital Stock will be deemed from and after the Effective Time,
for all corporate purposes, other than the payment of dividends, to
evidence only the right to receive the Merger consideration in respect of
each such share (subject to the escrow provisions set forth in Article
VII hereof).
(d) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or
other distributions declared or made after the Effective Time with respect
to Parent Common Stock with a record date after the Effective Time will be
paid to the holder of any unsurrendered Certificate with respect to the
shares of Parent Common Stock represented thereby until the holder of record
of such Certificate shall surrender such Certificate. Subject to applicable
law, following surrender of any such Certificate, there shall be paid to the
record holder of the certificates representing whole shares of Parent Common
Stock issued in exchange therefor, without interest, at the time of such
surrender, the amount of dividends (including stock dividends) or other
distributions with a record date after the Effective Time theretofore paid
with respect to such whole shares of Parent Common Stock.
(e) TRANSFERS OF OWNERSHIP. If any certificate for shares of Parent
Common Stock is to be issued in a name other than that in which the
Certificate surrendered in exchange therefor is registered or if any payment
is to be made to a person other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of
the issuance or payment thereof that the Certificate so surrendered will be
properly endorsed and otherwise in proper form for transfer and that the
person requesting such exchange or payment will have paid to Parent or any
agent designated by it any transfer or other taxes required by reason of the
issuance of a certificate for shares of Parent Common Stock in any name
other than that of the registered holder of the Certificate surrendered, or
established to the satisfaction of Parent or any agent designated by it that
such tax has been paid or is not payable.
(f) PAYMENTS WITH RESPECT TO UNEXCHANGED SHARES. No interest shall
accrue or be payable with respect to the Merger consideration payable on any
unexchanged shares of Company Capital Stock.
(g) NO LIABILITY. Notwithstanding anything to the contrary in this
Section 1.8, none of the Exchange Agent, the Surviving Corporation or any
party hereto shall be liable to a holder of shares of Parent Common Stock or
Company Capital Stock for any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
1.9 NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. All amounts paid
upon the surrender for exchange of shares of Company Capital Stock in accordance
with the terms hereof shall be deemed to have been issued in full satisfaction
of all rights pertaining to such shares of Company Capital Stock, and there
shall be no further registration of transfers on the records of the Surviving
Corporation of shares of Company Capital Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and the Merger consideration shall be delivered to the person
entitled thereto (subject to the escrow provisions set forth in Article VII
hereof).
1.10 LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such amount of cash and shares of
Parent Common Stock, as may be required pursuant to Section 1.6; provided,
however,
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that Parent may, in its reasonable discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
Certificates to deliver a bond in such sum or provide such other assurances as
it may reasonably direct as indemnity against any claim that may be made against
Parent or the Exchange Agent with respect to the Certificates alleged to have
been lost, stolen or destroyed.
1.11 TAX CONSEQUENCES. It is intended by the parties hereto that the
Merger shall constitute a reorganization within the meaning of Section 368 of
the Internal Revenue Code of 1986, as amended (the "CODE"). Concurrently with
the execution of this agreement, counsel to Parent and the Company
have provided assurances satisfactory to Parent and the Company to the effect
that, as currently structured, the Merger will constitute such a reorganization.
1.12 TAKING OF NECESSARY ACTION; FURTHER ACTION. If, at any time after the
Effective Time, Parent or the Surviving Corporation reasonably determines that
any deeds, assignments, or instruments or confirmations of transfer are
necessary or desirable to carry out the purposes of this Agreement and to vest
the Surviving Corporation with full right, title and possession to all assets,
property, rights, privileges, powers and franchises of the Company and Merger
Sub or to vest Parent with a one hundred percent (100%) ownership interest in
the Surviving Corporation or any of its assets, the officers and directors of
the Company and Merger Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
or desirable action.
1.13 AMENDMENT OF COMPANY CHARTER. Immediately prior to the Effective
Time, the Company will amend its Certificate of Incorporation to eliminate the
preferential rights, if any, of holders of Preferred Stock of the Company (i) to
receive Merger consideration and, (ii) as more fully described in Section 2.1(7)
of the Company Disclosure Letter.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Merger Sub, subject
to such exceptions as are disclosed by the Company in the schedules delivered
simultaneously herewith (the "COMPANY SCHEDULES") and dated as of the date
hereof:
2.1 ORGANIZATION OF THE COMPANY. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. The Company has the corporate power to own its properties and to carry
on its business as now being conducted. The Company is duly qualified to do
business and in good standing as a foreign corporation in each jurisdiction in
which the failure to be so qualified would have a material adverse effect on the
business, assets (including intangible assets), financial condition, results of
operations or prospects of the Company. The Company has delivered a true and
correct copy of its Certificate of Incorporation and Bylaws, each as amended to
date, to Parent.
2.2 COMPANY CAPITAL STRUCTURE.
(a) The authorized capital stock of the Company consists of 35,750,000
(to be promptly increased to 35,950,000) shares of Common Stock, of which,
as of May 23, 1996, 11,062,558 shares are issued and outstanding and
21,288,000 of authorized Preferred Stock. The authorized Preferred Stock
consists of 15,788,000 shares of Series A Preferred Stock, of which
15,788,000 shares are issued and outstanding and 5,500,000 shares of Series
B Preferred Stock, of which 5,500,000 shares are issued and outstanding. The
Company Capital Stock is held of record by the persons, with the addresses
of record and in the amounts set forth on Schedule 2.2(a). All outstanding
shares of Company Capital Stock are duly authorized, validly issued, fully
paid and non-assessable and not subject to preemptive rights created by
statute, the Certificate of Incorporation or Bylaws of the Company or any
agreement to which the Company is a party or by which it is bound.
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(b) The Company has reserved 13,289,999 shares of Common Stock for
issuance to employees and consultants pursuant to the Company's Option
Plans, of which as of May 23, 1996 3,132,817 shares are subject to
outstanding, unexercised options and 266,625 shares remain available for
future grant (to be promptly increased by 200,000). The Company has not
reserved any shares of Common Stock for issuance upon exercise of
outstanding Company Options granted outside the Option Plans. Schedule
2.2(b) sets forth for each outstanding Company Option the name of the holder
of such option, the domicile address of such holder, the number of shares of
Common Stock subject to such option, the exercise price of such option and
the vesting schedule for such option, including the extent vested to date
and whether the exercisability of such option will be accelerated and become
exercisable by the transactions contemplated by this Agreement. Except for
the Company Options described in Schedule 2.2(b), there are no options,
warrants, calls, rights, commitments or agreements of any character, written
or oral, to which the Company is a party or by which it is bound obligating
the Company to issue, deliver, sell, repurchase or redeem, or cause to be
issued, delivered, sold, repurchased or redeemed, any shares of the capital
stock of the Company. Except for the Company Options described in Schedule
2.2(b), there are no options, warrants, calls, rights, commitments or
agreements of any character, written or oral, to which the Company is a
party or by which it is bound obligating the Company to grant, extend,
accelerate the vesting of, change the price of, otherwise amend or enter
into any such option, warrant, call, right, commitment or agreement.
2.3 SUBSIDIARIES. Except as disclosed in Schedule 2.3, the Company does
not have and has never had any subsidiaries or affiliated companies and does not
otherwise own and has never otherwise owned any shares of capital stock or any
interest in, or control, directly or indirectly, any other corporation,
partnership, association, joint venture or other business entity.
2.4 AUTHORITY. Subject only to the requisite approval of the Merger and
this Agreement by the Company's stockholders, the Company has all requisite
corporate power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The vote required of the Company's
stockholders to duly approve the Merger and this Agreement is that number of
shares as would constitute (a) a majority of the outstanding shares of the
Common Stock and Preferred Stock, voting together as a single class (with each
share of Preferred Stock being entitled to a number of votes equal to the number
of whole shares of Common Stock into which such share of Preferred Stock could
be converted on the record date for the vote), and (b) two-thirds (b) of the
outstanding Preferred Stock voting separately as a single class. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of the Company, subject only to the approval of the Merger by the
Company's stockholders. The Company's Board of Directors has unanimously
approved the Merger and this Agreement. This Agreement has been duly executed
and delivered by the Company and constitutes the valid and binding obligation of
the Company, enforceable in accordance with its terms. Except as set forth on
Schedule 2.4, subject only to the approval of the Merger and this Agreement by
the Company's stockholders, the execution and delivery of this Agreement by the
Company does not, and, as of the Effective Time, the consummation of the
transactions contemplated hereby will not, conflict with, or result in any
material violation of, or material default under (with or without notice or
lapse of time, or both), or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of any material benefit under (any such
event, a "CONFLICT") (i) any provision of the Certificate of Incorporation or
Bylaws of the Company or (ii) any material mortgage, indenture, lease, contract
or other agreement or instrument, permit, concession, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to the Company or its properties or assets. No consent, waiver, approval, order
or authorization of, or registration, declaration or filing with, any court,
administrative agency or commission or other federal, state, county, local or
foreign governmental authority, instrumentality, agency or commission
("GOVERNMENTAL ENTITY") or any third party (so as not to trigger any Conflict),
is required by or with respect to the Company in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (i) the filing of the Certificate of Merger with
the Delaware Secretary of State,
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(ii) the filing of the notification and report form required for the
transactions contemplated hereby and any supplemental information requested in
connection therewith pursuant to the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), with the United States Federal Trade
Commission (the "FTC") and the United States Department of Justice (the "DOJ")
and compliance with the provisions of the HSR Act, (iii) such consents, waivers,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable federal and state securities laws, (iv) such as
may be required solely by virtue of Parent's status and (v) such other consents,
waivers, authorizations, filings, approvals and registrations which are set
forth on Schedule 2.4.
2.5 COMPANY FINANCIAL STATEMENTS.
(a) Schedule 2.5(a) sets forth the Company's audited balance sheet as of
December 31, 1995 and the related audited statements of operations and cash
flows for the twelve-month period then ended and the Company's unaudited
balance sheet as of March 31, 1996 (the "BALANCE SHEET") and the related
unaudited statements of operations and cash flows for the three-month period
then ended (collectively, the "COMPANY FINANCIALS"). The Company Financials
have been prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a basis consistent throughout the periods
indicated and consistent with each other. The Company Financials present
fairly, in all material respects, the financial condition and operating
results of the Company as of the dates and during the periods indicated
therein, subject, in the case of the unaudited financial statements, to the
absence of footnotes and to normal year-end adjustments, which will not be
material in amount or significance.
(b) The financial projections of the Company set forth in Schedule
2.5(b) (the "PROJECTIONS") were prepared in good faith and based on the
assumptions set forth therein, which assumptions the Company's management
believes to be reasonable.
2.6 NO UNDISCLOSED LIABILITIES. As of the date hereof, except as set forth
in Schedule 2.6, the Company does not have any material liability, indebtedness,
obligation, expense or claim, whether accrued, absolute, contingent, matured,
unmatured or other (whether or not required to be reflected in financial
statements in accordance with generally accepted accounting principles), which
individually or in the aggregate, (i) has not been reflected in the Balance
Sheet, or (ii) has not arisen in the ordinary course of the Company's business
since March 31, 1996, consistent with past practices.
2.7 NO CHANGES. Except as contemplated by this Agreement or specifically
in order to effect the transactions contemplated hereby, or as set forth in
Schedule 2.7, since March 31, 1996, there has not been, occurred or arisen any:
(a) transaction by the Company except in the ordinary course of business
as conducted on that date and consistent with past practices;
(b) amendments or changes to the Certificate of Incorporation or Bylaws
of the Company;
(c) capital expenditure or commitment by the Company of $500,000 in any
individual case or $1,500,000 in the aggregate;
(d) destruction of, damage to or loss of any material assets, business
or customer of the Company (whether or not covered by insurance);
(e) labor trouble or claim of wrongful discharge or other unlawful labor
practice or action;
(f) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company;
(g) revaluation by the Company of any of its assets;
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(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the capital stock of the Company, or any direct
or indirect redemption, purchase or other acquisition by the Company of any
of its capital stock, other than the repurchase of unvested shares of
Company Capital Stock at cost pursuant to arrangements with terminated
employees;
(i) increase in the salary or other compensation payable or to become
payable by the Company to any of its officers, directors, employees or
advisors, or the declaration, payment or commitment or obligation of any
kind for the payment, by the Company, of a bonus or other additional salary
or compensation to any such person except as otherwise contemplated by this
Agreement;
(j) acquisition, sale, lease, license or other disposition of any of
the assets or properties of the Company, except in the ordinary course of
business as conducted on that date and consistent with past practices;
(k) amendment or termination of any material contract, agreement or
license to which the Company is a party or by which it is bound other than
termination by the Company pursuant to the terms thereof;
(l) loan by the Company to any person or entity, incurring by the
Company of any indebtedness, guaranteeing by the Company of any
indebtedness, issuance or sale of any debt securities of the Company or
guaranteeing of any debt securities of others, except for advances to
employees for travel and business expenses in the ordinary course of
business, consistent with past practices;
(m) waiver or release of any right or claim of the Company, including
any write-off or other compromise of any account receivable of the Company
other than in the ordinary course of business and consistent with past
practice and which are not, individually or in the aggregate, material;
(n) commencement or notice or threat of commencement of any lawsuit or
proceeding against or investigation of the Company or its affairs;
(o) notice of any claim of ownership by a third party of any of the
Company Intellectual Property Rights (as defined in Section 2.11 below) or
of infringement by the Company of any third party's proprietary rights;
(p) issuance or sale by the Company of any of its shares of capital
stock, or securities exchangeable, convertible or exercisable therefor, or
of any other of its securities, other than (i) issuance of Company Common
Stock upon the exercise of outstanding options and (ii) issuance of options
previously approved in writing by Parent to employees in the ordinary course
of business pursuant to the Company's 1993 and 1996 Stock Option Plans as
described in Section 2.2(b);
(q) change in pricing or royalties set or charged by the Company to its
customers or licensees or in pricing or royalties set or charged by persons
who have licensed Intellectual Property to the Company;
(r) material event or material condition of an adverse nature affecting
the business or results of operations of the Company; or
(s) negotiation or agreement by the Company or any officer or employees
thereof to do any of the things described in the preceding clauses (a)
through (r) (other than negotiations with Parent and its representatives
regarding the transactions contemplated by this Agreement).
2.8 TAX AND OTHER RETURNS AND REPORTS.
(a) DEFINITION OF TAXES. For the purposes of this Agreement, "TAX" or,
collectively, "TAXES," means any and all federal, state, local and foreign
taxes, assessments and other governmental charges, duties, impositions and
liabilities, including taxes based upon or measured by
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gross receipts, income, profits, sales, use and occupation, and value added,
ad valorem, transfer, franchise, withholding, payroll, recapture,
employment, excise and property taxes, together with all interest, penalties
and additions imposed with respect to such amounts and any obligations under
any agreements or arrangements with any other person with respect to such
amounts and including any liability for taxes of a predecessor entity.
(b) TAX RETURNS AND AUDITS. Except as set forth in Schedule 2.8:
(i) The Company as of the Effective Time will have prepared and filed
all required federal, state, local and foreign returns, estimates,
information statements and reports ("Returns") (after giving effect to
any extensions of due dates which are set forth in Schedule 2.8) relating
to any and all Taxes concerning or attributable to the Company or its
operations and, to the Company's knowledge, such Returns have been
completed in accordance with applicable law;
(ii) The Company as of the Effective Time (A) will have paid or
accrued all Taxes it is required to pay or accrue and (B) will have
withheld with respect to its employees all federal and state income
taxes, FICA, FUTA and other Taxes required to be withheld;
(iii) The Company is not delinquent in the payment of any Tax nor is
there any Tax deficiency outstanding, proposed or assessed against the
Company, nor has the Company executed any waiver of any statute of
limitations on or extending the period for the assessment or collection
of any Tax;
(iv) No audit or other examination of any Return of the Company is
presently in progress, nor has the Company been notified of any request
for such an audit or other examination;
(v) The Company does not have any liabilities for unpaid federal,
state, local and foreign Taxes as of March 31, 1996 which have not been
accrued or reserved against in accordance with U.S. GAAP on the Balance
Sheet, whether asserted or unasserted, contingent or otherwise, and the
Company has no knowledge of any basis for the assertion of any such
liability attributable to the Company, its assets or operations;
(vi) The Company has provided to Parent copies of all federal and
state income and all state sales and use Tax Returns for all periods
since the date of Company's incorporation;
(vii) There are (and as of immediately following the Closing there
will be) no liens, pledges, charges, claims, security interests or other
encumbrances of any sort ("LIENS") on the assets of the Company relating
to or attributable to Taxes, other than Liens for Taxes not yet due and
payable;
(viii) None of the Company's assets are treated as "tax-exempt use
property" within the meaning of Section 168(h) of the Code;
(ix) As of the Effective Time, there will not be any contract,
agreement, plan or arrangement, including but not limited to the
provisions of this Agreement, covering any employee or former employee of
the Company that, individually or collectively, could give rise to the
payment of any amount that would not be deductible pursuant to Section
280G or 162 of the Code;
(x) The Company has not filed any consent agreement under Section
341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply
to any disposition of a subsection (f) asset (as defined in Section
341(f)(4) of the Code) owned by the Company;
(xi) The Company is not a party to a tax sharing or allocation
agreement nor does the Company owe any amount under any such agreement;
or
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(xii) The Company is not, and has not been at any time, a "United
States real property holding corporation" within the meaning of Section
897(c)(2) of the Code.
2.9 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no judgment, injunction,
order or decree to which the Company is a party or otherwise binding upon the
Company which has or reasonably would be expected to have the effect of
prohibiting or impairing any business practice of the Company, any acquisition
of property (tangible or intangible) by the Company or the conduct of business
by the Company. Without limiting the foregoing, the Company has not entered into
any agreement (noncompete or otherwise) under which the Company is restricted
from selling, licensing or otherwise distributing any of its products to any
class of customers, in any geographic area, during any period of time or in any
segment of the market (except as expressly contemplated by the Transition
Agreement).
2.10 TITLE TO PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES.
(a) The Company owns no real property, nor has it ever owned any real
property. Schedule 2.10(a) sets forth a list of all real property currently
leased by the Company, the name of the lessor and the date of the lease and
each amendment thereto and, with respect to any current lease, the aggregate
annual rental and other fees payable under any such lease. All such current
leases are in full force and effect, are valid and effective in accordance
with their respective terms, and there is not, under any of such leases, any
existing material default or event of default (or event which with notice or
lapse of time, or both, would constitute a default) by the Company or, to
the Company's knowledge, by any lessor.
(b) The Company has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens (as defined in Section 2.8(b)(vii)),
except as reflected in the Company Financials or in Schedule 2.10(b) and
except for liens for taxes not yet due and payable and such imperfections of
title and encumbrances, if any, which are not material in character, amount
or extent, and which do not materially detract from the value, or materially
interfere with the present use, of the property subject thereto or affected
thereby.
(c) The equipment owned or leased by the Company (the "EQUIPMENT") is
(i) adequate for the conduct of the business of the Company as currently
conducted and (ii) in good operating condition, regularly and properly
maintained, subject to normal wear and tear.
2.11 INTELLECTUAL PROPERTY.
(a) The Company owns, or is licensed or otherwise possesses legally
enforceable rights to use, all Company Registered Intellectual Property (as
defined below) and all patented or patentable inventions, trademarks, trade
names, service marks, copyrighted or copyrightable materials, maskworks, net
lists, schematics, technology, know-how, computer software programs or
applications (in both source code and object code form), and tangible or
intangible proprietary information or material that are used in the business
of the Company as currently conducted or as proposed to be conducted by the
Company as of the date hereof (collectively, the "COMPANY INTELLECTUAL
PROPERTY RIGHTS"). Following the Closing, the Company Intellectual Property
Rights will have been transferred to Merger Sub and Merger Sub will own or
will be entitled to use and be able to exercise the Company Intellectual
Property Rights without any additional consideration.
(b) Schedule 2.11(a) sets forth a complete list of all United States and
foreign patents, patent applications, registered and material unregistered
trademarks, registered copyrights, trade names and service marks and any
other registered intellectual property rights, and any applications
therefor, owned by, or exclusively licensed to, the Company (the "COMPANY
REGISTERED INTELLECTUAL PROPERTY RIGHTS"), and specifies, where applicable,
the jurisdictions in which each such Company Registered Intellectual
Property Right has been issued or registered or in which an application for
such issuance and registration has been filed, including the respective
registration or application numbers and the names of all registered owners.
Schedule 2.11(b) sets forth a complete list of all licenses, sublicenses and
other agreements (excluding object code end-
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user licenses granted to end-users in the ordinary course of business that
permit use of software products without a right to modify, distribute or
sublicense the same ("End-User Licenses")) to which the Company is a party
and pursuant to which either (i) the Company is granted any rights with
respect to any patents, copyrights, trade secrets, trademarks or other
proprietary rights of any third party or (ii) the Company has granted to any
third party rights to any of the Company Intellectual Property Rights, and
includes the identity of all parties thereto. The execution and delivery of
this Agreement by the Company, and the consummation of the transactions
contemplated hereby, will neither cause the Company to be in violation or
default under any such license, sublicense or agreement, nor entitle any
other party to any such license, sublicense or agreement to terminate or
modify such license, sublicense or agreement, nor require the Company to
repay any funds already received by it from a third party. Except as set
forth in Schedules 2.11(a) or 2.11(b), the Company is the licensee or sole
and exclusive owner of, with all right, title and interest in and to (free
and clear of any Liens), the Company Intellectual Property Rights, and has
sole and exclusive rights (and is not contractually obligated to pay any
compensation to any third party in respect thereof) to the use thereof or
the material covered thereby in connection with the services or products in
respect of which the Company Intellectual Property Rights are being used.
Following the Closing, all such licenses, sublicenses and agreements will
have been transferred to Merger Sub and Merger Sub will be able to exercise
all rights of the Company under such licenses, sublicenses and agreements
without payment by any party or the Surviving Corporation of any additional
consideration.
(c) No claims with respect to the Company Intellectual Property Rights
have been asserted or are, to the Company's knowledge, threatened by any
person, nor are there any valid grounds for any bona fide claims (i) to the
effect that the manufacture, sale, licensing or use of any of the products
or processes of the Company infringes on any copyright, patent, trade mark,
service mark, trade secret or other proprietary right, (ii) against the use
by the Company of any trademarks, service marks, trade names, trade secrets,
copyrights, maskworks, patents, technology, know-how or computer software
programs and applications used in the Company's business as currently
conducted or as proposed to be conducted by the Company, or (iii)
challenging the ownership by the Company, or the validity or effectiveness
of any of the Company Intellectual Property Rights. All registered
trademarks, service marks and copyrights held by the Company are valid and
subsisting. Except as set forth in Section 2.11(c) of the Disclosure Letter,
the business of the Company as currently conducted or as currently proposed
to be conducted by the Company has not and does not infringe on any
proprietary right of any third party. To the Company's knowledge, there is
no material unauthorized use, infringement or misappropriation of any of the
Company Intellectual Property Rights by any third party, including any
employee or former employee of the Company or any stockholder of the
Company. No Company Intellectual Property Right or product of the Company or
any of its subsidiaries is subject to any outstanding decree, order,
judgment, or stipulation restricting in any manner the practice or licensing
thereof by the Company. Except as set forth in Section 2.11(c) of the
Disclosure Letter, each current and former employee of and consultant to the
Company has executed a proprietary information and confidentiality agreement
substantially in the Company's standard forms.
(d) There has been no conveyance or other transfer of intellectual
property by the Company to any of its stockholders (other than Parent,
Seller and any corporate affiliate of Seller), except pursuant to
instruments identified in this Agreement and the Schedules and Exhibits
hereto.
2.12 AGREEMENTS, CONTRACTS AND COMMITMENTS. Except as set forth on
Schedule 2.11, 2.12(a) or 2.20, the Company does not have, is not a party to nor
is it bound by any of the following executory contracts:
(i) any collective bargaining agreements;
(ii) any agreements or arrangements that contain any severance pay or
post-employment liabilities or obligations;
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(iii) any bonus, deferred compensation, pension, profit sharing or
retirement plans, or any other employee benefit plans or arrangements;
(iv) any employment or consulting agreement, contract or commitment with
an employee or individual consultant or salesperson or consulting or sales
agreement, under which a firm or other organization provides services to the
Company;
(v) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation rights plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of which
will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by
this Agreement;
(vi) any fidelity or surety bond or completion bond;
(vii) any lease of personal property having a value individually in
excess of $200,000;
(viii) any agreement of indemnification or guaranty, other than
intellectual property indemnities, warranties and other customary
indemnification provisions included in commercial contracts disclosed in the
Schedules;
(ix) any agreement, contract or commitment containing any covenant
limiting the freedom of the Company to engage in any line of business or to
compete with any person;
(x) any agreement, contract or commitment relating to capital
expenditures and involving future payments in excess of $500,000
individually or $1,500,000 in the aggregate and excluding contracts in which
the Company's obligation to sell product requires it to procure such
components in the ordinary course of its business in order to sell it;
(xi) any agreement relating to the disposition or acquisition of assets
or any interest in any business enterprise outside the ordinary course of
the Company's business;
(xii) any mortgages, indentures, loans or credit agreements, security
agreements or other agreements or instruments relating to the borrowing of
money or extension of credit, including guaranties referred to in clause
(viii) hereof;
(xiii) any purchase order or contract for the purchase of raw materials
involving $250,000 or more outside of the ordinary course of the Company's
business;
(xiv) any construction contracts;
(xv) any distribution, joint marketing or development agreement;
(xvi) any agreement, contract or commitment pursuant to which the Company
has granted or may grant in the future, to any party a source code license
or option or other right to use or acquire source code;
(xvii) any agreement, contract or commitment with any customer which,
during the last two (2) fiscal years of the Company, accounted for, or is
expected to account for, more than ten percent (10%) of the Company's
revenue or trade payables; or
(xviii) any other agreement not disclosed pursuant to the above clauses
that involves $250,000 or more or is not cancelable without penalty within
thirty (30) days.
Except for such alleged breaches, violations and defaults, and events that
would constitute a breach, violation or default with the lapse of time, giving
of notice, or both, as are all noted in Schedule 2.12(b), the Company has not
breached, violated or defaulted under, or received notice that it has breached,
violated or defaulted under, any of the terms or conditions of any agreement,
contract or commitment required to be set forth on Schedule 2.11(b) or Schedule
2.12(a) (any such agreement,
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contract or commitment, a "CONTRACT"). Each Contract is in full force and effect
and, except as otherwise disclosed in Schedule 2.12(b), is not subject to any
default thereunder of which the Company has knowledge by any party obligated to
the Company pursuant thereto.
2.13 INTERESTED PARTY TRANSACTIONS. Except as set forth on Schedule 2.13,
to the Company's knowledge, no officer, director or affiliate (as defined under
Regulation C under the Securities Act of 1933, as amended) of the Company (nor
any ancestor, sibling, descendant or spouse of any of such persons, or any
trust, partnership or corporation in which any of such persons has or has had an
economic interest), has or has had, directly or indirectly, (i) an economic
interest in any entity which furnished or sold, or furnishes or sells, services
or products that the Company furnishes or sells, or proposes to furnish or sell,
or (ii) an economic interest in any entity that purchases from or sells or
furnishes to, the Company, any goods or services or (iii) a beneficial interest
in any contract or agreement set forth in Schedule 2.11(b) or Schedule 2.12(a);
provided, that (x) ownership of no more than one percent (1%) of the outstanding
voting stock of a publicly traded corporation and no more than five percent (5%)
of the outstanding equity of any other entity shall not be deemed an "economic
interest in any entity" for purposes of this Section 2.13 and (y) this provision
shall only apply if the terms and conditions applicable to the subject
relationship are materially less favorable to the Company than the terms and
conditions that could be obtained in an arms-length relationship.
2.14 COMPLIANCE WITH LAWS. The Company has complied in all material
respects with, is not in material violation of, and has not received any notices
of violation with respect to, any foreign, federal, state or local statute, law
or regulation.
2.15 LITIGATION. Except as set forth in Schedule 2.15, there is no action,
suit or proceeding of any nature pending or to the Company's knowledge
threatened against the Company, its properties or any of its officers or
directors, in their respective capacities as such. Except as set forth in
Schedule 2.15, to the Company's knowledge, there is no investigation pending or
threatened against the Company, its properties or any of its officers or
directors by or before any governmental entity, nor is there any basis therefor.
Schedule 2.15 sets forth, with respect to any pending or threatened action,
suit, proceeding or investigation, the forum, the parties thereto, the subject
matter thereof and the amount of damages claimed or other remedy requested. No
governmental entity has at any time challenged or questioned the legal right of
the Company to manufacture, offer or sell any of its products in the present
manner or style thereof.
2.16 INSURANCE. Except as set forth in Schedule 2.16, the Company
maintains insurance of the types and in the amounts customary for companies of
its size and in its business as disclosed on Schedule 2-16, which insurance is
identified in schedule 2.16. With respect to the insurance policies and fidelity
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of the Company, there is no claim by the
Company pending under any of such policies or bonds as to which coverage has
been questioned, denied or disputed by the underwriters of such policies or
bonds. All premiums due and payable under all such policies and bonds have been
paid and the Company is otherwise in material compliance with the terms of such
policies and bonds (or other policies and bonds providing substantially similar
insurance coverage). The Company has no knowledge of any threatened termination
of, or material premium increase with respect to, any of such policies.
2.17 MINUTE BOOKS. The minute books of the Company made available to
counsel for Parent are the only minute books of the Company and contain a
reasonably accurate summary of all meetings of directors (or committees thereof)
and stockholders or actions by written consent since the time of incorporation
of the Company.
2.18 ENVIRONMENTAL MATTERS.
(a) HAZARDOUS MATERIAL. The Company has not: (i) operated any underground
storage tanks at any property that the Company has at any time owned, operated,
occupied or leased; or (ii) illegally released any material amount of any
substance that has been designated by any Governmental Entity
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or by applicable federal, state or local law to be radioactive, toxic, hazardous
or otherwise a danger to health or the environment, including, without
limitation, PCBs, asbestos, petroleum, urea-formaldehyde and all substances
listed as hazardous substances pursuant to the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended, or defined as a
hazardous waste pursuant to the United States Resource Conservation and Recovery
Act of 1976, as amended, and the regulations promulgated pursuant to said laws,
(a "HAZARDOUS MATERIAL"), but excluding office and janitorial supplies properly
and safely maintained. No Hazardous Materials are present, as a result of the
deliberate actions of the Company, or, to the Company's knowledge, as a result
of any actions of any third party or otherwise, in, on or under any property,
including the land and the improvements, ground water and surface water thereof,
that the Company has at any time owned, operated, occupied or leased.
(b) HAZARDOUS MATERIALS ACTIVITIES. The Company has not transported,
stored, used, manufactured, disposed of, released or exposed its employees or
others to Hazardous Materials in violation of any law in effect on or before the
Closing Date, nor has the Company disposed of, transported, sold, or
manufactured any product containing a Hazardous Material (any or all of the
foregoing being collectively referred to as "HAZARDOUS MATERIALS ACTIVITIES") in
violation of any rule, regulation, treaty or statute promulgated by any
Governmental Entity in effect prior to or as of the date hereof to prohibit,
regulate or control Hazardous Materials or any Hazardous Material Activity.
(c) PERMITS. The Company currently holds all environmental approvals,
permits, licenses, clearances and consents (the "ENVIRONMENTAL PERMITS")
necessary for the conduct of the Company's Hazardous Material Activities and
other businesses of the Company as such activities and businesses are currently
being conducted.
(d) ENVIRONMENTAL LIABILITIES. No action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or to the
Company's knowledge, threatened concerning any Environmental Permit, Hazardous
Material or any Hazardous Materials Activity of the Company. The Company is not
aware of any fact or circumstance which could involve the Company in any
environmental litigation or impose upon the Company any environmental liability.
2.19 BROKERS' AND FINDERS' FEES. Except as set forth on Schedule 2.19, the
Company has not incurred, nor will it incur, directly or indirectly, any
liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with this Agreement or any transaction contemplated
hereby. Schedule 2.19 sets forth the principal terms and conditions of any
agreement, written or oral, with respect to such fees.
2.20 EMPLOYEE MATTERS AND BENEFIT PLANS.
(a) DEFINITIONS. With the exception of the definition of "Affiliate" set
forth in Section 2.20(a)(i) below (such definition shall only apply to this
Section 2.20), for purposes of this Agreement, the following terms shall have
the meanings set forth below:
(i) "AFFILIATE" shall mean any other person or entity under common
control with the Company within the meaning of Section 414(b), (c), (m) or
(o) of the Code and the regulations thereunder;
(ii) "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended;
(iii) "COMPANY EMPLOYEE PLAN" shall refer to any plan, program, policy,
practice, contract, agreement or other arrangement providing for
compensation, severance, termination pay, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or
remuneration of any kind, whether formal or informal, funded or unfunded,
including without limitation, each "employee benefit plan," within the
meaning of Section 3(3) of ERISA which is or
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has been maintained, contributed to, or required to be contributed to, by
the Company or any Affiliate for the benefit of any "Employee" (as defined
below), and pursuant to which the Company or any Affiliate has or may have
any material liability contingent or otherwise;
(iv) "EMPLOYEE" shall mean any current, former, or retired employee,
officer, or director of the Company or any Affiliate;
(v) "EMPLOYEE AGREEMENT" shall refer to each management, employment,
severance, consulting, relocation, repatriation, expatriation, visa, work
permit or similar agreement or contract between the Company or any Affiliate
and any Employee or consultant;
(vi) "IRS" shall mean the Internal Revenue Service;
(vii) "MULTIEMPLOYER PLAN" shall mean any "Pension Plan" (as defined
below) which is a "multiemployer plan," as defined in Section 3(37) of
ERISA; and
(viii) "PENSION PLAN" shall refer to each Company Employee Plan which is
an "employee pension benefit plan," within the meaning of Section 3(2) of
ERISA.
(b) SCHEDULE. Schedule 2.20(b) contains an accurate and complete list of
each Company Employee Plan and each Employee Agreement, together with a schedule
of all material liabilities, whether or not accrued, under each such Company
Employee Plan or Employee Agreement. Except as disclosed in Schedule 2.20(b),
the Company does not have any stated plan or commitment to establish any new
Company Employee Plan or Employee Agreement, to modify any Company Employee Plan
or Employee Agreement (except to the extent required by law or to conform any
such Company Employee Plan or Employee Agreement to the requirements of any
applicable law, in each case as previously disclosed to Parent in writing, or as
required by this Agreement), or to enter into any Company Employee Plan or
Employee Agreement.
(c) DOCUMENTS. The Company has provided to Parent (i) correct and complete
copies of all documents embodying or relating to each Company Employee Plan and
each Employee Agreement including all amendments thereto and written
interpretations thereof; (ii) the most recent annual actuarial valuations, if
any, prepared for each Company Employee Plan; (iii) the three (3) most recent
annual reports (Series 5500 and all schedules thereto), if any, required under
ERISA or the Code in connection with each Company Employee Plan or related
trust; (iv) if the Company Employee Plan is funded, the most recent annual and
periodic accounting, if any, of Company Employee Plan assets; (v) the most
recent summary plan description together with the most recent summary of
material modifications, if any, required under ERISA with respect to each
Company Employee Plan; (vi) all IRS determination letters and rulings relating
to Company Employee Plans and copies of all applications and correspondence to
or from the IRS or the Department of Labor ("DOL"), if any, with respect to any
Company Employee Plan; (vii) all communications material to any Employee or
Employees relating to any Company Employee Plan and any proposed Company
Employee Plans, in each case, relating to any amendments, terminations,
establishments, increases or decreases in benefits, acceleration of payments or
vesting schedules or other events which would result in any material liability
to the Company; and (viii) all registration statements and prospectuses prepared
in connection with each Company Employee Plan.
(d) EMPLOYEE PLAN COMPLIANCE. Except as set forth on Schedule 2.20(d), (i)
the Company has performed in all material respects all obligations required to
be performed by it under each Company Employee Plan and each Company Employee
Plan has been established and maintained in all material respects in accordance
with its terms and in substantial compliance with all applicable laws, statutes,
orders, rules and regulations, including but not limited to ERISA or the Code;
(ii) no "prohibited transaction," within the meaning of Section 4975 of the Code
or Section 406 of ERISA, has occurred with respect to any Company Employee Plan;
(iii) there are no actions, suits or claims pending, or, to the knowledge of the
Company, threatened or anticipated (other than routine claims for benefits and
proceedings with respect to qualified domestic relations orders) against any
Company
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Employee Plan or against the assets of any Company Employee Plan; and (iv) each
Company Employee Plan can be amended, terminated or otherwise discontinued after
the Effective Time in accordance with its terms, without liability to the
Company, Parent or any of its Affiliates (other than ordinary administration
expenses typically incurred in a termination event); (v) there are no inquiries
or proceedings pending or, to the knowledge of the Company or any affiliates,
threatened by the IRS or DOL with respect to any Company Employee Plan; and (vi)
neither the Company nor any Affiliate is subject to any penalty or tax with
respect to any Company Employee Plan under Section 502(i) of ERISA or Section
4975 through 4980 of the Code.
(e) PENSION PLANS. The Company does not now, nor has it ever, maintained,
established, sponsored, participated in, or contributed to, any Pension Plan
which is subject to Part 3 of Subtitle B of Title I of ERISA, Title IV of ERISA
or Section 412 of the Code.
(f) MULTIEMPLOYER PLANS. At no time has the Company contributed to or been
requested to contribute to any Multiemployer Plan.
(g) NO POST-EMPLOYMENT OBLIGATIONS. Except as set forth in Schedule
2.20(g), no Company Employee Plan provides, or has any liability to provide,
life insurance, medical or other employee benefits to any Employee upon his or
her retirement or termination of employment for any reason, except as may be
required by statute, and the Company has never represented, promised or
contracted (whether in oral or written form) to any Employee (either
individually or to Employees as a group) that such Employee(s) would be provided
with life insurance, medical or other employee welfare benefits upon their
retirement or termination of employment, except to the extent required by
statute.
(h) EFFECT OF TRANSACTION.
(i) Except as provided in Section 1.6 of this Agreement or as set forth
on Schedule 2.20(h)(i), the execution of this Agreement and the consummation
of the transactions contemplated hereby will not (either alone or upon the
occurrence of any additional or subsequent events) constitute an event under
any Company Employee Plan, Employee Agreement, trust or loan that will or
may result in any payment (whether of severance pay or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution, increase
in benefits or obligation to fund benefits with respect to any Employee.
(ii) Except as set forth on Schedule 2.20(h)(ii), no payment or benefit
which will or may be made by the Company or Parent or any of their
respective affiliates with respect to any Employee will be characterized as
an "excess parachute payment," within the meaning of Section 280G(b)(1) of
the Code.
(i) EMPLOYMENT MATTERS. The Company (i) is in compliance in all material
respects with all applicable foreign, federal, state and local laws, rules and
regulations respecting employment, employment practices, terms and conditions of
employment and wages and hours, in each case, with respect to Employees; (ii)
has withheld all amounts required by law or by agreement to be withheld from the
wages, salaries and other payments to Employees; (iii) is not liable for any
arrears of wages or any taxes or any penalty for failure to comply with any of
the foregoing; and (iv) is not liable for any payment to any trust or other fund
or to any governmental or administrative authority, with respect to unemployment
compensation benefits, social security or other benefits or obligations for
Employees (other than routine payments to be made in the normal course of
business and consistent with past practice).
(j) LABOR. No work stoppage or labor strike against the Company is pending
or, to the best knowledge of the Company, threatened. Except as set forth in
Schedule 2.20(j), the Company is not involved in or, to the knowledge of the
Company, threatened with, any labor dispute, grievance, or litigation relating
to labor, safety or discrimination matters involving any Employee, including,
without limitation, charges of unfair labor practices or discrimination
complaints, which, if adversely determined, would, individually or in the
aggregate, result in liability to the Company. Neither the
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Company nor any of its subsidiaries has engaged in any unfair labor practices
within the meaning of the National Labor Relations Act which would, individually
or in the aggregate, directly or indirectly result in a liability to the
Company. Except as set forth in Schedule 2.20(j), the Company is not presently,
nor has it been in the past, a party to, or bound by, any collective bargaining
agreement or union contract with respect to Employees and no collective
bargaining agreement is being negotiated by the Company.
2.21 COMPLETE COPIES OF MATERIALS. The Company has delivered or made
available to Parent true and complete copies of each agreement, contract,
commitment or other document (or summaries of same) that is referred to in the
Company Schedules or that has been requested by Parent or its counsel.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to Seller and the Company as
follows:
3.1 ORGANIZATION, STANDING AND POWER. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. Each of Parent and Merger
Sub has the corporate power to own its properties and to carry on its business
as now being conducted and is duly qualified to do business and is in good
standing in each jurisdiction in which the failure to be so qualified would have
a material adverse effect on the ability of Parent and Merger Sub to consummate
the transactions contemplated hereby.
3.2 AUTHORITY. Parent and Merger Sub have all requisite corporate power
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Parent and Merger Sub. This
Agreement has been duly executed and delivered by Parent and Merger Sub and
constitutes the valid and binding obligations of Parent and Merger Sub,
enforceable in accordance with its terms. The execution and delivery of this
Agreement by Parent does not, and, as of the Effective Time, the consummation of
the transactions contemplated hereby will not, conflict with (i) any provision
of the Certificate of Incorporation or Bylaws of Parent, or (ii) any material
mortgage, indenture, lease, contract or other agreement or instrument, permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Parent or its properties or assets.
3.3 CAPITAL STRUCTURE.
(a) The authorized stock of Parent consists of 150,000,000 shares of Common
Stock, of which 33,038,821 shares were issued and outstanding as of April 30,
1996, and 5,000,000 shares of Preferred Stock, none of which is issued or
outstanding. The authorized capital stock of Merger Sub consists of 1,000 shares
of Common Stock, 1,000 shares of which, as of the date hereof, are issued and
outstanding and are held by Parent. All such shares have been duly authorized,
and all such issued and outstanding shares have been validly issued, are fully
paid and nonassessable and are free of any liens or encumbrances other than any
liens or encumbrances created by or imposed upon the holders thereof. Under
Parent's stock option plans, an aggregate of 6,276,728 options to purchase
Parent Common Stock were outstanding as of April 30, 1996 and an aggregate of
4,586,164 such options are currently available for grant.
(b) The shares of Parent Common Stock to be issued pursuant to the Merger
will be duly authorized, validly issued, fully paid and non-assessable. All of
such shares will be issued in compliance with applicable state and federal
securities laws (subject to the provisions of Rule 145 and the Affiliates
Agreements, where applicable).
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3.4 CASH CONSIDERATION. Parent currently has available, and at the
Effective Time of the Merger will continue to have available, sufficient cash to
enable it to perform its obligations under this Agreement.
3.5 SEC DOCUMENTS; PARENT FINANCIAL STATEMENTS. Parent has furnished or
made available to the Company true and complete copies of all reports or
registration statements filed by it with the U.S. Securities and Exchange
Commission (the "SEC") under the Securities Exchange Act of 1934 (the "EXCHANGE
ACT") for all periods subsequent to the year ended December 31, 1993, all in the
form so filed (all of the foregoing being collectively referred to as the "SEC
DOCUMENTS"). As of their respective filing dates, the SEC Documents complied in
all material respects with the requirements of the Exchange Act, and none of the
SEC Documents contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances in which they were made,
not misleading, except to the extent corrected by a subsequently filed document
with the SEC. Except for the SEC Documents, there have been no filings required
under the Exchange Act or the Securities Act of 1933, as amended, in respect of
Parent, nor have there been any amendments required to be filed in respect of
the SEC Documents. The financial statements of Parent, including the notes
thereto, included in the SEC Documents (the "PARENT FINANCIAL STATEMENTS")
comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles consistently applied (except as may be indicated in the
notes thereto) and present fairly the consolidated financial position of Parent
at the dates thereof and of its operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal audit
adjustments). There has been no change in Parent accounting policies except as
described in the notes to the Parent Financial Statements.
3.6 NO MATERIAL ADVERSE CHANGE. Since the date of the balance sheet
included in the Parent's most recently filed SEC Document, Parent has conducted
its business in the ordinary course and there has not occurred: (a) any material
adverse change in the financial condition, liabilities, assets or business of
Parent; (b) any amendment or change in the Certificate of Incorporation (other
than to increase the authorized shares of Parent Common Stock from 50,000,000 to
150,000,000 shares) or Bylaws of Parent; or (c) any damage to, destruction or
loss of any assets of the Parent, (whether or not covered by insurance) that
materially and adversely affects the financial condition or business of Parent.
3.7 LITIGATION. There is no action, suit, proceeding, claim, arbitration
or investigation pending, or as to which Parent has received any notice of
assertion against Parent which in any manner challenges or seeks to prevent,
enjoin, alter or materially delay any of the transactions contemplated by this
Agreement or that would have a material adverse effect on the business, assets
(including intangible assets), financial condition, prospects or results of
operations of Parent and its subsidiaries, taken as whole.
3.8 REGISTRATION STATEMENT ON FORM S-4. As of its filing date, the
Registration Statement, as defined below, will comply in all material respects
with the requirements of the Exchange Act, and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of the
circumstances in which they are made, not misleading, except to the extent
corrected by a subsequently filed document with the SEC. The financial
statements of Parent, including the notes thereto, included in the Registration
Statement will comply as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto, will have been prepared in accordance with generally
accepted accounting principles consistently applied (except as may be indicated
in the notes thereto) and will present fairly the consolidated financial
position of Parent at the dates thereof and of its operations and cash flows for
the periods then ended (subject, in the case of unaudited statements, to normal
audit adjustments).
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3.9 COMPLIANCE WITH LAWS. Parent has complied in all material respects
with, is not in material violation of, and has not received any notices of
violation with respect to, any foreign, federal, state or local statute, law or
regulation.
3.10 BROKERS' AND FINDERS' FEES; THIRD PARTY EXPENSES. Parent has not
incurred, nor will it incur, directly or indirectly, any liability for brokerage
or finders' fees or agents' commissions or any similar charges in connection
with this Agreement or any transaction contemplated hereby.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 CONDUCT OF BUSINESS OF THE COMPANY. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement and the Effective Time, the Company agrees (except to the extent that
Parent shall otherwise consent in writing) to carry on its business in the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted, to pay its debts and Taxes when due, to pay or perform
other obligations when due, and, to the extent consistent with such business, to
use all reasonable efforts consistent with past practice and policies to
preserve intact its present business organization, keep available the services
of its present officers and key employees and preserve their relationships with
customers, suppliers, distributors, licensors, licensees, and others having
business dealings with it, all with the goal of preserving unimpaired its
goodwill and ongoing businesses at the Effective Time. The Company shall
promptly notify Parent of any materially negative event related to the Company
or its business. Except as expressly contemplated by this Agreement or disclosed
in Schedule 4.1, the Company shall not, without the prior written consent of
Parent, which consent shall not be unreasonably withheld:
(a) Enter into any commitment or transaction not in the ordinary course
of business;
(b) Transfer to any person or entity any rights to the Company
Intellectual Property Rights (other than pursuant to End-User Licenses in
the ordinary course of business);
(c) Enter into or amend any agreements pursuant to which any other party
is granted marketing, distribution or similar rights of any type or scope
with respect to any products of the Company;
(d) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of the agreements
set forth or described in the Company Schedules;
(e) Commence any litigation;
(f) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of capital stock of the Company, or
repurchase, redeem or otherwise acquire, directly or indirectly, any shares
of its capital stock (or options, warrants or other rights exercisable
therefor other than repurchases of employees' restricted shares upon
termination of their employment pursuant to existing arrangements and
consistent with past practices);
(g) Issue, grant, deliver or sell or authorize or propose the issuance,
grant, delivery or sale of, or purchase or propose the purchase of, any
shares of its capital stock or securities convertible into, or
subscriptions, rights, warrants or options to acquire, or other agreements
or commitments of any character obligating it to issue any such shares or
other convertible securities, except for (i) the issuance of Company Common
Stock upon the exercise of outstanding Options, and (ii) the issuance of
heretofore authorized options to employees in the ordinary course of
business pursuant to the Company's Option Plans as described in Section
2.2(b);
(h) Cause or permit any amendments to its Certificate of Incorporation
(except as described in Section 1.13 and Section 2.2(a)) or Bylaws;
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(i) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire
any assets in an amount in excess of $200,000 in the case of a single
transaction or in excess of $500,000 in the aggregate;
(j) Sell, lease, license or otherwise dispose of any of its properties
or assets, except in the ordinary course of business;
(k) Incur any indebtedness for borrowed money without prior consultation
or guarantee any such indebtedness or issue or sell any debt securities of
the Company or guarantee any debt securities of others;
(l) Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee except payments made pursuant to
standard written agreements outstanding on the date hereof or the Company's
pre-existing severance policy as disclosed herein;
(m) Adopt or amend any employee benefit plan, or enter into any
employment contract, extend employment offers, pay or agree to pay any
special bonus or special remuneration to any director or employee, or
increase the salaries or wage rates of its employees, other than as
disclosed in Schedule 2.7;
(n) Revalue any of its assets, including without limitation writing down
the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business;
(o) Pay, discharge or satisfy, in an amount in excess of $100,000 in any
one case or $250,000 in the aggregate, any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction in the ordinary course of
business of liabilities reflected or reserved against in the Company
Financial Statements or the notes thereto or that arose in the ordinary
course of business subsequent to March 31, 1996, or expenses consistent with
the provisions of this Agreement incurred in connection with any transaction
contemplated hereby;
(p) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to
any extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes; or
(q) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (p) above, or any other action that
would prevent the Company from performing or cause the Company not to
perform its covenants hereunder.
4.2 NO SOLICITATION. Until the earlier of the Effective Time and the date
of termination of this Agreement pursuant to the provisions of Section 8.1:
(a) The Company will not (nor will the Company permit any of the
Company's officers, directors, agents, representatives or affiliates to)
directly or indirectly, take any of the following actions with any party
other than Parent and its designees: (i) solicit, conduct discussions with,
engage in or continue with negotiations with any person relating to the
possible acquisition of the Company (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise) or any material portion of
its or their capital stock or assets, (ii) provide information with respect
to it to any person, other than Parent, relating to the possible acquisition
of the Company (whether by way of merger, purchase of capital stock,
purchase of assets or otherwise) or any material portion of its capital
stock or assets, (iii) enter into an agreement with any person, other than
Parent, providing for the acquisition of the Company (whether by way of
merger, purchase of capital stock, purchase of assets or otherwise) or any
material portion of its capital stock or assets or (iv) make or authorize
any statement, recommendation or solicitation in support of any
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possible acquisition of the Company (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise) or any material portion of
its capital stock or assets by any person, other than by Parent.
In addition to the foregoing, if the Company receives after the date
hereof and prior to the Effective Time or the termination of this Agreement
any offer or proposal relating to any of the above, the Company shall
promptly notify Parent thereof, including information as to the identity of
the offeror or the party making any such offer or proposal and the specific
terms of such offer or proposal, as the case may be, and such other
information related thereto as Parent may reasonably request; and
(b) Parent will not (nor will Parent permit any of Parent's officers,
directors, agents, representatives or affiliates to) directly or indirectly,
take any of the following actions with any party other than the Company and
its designees: (i) solicit, conduct discussions with, engage in or continue
with negotiations with any person relating to the possible acquisition
(whether by way of merger, purchase of capital stock, purchase of assets or
otherwise) of any entity conducting a business substantially the same as
that currently conducted by the Company or any material portion of such
entity or its capital stock or assets, or (ii) enter into an agreement with
any person providing for the acquisition of any such entity (whether by way
of merger, purchase of capital stock, purchase of assets or otherwise) or
any material portion of its capital stock or assets.
4.3 STRATEGIC AGREEMENTS. The Company agrees that it will not enter into
any strategic alliance, joint development or joint marketing agreement during
the period from the date of this Agreement and continuing until the earlier of
the termination of this Agreement and the Effective Time without the prior
written consent of Parent, which shall not be unreasonably withheld.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 REGISTRATION STATEMENT; COMPANY STOCKHOLDER APPROVAL.
(a) As promptly as practicable after the execution of this Agreement, Parent
shall, prepare, and the Company shall assist in preparing a registration
statement on Form S-4 (the "REGISTRATION STATEMENT") pertaining to the offer and
sale of shares of Parent Common Stock to be issued by virtue of the Merger,
which shall include therein a Proxy Statement (the "PROXY STATEMENT") relating
to the solicitation of the consent of the stockholders of the Company to the
Merger. Parent shall file with the SEC the Registration Statement as soon as is
reasonably practicable following preparation thereof. The Company shall provide
to Parent and its counsel for inclusion in the Registration Statement in form
and substance reasonably satisfactory to Parent and its counsel, such
information concerning the Company, its operations, capitalization, technology,
share ownership and other material as Parent or its counsel may reasonably
request. Each of Parent and the Company shall use its reasonable efforts to
respond to any comments of the SEC and to have the Registration Statement
declared effective as promptly as practicable after the filing. Each party will
notify the other parties hereto promptly of the receipt of any comments from the
SEC and of any request by the SEC for amendments or supplements to the
Registration Statement or for additional information and will supply the other
party with copies of all correspondence between such party or any of its
representatives, on the one hand, and the SEC on the other hand, with respect to
the Registration Statement. Whenever any event occurs which should be set forth
in an amendment or supplement to the Registration Statement, Parent or the
Company shall promptly inform the other party of such occurrence and cooperate
in filing with the SEC any such amendment or supplement.
(b) No more than 30 days after the Registration Statement has been declared
effective, the Company shall submit this Agreement and the transactions
contemplated hereby to its stockholders for approval and adoption as provided by
applicable law. The Company shall use all reasonable efforts
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to solicit and obtain the consent of its stockholders sufficient to approve the
Merger and this Agreement and to enable the Closing to occur as promptly as
practicable. The materials submitted to the Company's stockholders shall include
the unanimous recommendation of the Board of Directors of the Company in favor
of the Merger and this Agreement. Drafts of the Registration and Proxy
Statements will be provided to Seller in advance of filing and mailing so as to
provide a reasonable opportunity for review and comment, and any description of
Seller or its affiliates (including directors of the Company) must be reasonably
acceptable to Seller.
5.2 ACCESS TO INFORMATION. Subject to any applicable contractual
confidentiality obligations (which the disclosing party shall use all reasonable
efforts to cause to be waived) each party shall afford the others and their
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (a) all of its
properties, books, contracts, agreements and records, and (b) all other
information concerning the business, properties and personnel (subject to
restrictions imposed by applicable law) of it as the others may reasonably
request. No information or knowledge obtained in any investigation pursuant to
this Section 5.2 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties to
consummate the Merger.
5.3 HSR FILINGS; PERMITS AND CONSENTS.
(a) Promptly after the date hereof, Parent and Seller shall file with the
FTC and the DOJ the notification and report form required for the transactions
contemplated hereby and any supplemental information requested in connection
therewith pursuant to the HSR Act. Any such notification and report form and
supplemental information will be in substantial compliance with the requirements
of the HSR Act. Parent and Seller shall furnish each other with all necessary
information and assistance as the other may reasonably request, and shall keep
each other apprised of the status of any inquiries from the FTC or DOJ, with
which each shall promptly comply as applicable. Parent and Seller will use all
reasonable efforts to obtain the required clearance under the HSR Act.
(b) Promptly after the date hereof, the parties shall make all other filings
with governmental authorities, and use all reasonable efforts to obtain all
permits, approvals, authorizations and consents of all third parties required to
consummate the transactions contemplated hereby.
5.4 CONFIDENTIALITY. Each of the parties hereto hereby agrees to and
reaffirms the terms and provisions of the Mutual Nondisclosure Letter between
Parent and the Company dated as of April 1, 1996, as amended.
5.5 EXPENSES. Whether or not the Merger is consummated, all fees and
expenses incurred in connection with the Merger including, without limitation,
all legal, accounting, financial advisory, consulting and all other fees and
expenses of third parties incurred by a party in connection with the negotiation
and effectuation of the terms and conditions of this Agreement and the
transactions contemplated hereby, shall be the obligation of the respective
party incurring such fees and expenses.
5.6 PUBLIC DISCLOSURE. Unless otherwise required by law (including,
without limitation, securities laws) or, as to Parent, by the rules and
regulations of the National Association of Securities Dealers, Inc., prior to
the Effective Time, no disclosure (whether or not in response to an inquiry) of
the subject matter of this Agreement shall be made by any party hereto unless
approved by Parent, Seller and the Company prior to release except that, upon
execution of this Agreement, Parent, after consultation with Seller and the
Company, will issue a mutually agreed upon press release describing the material
terms hereof and the parties will promptly collaborate in the preparation and
review thereof.
5.7 CONSENTS. Each of Parent and the Company shall use all reasonable
efforts to obtain the consents, waivers and approvals (all of which Company
consents, waivers and approvals are set forth in Company Schedules) under any of
the Contracts as may be required in connection with the Merger so as to preserve
all rights of, and benefits to the Company thereunder.
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5.8 FIRPTA COMPLIANCE. On the Closing Date, the Company shall deliver to
Parent a properly executed statement in a form reasonably acceptable to Parent
for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1.1445-2(c)(3).
5.9 DILIGENT EFFORTS. Subject to the terms and conditions provided in this
Agreement, each of the parties hereto shall use its diligent efforts to take
promptly, or cause to be taken, all actions, and to do promptly, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
hereby to obtain all necessary waivers, consents and approvals and to effect all
necessary registrations and filings and to remove any injunctions or other
impediments or delays, legal or otherwise, in order to consummate and make
effective the transactions contemplated by this Agreement for the purpose of
securing to the parties hereto the benefits contemplated by this Agreement;
provided that Parent shall not be required to agree to any divestiture by Parent
or the Company or any of Parent's subsidiaries or affiliates of shares of
capital stock or of any business, assets or property of Parent or its
subsidiaries or affiliates or the Company or its affiliates, or the imposition
of any material limitation on the ability of any of them to conduct their
businesses or to own or exercise control of such assets, properties and stock.
5.10 NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt notice
to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the Company and
Parent or Merger Sub, respectively, contained in this Agreement to be untrue or
inaccurate in any material respect at or prior to the Effective Time except as
contemplated by their Agreement (including the Company Schedules) and (ii) any
failure of the Company or Parent, as the case may be, to comply with or satisfy
in any material respect any covenant, condition or agreement to be complied with
or satisfied by it hereunder; provided, however, that the delivery of any notice
pursuant to this Section 5.10 shall not limit or otherwise affect any remedies
available to the party receiving such notice.
5.11 AFFILIATE AGREEMENTS. Schedule 5.11 sets forth those persons who, in
the Company's reasonable judgment, are "affiliates" of the Company within the
meaning of Rule 145 (each such person an "AFFILIATE") promulgated under the
Securities Act ("RULE 145"). The Company shall provide Parent such information
and documents as Parent shall reasonably request for purposes of reviewing such
list. The Company has delivered or shall cause to be delivered to Parent,
concurrently with the execution of this Agreement, (i) from the Seller an
executed Affiliate Agreement in the form attached hereto as EXHIBIT A-1, and
(ii) from each of its other Affiliates, an executed Affiliate Agreement in the
form attached hereto as EXHIBIT A-2. Parent and Merger Sub shall be entitled to
place appropriate legends on the certificates evidencing any Parent Common Stock
to be received by Affiliates of the Company pursuant to the terms of this
Agreement, and to issue appropriate stop transfer instructions to the transfer
agent for Parent Common Stock, consistent with the terms of such Affiliate
Agreements.
5.12 ADDITIONAL DOCUMENTS AND FURTHER ASSURANCES. Each party hereto, at
the request of the other party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be reasonably
necessary or desirable for effecting completely the consummation of this
Agreement and the transactions contemplated hereby.
5.13 FORM S-8. Parent shall file a registration statement on Form S-8 for
the shares of Parent Common Stock issuable with respect to assumed Company
Options as soon as practicable after the Closing Date and maintain such
registration statement effective for so long as the Options assumed by Parent
hereunder remain outstanding and will at all times reserve sufficient shares for
issuance upon exercise of such Options. Parent will provide facilities to
optionholders for simultaneous exercise and sale.
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5.14 NASDAQ LISTING. Parent shall authorize for listing on The Nasdaq
Stock Market, or the national securities exchange on which Parent's Common Stock
is then traded, the shares of Parent Common Stock issuable, and those required
to be reserved for issuance, in connection with the Merger, upon official notice
of issuance.
5.15 VOTING AND NONCOMPETITION AGREEMENTS. Concurrently with the execution
of this Agreement, the persons and entities listed in the preamble to EXHIBIT B
hereto shall execute Voting Agreements in the form attached hereto as EXHIBIT B
(the "VOTING AGREEMENTS") and NONCOMPETITION Agreements in the form of EXHIBIT C
hereto (the "NONCOMPETITION AGREEMENTS"), agreeing, among other things, to vote
in favor of the Merger and against any competing proposals.
5.16 BLUE SKY LAWS. Parent shall take such steps as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the Parent Common Stock pursuant hereto. The
Company shall use all reasonable efforts to assist Parent as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable in connection with the issuance of Parent Common Stock pursuant
hereto.
5.17 TRANSITION AGREEMENT. Concurrently with the execution of this
Agreement, Seller and the Company will enter into the Transition and License
Agreement (the "Transition Agreement") in the form attached hereto as EXHIBIT D.
The covenants, representations and warranties in this Agreement are all deemed
to include any appropriate exceptions regarding the Transition Agreement.
5.18 CONTINUITY OF INTEREST. Parent will not take any steps following the
Effective Time that would have an adverse effect upon the "continuity of
interest" test pertaining to the tax-free nature of the transaction.
5.19 CERTAIN AGREEMENTS. At the Effective Time, the Surviving Corporation
will execute an acknowledgment as to the continued validity of (i)
indemnification agreements in respect of the officers and directors of the
Company and (ii) the Transition Agreement.
5.20 INDEMNIFICATION. Each party agrees to indemnify and hold harmless the
other party (including such other party's directors, officers, employees and
agents) against, and with respect to, any liability, damages, losses, expenses
or costs arising from or by virtue of any material misstatement by such party or
omission to state any fact which is required to be disclosed by such party for
purposes of the inclusion of such information in any regulatory filing made on
behalf of the parties hereto for the purpose of effecting the terms of this
Agreement, including, but not limited to, the Registration Statement and any
amendments thereto.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing of the following
conditions:
(a) STOCKHOLDER APPROVAL. This Agreement and the Merger shall have
been approved and adopted by the stockholders of the Company by the
requisite vote under applicable law and the Company's Certificate of
Incorporation and such Certificate of Incorporation shall have been amended
as provided in Section 1.13.
(b) REGISTRATION STATEMENT EFFECTIVE. The SEC shall have declared the
Registration Statement effective, no stop order suspending the effectiveness
of the Registration Statement or any part thereof shall have been issued and
no proceeding for that purpose shall have been initiated or threatened in
writing by the SEC; and all requests for additional information on the part
of the SEC shall have been complied with to the reasonable satisfaction of
the parties hereto.
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(c) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger shall be in effect,
nor shall any proceeding brought by an administrative agency or commission
or other governmental authority or instrumentality, domestic or foreign,
seeking any of the foregoing be pending; nor shall there be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced
or deemed applicable to the Merger, which makes the consummation of the
Merger illegal.
(d) HSR ACT. Any waiting period applicable to the consummation of the
Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, shall have expired or been terminated and no action shall have been
instituted by the Department of Justice or Federal Trade Commission
challenging or seeking to enjoin the consummation of the Merger, which
action shall not have been withdrawn or terminated.
(e) NASDAQ LISTING. The shares of Parent Common Stock issuable to
stockholders of the Company pursuant to this Agreement and such other shares
required to be reserved for issuance in connection with the Merger shall
have been authorized for listing on The Nasdaq Stock Market, the New York
Stock Exchange or the American Stock Exchange.
(f) REGISTRATION RIGHTS AGREEMENT. Parent and the Seller shall have
executed and delivered the Registration Rights Agreement substantially in
the form attached hereto as EXHIBIT E.
(g) TRANSITION AND LICENSE AGREEMENT. The Transition Agreement shall
be in full force and effect, there shall have occurred no default thereunder
(or any action that, with the passage of time or the give of notice or both
would result in a default thereunder) that shall not have been cured or
waived, and the parties thereto shall have performed all actions required to
be performed by them thereunder prior to the Effective Time.
(h) TERMINATION OF VESTED COMPANY OPTIONS. Vested Company Options
shall have been terminated to the extent not exercised as of the Effective
Time.
6.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF SELLER AND THE COMPANY. The
obligations of the Company to consummate the Merger and the transactions
contemplated by this Agreement shall be subject to the satisfaction at or prior
to the Closing of each of the following conditions, any of which may be waived,
in writing, exclusively by Seller and the Company:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Parent and Merger Sub contained in this Agreement shall be true and
correct on and as of the Closing, except for changes contemplated by this
Agreement and except for those representations and warranties which address
matters only as of a particular date (which shall remain true and correct as
of such date), with the same force and effect as if made on and as of the
Effective Time; and Seller and the Company shall have received a certificate
to such effect signed on behalf of Parent by a duly authorized officer of
Parent.
(b) AGREEMENTS AND COVENANTS. Parent and Merger Sub shall have
performed or complied (which performance or compliance shall be subject to
Parent's or Merger Sub's ability to cure as provided in Section 8.1(e)
below) in all material respects with all agreements and covenants required
by this Agreement to be performed or complied with by them on or prior to
the Effective Time; and Seller and the Company shall have received a
certificate to such effect signed by a duly authorized officer of Parent.
(c) THIRD PARTY CONSENTS. The Company shall have been furnished with
evidence satisfactory to it that Parent has obtained the consents, approvals
and waivers set forth in Schedule 6.2(c).
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(d) LEGAL OPINION. The Company and Seller shall have received a legal
opinion from Wilson Sonsini Goodrich & Rosati, Professional Corporation,
legal counsel to Parent, covering matters customarily addressed in similar
transactions and in the form and substance reasonably acceptable to Company
and Seller.
(e) MATERIAL ADVERSE CHANGE. There shall not have occurred any
material adverse change in the business, assets (including intangible
assets), financial condition, prospects or results of operations of Parent
since March 31, 1996.
(f) OTHER ADVERSE DEVELOPMENTS. There shall not have occurred (i) any
suspension or limitation of trading in securities generally on the Nasdaq
Stock Market or any national securities exchange, or any setting of minimum
prices for trading on any such exchange or in the over-the-counter market,
(ii) any imposition of governmental restrictions on trading in securities
generally, (iii) a banking moratorium either by Federal or California
authorities, or (iv) an outbreak of major international hostilities or other
national calamity in the United States.
6.3 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF PARENT AND MERGER SUB. The
obligations of Parent and Merger Sub to consummate the Merger and the
transactions contemplated by this Agreement shall be subject to the satisfaction
at or prior to the Closing of each of the following conditions, any of which may
be waived, in writing, exclusively by Parent:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the Company contained in this Agreement shall be true and correct on and
as of the Effective Time with the same force and effect as if made on and as
of the Effective Time, except for (i) changes contemplated by this
Agreement, (ii) those representations and warranties which address matters
only as of a particular date (which shall remain true and correct as of such
date), and (iii) those representations and warranties, the breach of which,
individually or in the aggregate, has not resulted in a material adverse
change in the business, assets (including intangible assets), financial
condition, prospects or results of operations of the Company; and Parent and
Merger Sub shall have received a certificate to such effect signed on behalf
of the Company by a duly authorized officer of the Company; PROVIDED,
HOWEVER, that to the extent representations and warranties are untrue or
inaccurate as a result of actions taken (i) by Parent, or (ii) by Company at
the direction of, or with the prior written consent of, Parent, during the
period from the date of this Agreement through the Closing, all such matters
shall be deemed to be included in Company's Disclosure Letter with Parent's
Consent, with no potential liability accruing to the Significant
Stockholders for such untruths or inaccuracies of such representations and
warranties.
(b) AFFILIATE AGREEMENTS. Each of the parties identified by the
Company as being one of its Affiliates shall have delivered an executed
Affiliate Agreement in accordance with Section 5.11, which shall be in full
force and effect.
(c) AGREEMENTS AND COVENANTS. The Company shall have performed or
complied (which performance or compliance shall be subject to the Company's
ability to cure as provided in Section 8.1(d) below) in all material
respects with all agreements and covenants required by this Agreement to be
performed or complied with by it on or prior to the Effective Time; and
Parent and Merger Sub shall have received a certificate to such effect
signed by a duly authorized officer of the Company.
(d) THIRD PARTY CONSENTS. Parent shall have been furnished with
evidence satisfactory to it that the Company has obtained the material
consents, approvals and waivers set forth in Schedule 6.3(d).
(e) LEGAL OPINIONS. Parent shall have received legal opinions from
Fenwick & West, legal counsel to the Company, and from legal counsel to
Seller, each covering matters customarily covered in similar transactions
and in substantially the form and substance reasonably satisfactory to
Parent.
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(f) MATERIAL ADVERSE CHANGE. There shall not have occurred any
material adverse change in the business, assets (including intangible
assets) financial condition, results of operations or prospects of the
Company since March 31, 1996.
(g) NONCOMPETITION AGREEMENTS. Each person listed in the preamble to
Exhibit C attached hereto shall have executed and delivered to Parent a
Noncompetition Agreement in substantially the form of EXHIBIT C attached
hereto, and all such Noncompetition Agreements shall remain in full force
and effect.
(h) DISSENTERS' RIGHTS. Holders of more than five percent (5%) of the
outstanding shares of Company Capital Stock shall not have exercised, nor
shall they have any continued right to exercise, appraisal, dissenters' or
similar rights under applicable law with respect to their shares by virtue
of the Merger.
(i) ACCOUNTING TREATMENT. The SEC shall not have required as a
condition to declaring the Registration Statement effective any material
change in Parent's proposed accounting for the Merger.
(j) TAX TREATMENT OF TRANSACTION. Parent shall be reasonably satisfied
that the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW
7.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company and Seller in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Merger for a period of
270 days. Following the Effective Time, the remedies of Parent for breach of any
of the foregoing shall be solely as set forth in Section 7.2. The Significant
Stockholders shall have no liability for breach of any of the foregoing except
to the extent of then respective proportionate interest in the Escrow Fund, as
defined below. Notwithstanding the foregoing, if the Merger is not consummated,
the Company will not be liable for any breach of any representation or warranty.
The representations and warranties of Parent and Merger Sub in this Agreement or
in any instrument delivered pursuant to this Agreement shall terminate upon the
Closing.
7.2 ESCROW ARRANGEMENTS.
(a) ESCROW FUND. At the Effective Time, the Significant Stockholders
will be deemed to have received and deposited with the Escrow Agent the
Escrow Amount (plus any additional shares as may be issued upon any stock
split, stock dividend or recapitalization effected by Parent after the
Effective Time) without any act of any stockholder. As soon as practicable
after the Effective Time, the Escrow Amount, without any act of any
stockholder, will be deposited with the Escrow Agent, such deposit to
constitute an escrow fund (the "ESCROW FUND") to be governed by the terms
set forth herein and at Parent's cost and expense. The Escrow Fund shall be
available to compensate Parent and its affiliates for any claims, losses,
liabilities, damages, costs and expenses, including attorneys' fees and
expenses, and expenses of investigation and defense (hereinafter
individually a "LOSS" and collectively "LOSSES") incurred by Parent, its
officers, directors, or affiliates (including the Surviving Corporation) as
a result of any willful breach of a representation or warranty of the
Company contained herein that, individually or in the aggregate, results in
aggregate damage to the Company and its subsidiaries of not less than
$2,000,000.
(b) ESCROW PERIOD; DISTRIBUTION UPON TERMINATION OF ESCROW
PERIODS. Subject to the following requirements, the Escrow Fund shall be in
existence immediately following the Effective Time and shall terminate at
5:00 p.m., California time, on the date which is 270 days following the
Closing (the "ESCROW PERIOD"); provided that in the event a claim has been
made against the Escrow Fund prior to such time, the Escrow Agent shall only
deliver to the Significant Stockholders that portion of the Escrow Fund as
to which Parent and the Securityholders' Agents have
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agreed to the release. As soon as all such claims have been resolved, the
Escrow Agent shall deliver to the Significant Stockholders the remaining
portion of the Escrow Fund not required to satisfy such claims. Deliveries
of Escrow Amounts to the Significant Stockholders pursuant to this Section
7.2(b) shall be made in proportion to their respective original
contributions to the Escrow Fund.
(c) PROTECTION OF ESCROW FUND.
(i) The Escrow Agent shall hold and safeguard the Escrow Fund during
the Escrow Period, shall treat such fund as a trust fund in accordance
with the terms of this Agreement and not as the property of Parent and
shall hold and dispose of the Escrow Fund only in accordance with the
terms hereof.
(ii) Any shares of Parent Common Stock or other equity securities
issued or distributed by Parent (including shares issued upon a stock
split) ("NEW SHARES") in respect of, and any cash dividends on, Parent
Common Stock in the Escrow Fund which have not been released from the
Escrow Fund shall be added to the Escrow Fund and become a part thereof.
New Shares issued in respect of shares of, and any cash dividends on,
Parent Common Stock which have been released from the Escrow Fund shall
not be added to the Escrow Fund, but shall be distributed to the record
holders thereof.
(iii) Each stockholder shall have voting rights with respect to the
shares of Parent Common Stock contributed to the Escrow Fund on behalf of
such stockholder (and on any voting securities added to the Escrow Fund
in respect of such shares of Parent Common Stock) so long as such shares
of Parent Common Stock or other voting securities are held in the Escrow
Fund.
(d) CLAIMS UPON ESCROW FUND.
(i) Upon receipt by the Escrow Agent at any time on or before the
last day of the Escrow Period of a certificate signed by any officer of
Parent (an "OFFICER'S CERTIFICATE"): (A) stating that Parent has paid or
properly accrued or reasonably anticipates that it will have to pay or
accrue Losses, and (B) specifying in reasonable detail each Loss included
in the amount so stated, the date each such item was paid or properly
accrued, or the basis for such anticipated Loss, and the nature of the
willful and material breach of a representation or warranty of the
Company contained herein (including the basis for Parent's belief that
such breach is willful), the Escrow Agent shall, subject to the
provisions of Section 7.2(e) hereof, deliver to Parent out of the Escrow
Fund, as promptly as practicable, such shares of Parent Common Stock, New
Shares and/or cash held in the Escrow Fund then having an aggregate value
equal to the amount of such Losses.
(ii) For the purposes of determining the number of shares of Parent
Common Stock to be delivered to Parent out of the Escrow Fund pursuant to
Section 7.2(d)(i) hereof, the shares of Parent Common Stock shall be
valued at the average of the closing prices of Parent's Common Stock on
the principal securities exchange on which Parent's Common Stock is then
traded, or if not so traded, the Nasdaq National Market System, in either
case as reported in THE WALL STREET JOURNAL for the five (5) consecutive
trading days ending on the date that is two (2) trading days prior to the
date such shares are delivered to Parent out of the Escrow Fund. Parent
and the Securityholder Agents shall certify that such value has been
determined in accordance with this clause (ii) in a certificate signed by
both Parent and the Securityholder Agents, and shall deliver such
certificate to the Escrow Agent.
(e) OBJECTIONS TO CLAIMS. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such certificate shall
be delivered to the Securityholder Agents and for a period of thirty (30)
days after such delivery, the Escrow Agent shall make no delivery to Parent
of any Escrow Amounts pursuant to Section 7.2(d) hereof unless the Escrow
Agent shall have received written authorization from the Securityholder
Agents to make such delivery. After the
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expiration of such thirty (30) day period, the Escrow Agent shall make
delivery of an amount from the Escrow Fund in accordance with Section 7.2(d)
hereof, provided that no such payment or delivery may be made if either of
the Securityholder Agents shall object in a written statement to the claim
made in the Officer's Certificate, and such statement shall have been
delivered to the Escrow Agent prior to the expiration of such thirty (30)
day period.
(f) RESOLUTION OF CONFLICTS; ARBITRATION.
(i) In case either of the Securityholder Agents shall so object in
writing to any claim or claims made in any Officer's Certificate, the
Securityholder Agents and Parent shall attempt in good faith to agree
upon the rights of the respective parties with respect to each of such
claims. If the Securityholder Agents and Parent should so agree, a
memorandum setting forth such agreement shall be prepared and signed by
both parties and shall be furnished to the Escrow Agent. The Escrow Agent
shall be entitled to rely on any such memorandum and distribute amounts
from the Escrow Fund in accordance with the terms thereof.
(ii) If no such agreement can be reached after good faith
negotiation, either Parent or the Securityholder Agents may demand
arbitration of the matter unless the amount of the damage or loss is at
issue in pending litigation with a third party, in which event
arbitration shall not be commenced until such amount is ascertained or
both parties agree to arbitration; and in either such event the matter
shall be settled by arbitration conducted by three arbitrators. Parent
and the Securityholder Agents shall each select one arbitrator, and the
two arbitrators so selected shall select a third arbitrator, each of
which arbitrators shall be independent and have at least ten years
relevant experience. The arbitrators shall set a limited time period and
establish procedures designed to reduce the cost and time for discovery
while allowing the parties an opportunity, adequate in the sole judgment
of the arbitrators, to discover relevant information from the opposing
parties about the subject matter of the dispute. The arbitrators shall
rule upon motions to compel or limit discovery and shall have the
authority to impose sanctions, including attorneys fees and costs, to the
extent as a court of competent law or equity, should the arbitrators
determine that discovery was sought without substantial justification or
that discovery was refused or objected to without substantial
justification. The decision of a majority of the three arbitrators as to
the validity and amount of any claim in such Officer's Certificate shall
be binding and conclusive upon the parties to this Agreement, and
notwithstanding anything in Section 7.2(e) hereof, the Escrow Agent shall
be entitled to act in accordance with such decision and make or withhold
payments out of the Escrow Fund in accordance therewith. Such decision
shall be written and shall be supported by written findings of fact and
conclusions which shall set forth the award, judgment, decree or order
awarded by the arbitrators.
(iii) Judgment upon any award rendered by the arbitrators may be
entered in any court having jurisdiction. Any such arbitration shall be
held in Santa Clara County, California under the rules of the American
Arbitration Association then in effect. For purposes of this Section
7.2(f), in any arbitration hereunder in which any claim or the amount
thereof stated in the Officer's Certificate is at issue, Parent shall be
deemed to be the Non-Prevailing Party in the event that the arbitrators
award Parent less than the sum of one-half (1/2) of the disputed amount
plus any amounts not in dispute; otherwise, the stockholders of the
Company as represented by the Securityholder Agents shall be deemed to be
the Non-Prevailing Party. The Non-Prevailing Party to an arbitration
shall pay its own expenses, the fees of each arbitrator, the
administrative costs of the arbitration, and the expenses, including
without limitation, reasonable attorneys' fees and costs, incurred by the
other party to the arbitration.
(g) SECURITYHOLDER AGENTS OF THE SIGNIFICANT STOCKHOLDERS; POWER OF
ATTORNEY.
(i) In the event that the Merger is approved, effective upon such
vote, and without further act of any stockholder, Mr. Nolan Daines, on
behalf of the Company, and Ms. Caroline
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de Puysegur, on behalf of Seller, shall be appointed as co-agents and
attorneys-in-fact (the "SECURITYHOLDER AGENTS") for and on behalf of the
Significant Stockholders, to give and receive notices and communications,
to authorize delivery to Parent of assets from the Escrow Fund in
satisfaction of claims by Parent, to object to such deliveries, to agree
to, negotiate, enter into settlements and compromises of, and demand
arbitration and comply with orders of courts and awards of arbitrators
with respect to such claims, and to take all actions necessary or
appropriate in the judgment of Securityholder Agents for the
accomplishment of the foregoing. Such agency may be changed (i) as to Mr.
Daines' position, by the vote or action of two-thirds in interest of the
Significant Stockholders other than Seller, and (ii) as to Ms. de
Puysegur, by Seller from time to time, in either case upon not less than
thirty (30) days prior written notice to Parent. Any vacancy in the
position of either of the Securityholder Agents may be filled by the
foregoing procedures as to the respective agent. No bond shall be
required of the Securityholder Agents, and the Securityholder Agents
shall not receive compensation for their services. Notices or
communications to or from the Securityholder Agents shall constitute
notice to or from each of the Significant Stockholders of the Company. In
no event shall Parent be required to resolve any dispute among the
Securityholder Agents, who shall act jointly in all matters as to Parent,
except that either of the Securityholder Agents may execute an objection
to a claim by Parent (but the Securityholder Agents will act jointly to
resolve such dispute). As between the Securityholder Agents, all actions
will be submitted to a simple majority vote in which the representation
of the Selling Stockholders other than Seller will have 49 votes and
Seller's representative will have 51 votes. Upon any reasonable request
by Parent, the Securityholder Agents will undertake to vote upon a
matter.
(ii) The Securityholder Agents shall not be liable for any act done
or omitted hereunder as Securityholder Agents while acting in good faith
and in the exercise of reasonable judgment.
(h) ACTIONS OF THE SECURITYHOLDER AGENTS. A decision, act, consent or
instruction of the Securityholder Agents shall constitute a decision of all
the Significant Stockholders and shall be final, binding and conclusive upon
each of the Significant Stockholders, and the Escrow Agent and Parent may
rely upon any such decision, act, consent or instruction of the
Securityholder Agents as being the decision, act, consent or instruction of
each Significant Stockholder. The Escrow Agent and Parent are hereby
relieved from any liability to any person for any acts done by them in
accordance with such decision, act, consent or instruction of the
Securityholder Agents.
(i) THIRD-PARTY CLAIMS. In the event Parent becomes aware of a
third-party claim which Parent believes may result in a demand against the
Escrow Fund, Parent shall notify the Securityholder Agents of such claim,
and the Securityholder Agents shall be entitled, at their expense, to assume
and control any defense of such claim. Parent may not agree to settle any
such claim without the prior written consent of the Securityholder Agents,
which will not be unreasonably withheld. In the event that the
Securityholder Agents have consented to any such settlement, including the
amount thereof, and acknowledged that the claim is a valid claim against the
Escrow Fund, the Securityholder Agents shall have no power or authority to
object under any provision of this Article VII to the amount of any claim by
Parent against the Escrow Fund with respect to such settlement.
(j) ESCROW AGENT'S DUTIES.
(i) The Escrow Agent shall be obligated only for the performance of
such duties as are specifically set forth herein, and as set forth in any
additional written escrow instructions which the Escrow Agent may receive
after the date of this Agreement which are signed by an officer of Parent
and the Agent, and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed to be
genuine and to have been signed or presented by the proper party or
parties. The Escrow Agent shall not be liable for any act
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done or omitted hereunder as Escrow Agent while acting in good faith and
in the exercise of reasonable judgment, and any act done or omitted
pursuant to the advice of counsel shall be conclusive evidence of such
good faith.
(ii) The Escrow Agent is hereby expressly authorized to comply with
and obey orders, judgments or decrees of any court. In case the Escrow
Agent obeys or complies with any such order, judgment or decree of any
court, the Escrow Agent shall not be liable to any of the parties hereto
or to any other person by reason of such compliance, notwithstanding any
such order, judgment or decree being subsequently reversed, modified,
annulled, set aside, vacated or found to have been entered without
jurisdiction.
(iii) The Escrow Agent shall not be liable for the expiration of any
rights under any statute of limitations with respect to this Agreement or
any documents deposited with the Escrow Agent.
(iv) In performing any duties under the Agreement, the Escrow Agent
shall not be liable to any party for damages, losses, or expenses, except
for gross negligence or willful misconduct on the part of the Escrow
Agent. The Escrow Agent shall not incur any such liability for (A) any
act or failure to act made or omitted in good faith, or (B) any action
taken or omitted in reliance upon any instrument, including any written
statement of affidavit provided for in this Agreement that the Escrow
Agent shall in good faith believe to be genuine, nor will the Escrow
Agent be liable or responsible for forgeries, fraud, impersonations, or
determining the scope of any representative authority. In addition, the
Escrow Agent may consult with the legal counsel in connection with Escrow
Agent's duties under this Agreement and shall be fully protected in any
act taken, suffered, or permitted by him/her in good faith in accordance
with the advice of counsel. The Escrow Agent is not responsible for
determining and verifying the authority of any person acting or
purporting to act on behalf of any party to this Agreement.
(v) If any controversy arises between the parties to this Agreement,
or with any other party, concerning the subject matter of this Agreement,
its terms or conditions, the Escrow Agent will not be required to
determine the controversy or to take any action regarding it. The Escrow
Agent may hold all documents, cash and shares of Parent Common Stock and
may wait for settlement of any such controversy by final appropriate
legal proceedings or other means as, in the Escrow Agent's discretion,
the Escrow Agent may be required, despite what may be set forth elsewhere
in this Agreement. In such event, the Escrow Agent will not be liable for
damage.
Furthermore, the Escrow Agent may at its option, file an action of
interpleader requiring the parties to answer and litigate any claims and
rights among themselves. The Escrow Agent is authorized to deposit with
the clerk of the court all documents, cash and shares of Parent Common
Stock held in escrow, except all cost, expenses, charges and reasonable
attorney fees incurred by the Escrow Agent due to the interpleader action
and which the Escrow Agent may recoup directly from the Escrow Fund. Upon
initiating such action, the Escrow Agent shall be fully released and
discharged of and from all obligations and liability imposed by the terms
of this Agreement.
(vi) Parent and its successors and assigns agree to indemnify and
hold Escrow Agent harmless against any and all losses, claims, damages,
liabilities, and expenses, including reasonable costs of investigation,
counsel fees, and disbursements that may be imposed on Escrow Agent or
incurred by Escrow Agent in connection with the performance of the Escrow
Agent's duties under this Agreement, including but not limited to any
litigation arising from this Agreement or involving its subject matter.
(vii) The Escrow Agent may resign at any time upon giving at least
thirty (30) days written notice to Parent and the Securityholder Agents;
provided, however, that no such
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resignation shall become effective until the appointment of a successor
escrow agent which shall be accomplished as follows: Parent and the
Securityholder Agents shall use their best efforts to mutually agree on a
successor escrow agent within thirty (30) days after receiving such
notice. If the parties fail to agree upon a successor escrow agent within
such time, Parent shall have the right to appoint a successor escrow
agent authorized to do business in the State of California. The successor
escrow agent shall execute and deliver an instrument accepting such
appointment and it shall, without further acts, be vested with all the
estates, properties, rights, powers, and duties of the predecessor escrow
agent as if originally named as escrow agent. The Escrow Agent shall be
discharged from any further duties and liability under this Agreement.
(k) FEES. All fees of the Escrow Agent for performance of its duties
hereunder shall be paid by Parent. It is understood that the fees and usual
charges agreed upon for services of the Escrow Agent shall be considered
compensation for ordinary services as contemplated by this Agreement. In the
event that the conditions of this Agreement are not promptly fulfilled, or
if the Escrow Agent renders any service not provided for in this Agreement,
or if the parties request a substantial modification of its terms, the
Escrow Agent shall be reasonably compensated for such extraordinary
services. Parent promises to pay these sums upon demand.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 TERMINATION. Except as provided in Section 8.2 below, this Agreement
may be terminated and the Merger abandoned at any time prior to the Effective
Time:
(a) by mutual consent of the Company, Seller and Parent;
(b) by Parent, Seller or the Company if: (i) the Effective Time has not
occurred by August 31, 1996 (provided that the right to terminate this
Agreement under this clause 8.1(b)(i) shall not be available to any party
whose willful failure to fulfill any obligation hereunder has been the cause
of, or resulted in, the failure of the Effective Time to occur on or before
such date); (ii) there shall be a final nonappealable order of a federal or
state court in effect preventing consummation of the Merger; or (iii) there
shall be any statute, rule, regulation or order enacted, promulgated or
issued or deemed applicable to the Merger by any Governmental Entity that
would make consummation of the Merger illegal;
(c) by Parent if there shall be any action taken, or any statute, rule,
regulation or order enacted, promulgated or issued or deemed applicable to
the Merger, by any Governmental Entity, which would: (i) prohibit Parent's
or the Company's ownership or operation of any portion of the business of
the Company or (ii) compel Parent or the Company to dispose of or hold
separate, as a result of the Merger, any portion of the business or assets
of the Company or Parent; in either case, the unavailability of which assets
or business would have an adverse effect on Parent's ability to realize the
benefits expected from the Merger;
(d) by Parent if it is not in material breach of its obligations under
this Agreement and there has been a breach of any representation, warranty,
covenant or agreement contained in this Agreement on the part of the Company
and as a result of such breach the conditions set forth in Section 6.3(a) or
6.3(b), as the case may be, would not then be satisfied; provided, however,
that if such breach is curable by the Company within thirty (30) days
through the exercise of its reasonable best efforts, then for so long as the
Company continues to exercise such reasonable best efforts Parent may not
terminate this Agreement under this Section 8.1(d) unless such breach is not
cured within thirty (30) days (but no cure period shall be required for a
breach which by its nature cannot be cured);
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(e) by the Company if it is not in material breach of its obligations
under this Agreement and there has been a breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of
Parent or Merger Sub and as a result of such breach the conditions set forth
in Section 6.2(a) or 6.2(b), as the case may be, would not then be
satisfied; provided, however, that if such breach is curable by Parent or
Merger Sub within thirty (30) days through the exercise of its reasonable
best efforts, then for so long as Parent or Merger Sub continues to exercise
such reasonable best efforts the Company may not terminate this Agreement
under this Section 8.1(e) unless such breach is not cured within thirty (30)
days (but no cure period shall be required for a breach which by its nature
cannot be cured); and
(f) by Parent if the Company shall not have obtained the approval of its
stockholders to the Merger and the transactions contemplated by this
Agreement by thirty days after the effective date of the Registration
Statement.
Where action is taken to terminate this Agreement pursuant to this Section
8.1, it shall be sufficient for such action to be authorized by the Board of
Directors (as applicable) of the party taking such action, but such termination
shall only be effective upon delivery of written notice to the other parties
hereto.
8.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
as provided in Section 8.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Parent, Merger Sub or the
Company, or their respective officers, directors or stockholders, provided that
each party shall remain liable for any breaches of this Agreement prior to its
termination; and provided further that the provisions of Sections 5.4 and 5.5
and Article VIII of this Agreement shall remain in full force and effect and
survive any termination of this Agreement.
8.3 AMENDMENT. Except as is otherwise required by applicable law after the
stockholders of the Company approve this Agreement, this Agreement may be
amended by the parties hereto at any time by execution of an instrument in
writing signed on behalf of each of the parties hereto.
8.4 EXTENSION; WAIVER. At any time prior to the Effective Time, Parent and
Merger Sub, on the one hand, and the Company and Seller, on the other, may, to
the extent legally allowed, (i) extend the time for the performance of any of
the obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
8.5 NOTICE OF TERMINATION. Any termination of the Agreement under Section
8.1 above will be effective immediately upon the delivery of written notice of
the terminating party to the other parties hereto.
ARTICLE IX
GENERAL PROVISIONS
9.1 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or
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certified mail (return receipt requested) or sent via facsimile (with
acknowledgment of complete transmission) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to Parent or Merger Sub, to:
C-Cube Microsystems Inc.
1778 McCarthy Boulevard
Milpitas, California 95035
Attention: President and Chief Executive Officer
Telephone No.: (408) 944-6300
Facsimile No.: (408) 944-8167
with a copy to:
Wilson Sonsini Goodrich & Rosati, Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Larry W. Sonsini, Esq.
Aaron J. Alter, Esq.
Telephone No.: (415) 493-9300
Facsimile No.: (415) 493-6811
(b) if to the Company, to:
DiviCom Inc.
1708 McCarthy Boulevard
Milpitas, California 95035
Attention: President and Chief Executive Officer
Telephone No.: (408) 953-6700
Facsimile No.: (408) 944-6524
with a copy to:
Fenwick & West
Two Palo Alto Square
Palo Alto, California 94306
Attention: Jacqueline Daunt, Esq.
Telephone No.: (415) 494-0600
Facsimile No.: (415) 494-1417
(c) if to the Seller, to:
SAGEM S.A.
27 rue Leblanc
75015 Ponnant
France
Attention: Michel Toussan
Telephone No.: 011-33-1-40-70-64-56
Facsimile No.: 011-33-1-40-70-64-38
with a copy to:
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071-3197
Attention: Jennifer Bellah, Esq.
Telephone No.: (213) 229-7000
Facsimile No.: (213) 229-7520
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(d) if to the Securityholder Agents:
Mr. Nolan Daines
c/o DiviCom Inc.
1708 McCarthy Boulevard
Milpitas, California 95035
Telephone No.: (408) 953-6700
Facsimile No.: (408) 944-6524
Caroline de Puysegur
27 rue Leblanc
75015 Ponnant
France
Telephone No.: 011-33-1-40-65-90
Facsimile No.: 011-33-1-40-70-64-81
(e) if to the Escrow Agent:
Boston Equiserve
435 Tasso Street, Suite 250
Palo Alto, California 94301
Attention: Mr. Geoff Anderson
Telephone No.: (415) 853-0980
Facsimile No.: (415) 853-1425
9.2 INTERPRETATION. The words "include," "includes" and "including" when
used herein shall be deemed in each case to be followed by the words "without
limitation." The word "agreement" when used herein shall be deemed in each case
to mean any contract, commitment or other agreement, whether oral or written,
that is legally binding. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Nothing in this agreement,
including in respect of Section 4.1, shall be interpreted to eliminate any
existing restrictions upon the authority of the officers of the Company or to
limit the authority of the Company's board of directors to impose or alter such
restrictions from time to time.
9.3 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
9.4 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement, the schedules and
Exhibits hereto, and the documents and instruments and other agreements among
the parties hereto referenced herein: (a) constitute the entire agreement among
the parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof; (b) are not intended to confer upon any
other person any rights or remedies hereunder; and (c) shall not be assigned by
operation of law or otherwise except as otherwise specifically provided.
9.5 SEVERABILITY. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent jurisdiction
to be illegal, void or unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of such void or unenforceable provision.
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9.6 OTHER REMEDIES. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
9.7 GOVERNING LAW; VENUE. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof. Each of the parties hereto agrees that process may be served upon
them in any manner authorized by the laws of the State of California for such
persons and waives and covenants not to assert or plead any objection which they
might otherwise have to such jurisdiction and such process. Any action in
connection with this Agreement shall be brought in the appropriate state or
Federal courts in Santa Clara County, California; PROVIDED, HOWEVER, that any
dispute under Article VII hereof shall be subject to the arbitration provisions.
9.8 RULES OF CONSTRUCTION. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
9.9 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at law or in equity.
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IN WITNESS WHEREOF, Parent, Merger Sub, the Company and Seller have caused
this Agreement to be signed by their duly authorized respective officers, all as
of the date first written above.
DIVICOM INC. C-CUBE MICROSYSTEMS, INC.
By: /s/ NOLAN DAINES By: /s/ ALEXANDRE BALKANSKI
-------------------------------- --------------------------------
Nolan Daines Alexandre Balkanski
PRESIDENT AND CHIEF EXECUTIVE PRESIDENT AND CHIEF EXECUTIVE
OFFICER OFFICER
SAGEM S.A. C-CUBE ACQUISITION CORP.
By: /s/ FRANCIS GAILLARD By: /s/ ALEXANDRE BALKANSKI
-------------------------------- --------------------------------
Francis Gaillard Alexandre Balkanski
CORPORATE COMPTROLLER PRESIDENT AND CHIEF EXECUTIVE
OFFICER
SAGEM INTERNATIONAL IENA INTERNATIONAL S.A.
By: /s/ FRANCIS GAILLARD By: /s/ FRANCIS GAILLARD
-------------------------------- --------------------------------
Francis Gaillard Francis Gaillard
AUTHORIZED REPRESENTATIVE AUTHORIZED REPRESENTATIVE
TREGOR ELECTRONIQUE S.A.
By: /s/ FRANCIS GAILLARD
--------------------------------
Francis Gaillard
AUTHORIZED REPRESENTATIVE
A-39
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ANNEX B
SECTION 262
DELAWARE GENERAL CORPORATION LAW
APPRAISAL RIGHTS
262 APPRAISAL RIGHTS. (a) Any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251, 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of a merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market systems security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the holders of the surviving corporation as provided in
(1) SUBSECTIONS (f) OR (g) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to Sections
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts, and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) and (c) hereof that appraisal rights are
available for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of his shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the appraisal of his
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must do
so by a separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation
who has complied with this subsection and has not voted in favor of or
consented to the merger or consolidation of the date that the merger or
consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or 253 of this title, the surviving or resulting corporation, either before
the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it appears
on the records of the corporation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of the notice, demand
in writing from the surviving or resulting corporation the appraisal of his
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after
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his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by one or more publications at least one week before the day
of the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to any appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so make to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
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(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation. (Last amended by Ch. 79, L.
'95, eff. 7-1-95.)
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ANNEX C
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DIVICOM INC.
I. NAME.
FIRST: The name of the corporation (hereinafter called the "Corporation") is
DiviCom Inc.
II. REGISTERED AGENT.
SECOND: The address of the registered office of the Corporation in the State
of Delaware is 1013 Centre Road, Wilmington, City of Dover, County of Kent, and
the name of the registered agent of the Corporation in the State of Delaware at
such address is The Prentice Hall Corporation System.
III. PURPOSE.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
IV. STOCK.
FOURTH:
A. This Corporation is authorized to issue two classes of shares to be
designated, respectively, Preferred Stock ("Preferred Stock") and Common Stock
("Common Stock"). The total number of shares of capital stock that the
Corporation is authorized to issue is 57,238,000. The total number of shares of
Preferred Stock this Corporation shall have authority to issue is 21,288,000, of
which 15,788,000 shares shall be designated Series A Preferred Stock ("Series A
Stock") and 5,500,000 shares shall be designated Series B Preferred Stock
("Series B Stock"). The total number of shares of Common Stock this Corporation
shall have authority to issue is 35,950,000. Upon the amendment of this Article
to read as set forth herein, each share of Preferred Stock outstanding before
such amendment held by a stockholder shall be converted into one share of Series
A Stock. The Preferred Stock shall have a par value of $.001 per share and the
Common Stock shall have a par value of $.001 per share. 21,288,000 shares of
Common Stock shall be reserved for issuance upon conversion of the Preferred
Stock. The number of authorized shares of Common Stock may be increased or
decreased (but not only below the number of shares of such Common Stock then
outstanding) by the affirmative vote of a majority of all stock of the
Corporation entitled to vote, voting together as a single class. Except as
specifically provided below, the Preferred Stock and the Common Stock shall in
all respects be identical and shall have the same powers, preferences, rights,
restrictions and other characteristics.
B. The powers, preferences, rights, restrictions, and other characteristics
relating to the Series A Stock and Series B Stock are as follows:
1. LIQUIDATION PREFERENCE.
a. In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of Series A
Stock and Series B Stock, PARI PASSU with each other, shall be entitled
to receive, prior and in preference to any distribution of any of the
assets or surplus funds of the Corporation to the holders of the Common
Stock by reason of their ownership thereof, the amount of $0.40 per share
of Series A Stock (the "Series A Stock Issue Price") and $1.00 for each
share of Series B Stock (the "Series B Stock Issue Price") (each as
adjusted for any stock dividends, combinations or splits with respect to
such shares). If upon the occurrence of such event, the assets and funds
thus distributed
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among the holders of the Preferred Stock shall be insufficient to permit
the payment to such holders of the full aforesaid preferential amount,
then the entire assets and funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of the
Preferred Stock in proportion to the preferential amount each such holder
is otherwise entitled to receive.
b. After payment to the holders of the Preferred Stock of the
amounts set forth in Section B.1.a. above, the entire remaining assets
and funds of the Corporation legally available for distribution, if any,
shall be distributed among the holders of the Common Stock and the
Preferred Stock in proportion to the shares of Common Stock then held by
them and the shares of Common Stock which they have the right to acquire
upon conversion of the shares of Preferred Stock then held by them.
c. For purposes of this Section B.1., (i) any acquisition of the
Corporation by means of merger or other form of corporate reorganization
in which outstanding shares of the Corporation are exchanged for
securities or other consideration issued, or caused to be issued, by the
acquiring corporation or its subsidiary (other than a mere
reincorporation transaction) or (ii) a sale of all or substantially all
of the assets of the Corporation (collectively, events under this Section
B.1(c) shall hereafter be referred to as an "Acquisition"), shall not be
treated as a liquidation, dissolution or winding up of the Corporation.
In each such case, any cash, securities or other property (valued as
provided in Section B.1.d. below) delivered pursuant to an Acquisition,
shall be distributed among the holders of the Common Stock and the
Preferred Stock in proportion to the shares of Common Stock then held by
them and the shares of Common Stock which they have the right to acquire
upon conversion of the shares of Preferred Stock then held by them.
d. Whenever the distribution provided for in this Section B.1. shall
be payable in securities or property other than cash, the value of such
distribution shall be the fair market value of such securities or other
property as determined in good faith by the Board of Directors.
2. VOTING RIGHTS; DIRECTORS.
a. Each holder of shares of Preferred Stock shall be entitled to the
number of votes equal to the number of shares of Common Stock into which
such shares of Preferred Stock could be converted and shall have voting
rights and powers equal to the voting rights and powers of the Common
Stock (except as otherwise expressly provided herein or as required by
law, voting together with the Common Stock as a single class) and shall
be entitled to notice of any stockholders' meeting in accordance with the
Bylaws of the Corporation. Fractional votes shall not, however, be
permitted and any fractional voting rights resulting from the above
formula (after aggregating all shares into which shares of Preferred
Stock held by each holder could be converted) shall be rounded to the
nearest whole number (with one-half being rounded upward). Each holder of
Common Stock shall be entitled to one (1) vote for each share of Common
Stock held.
b. Each holder of shares of Preferred Stock and each holder of
shares of the Common Stock shall be entitled at all elections of
directors to as many votes as shall equal the number of votes which
(except for this provision as to cumulative voting) he would be entitled
to cast for the election of directors with respect to his shares of stock
multiplied by the number of directors to be elected, and such holder may
cast all of such votes for a single director or may distribute them among
the number to be voted for, or for any two or more of them as he may see
fit, and to one vote for each share upon all other matters. The right to
cumulative voting in the election of directors set forth in this Section
B.2.b. shall expire upon the first sale of Common Stock of the
Corporation to the public pursuant to a registration statement filed
with, and declared effective by, the Securities and Exchange Commission.
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3. CONVERSION. The holders of Preferred Stock shall have conversion
rights as follows (the "Conversion Rights"):
a. RIGHT TO CONVERT. Each share of Series A Stock and Series B Stock
shall be convertible, at the option of the holder thereof, at any time
after the date of issuance of such share, at the office of the
Corporation or any transfer agent for such stock, into such number of
fully paid and nonassessable shares of Common Stock as is determined by
dividing the Series A Stock Issue Price or Series B Stock Issue Price, as
the case may be by the Conversion Price applicable to such share,
determined as hereinafter provided, in effect on the date the certificate
is surrendered for conversion. The price at which shares of Common Stock
shall be deliverable upon conversion of shares of the Series A Stock or
Series B Stock (the "Conversion Price") shall initially be the Series A
Stock Issue Price and Series B Stock Issue Price, respectively. Such
initial Conversion Price shall be adjusted as hereinafter provided.
b. AUTOMATIC CONVERSION.
(i) Each share of Series A Stock shall automatically be converted
into shares of Common Stock at then-effective Conversion Price, upon
the earlier of (x) the date specified by vote or written consent or
agreement of holders of at least two-thirds (2/3) of the shares of
Series A Stock then outstanding, or (y) immediately upon the closing
of the sale of the Corporation's Common Stock in a firm commitment,
underwritten public offering registered under the Securities Act of
1933, as amended (the "Securities Act"), other than a registration
relating solely to a transaction under Rule 145 under such Act (or
any successor thereto) or to an employee benefit plan of the
Corporation, at a public offering price (prior to underwriters'
discounts and expenses) at a per share offering price equal to or
exceeding $2.80 per share of Common Stock (as adjusted for any stock
dividends, combinations or splits with respect to such shares) and
the aggregate proceeds of which to the Corporation (after deduction
for underwriters' discounts and expenses relating to the issuance,
including, without limitation, fees of the Corporation's counsel)
exceed $10,000,000.
(ii) Each share of Series B Stock shall automatically be
converted into shares of Common Stock at then-effective Conversion
Price, upon the earlier of (x) the date specified by vote or written
consent or agreement of holders of at least two-thirds (2/3) of the
shares of Series B Stock then outstanding, or (y) immediately upon
the closing of the sale of the Corporation's Common Stock in a firm
commitment, underwritten public offering registered under the
Securities Act of 1933, as amended (the "Securities Act"), other than
a registration relating solely to a transaction under Rule 145 under
such Act (or any successor thereto) or to an employee benefit plan of
the Corporation, at a public offering price (prior to underwriters'
discounts and expenses) at a per share offering price equal to or
exceeding $7.00 per share of Common Stock (as adjusted for any stock
dividends, combinations or splits with respect to such shares) and
the aggregate proceeds of which to the Corporation (after deduction
for underwriters' discounts and expenses relating to the issuance,
including, without limitation, fees of the Corporation's counsel)
exceed $10,000,000.
c. MECHANICS OF CONVERSION.
(i) Before any holder of Series A Stock or Series B Stock shall
be entitled to convert the same into shares of Common Stock, he shall
surrender the certificate or certificates therefor, duly endorsed, at
the office of the Corporation or of any transfer agent for such
stock, and shall give written notice to the Corporation at such
office that he elects to convert the same and shall state therein the
name or names in which he wishes the certificate or certificates for
shares of Common Stock to be issued. The Corporation shall, as soon
as practicable thereafter, issue and deliver at such office to such
holder of Series A Stock or Series B Stock, a certificate or
certificates for the number of shares of
C-3
<PAGE>
Common Stock to which he shall be entitled as aforesaid. Such
conversion shall be deemed to have been made immediately prior to the
close of business on the date of surrender of the shares of Series A
Stock or Series B Stock to be converted, and the person or persons
entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date.
(ii) If the conversion is in connection with an underwritten
offering of securities pursuant to the Securities Act, the conversion
may, at the option of any holder tendering shares of Series A Stock
or Series B Stock for conversion, be conditioned upon the closing
with the underwriters of the sale of securities pursuant to such
offering, in which event the person(s) entitled to receive the Common
Stock upon conversion of the Series A Stock or Series B Stock shall
not be deemed to have converted such Series A Stock or Series B Stock
until immediately prior to the closing of such sale of securities.
d. ADJUSTMENTS TO CONVERSION PRICE FOR CERTAIN DILUTING ISSUES.
(i) SPECIAL DEFINITIONS. For purposes of this Section B.3.d.,
the following definitions apply:
(1) "Options" shall mean rights, options, or warrants to
subscribe for, purchase or otherwise acquire either Common Stock
or Convertible Securities (defined below).
(2) "Original Issue Date" shall mean the date on which a
share of Series A Stock or Series B Stock was first issued.
(3) "Convertible Securities" shall mean any evidences of
indebtedness, shares (other than Common Stock and Preferred
Stock) or other securities convertible into or exchangeable for
Common Stock.
(4) "Additional Shares of Common Stock" shall mean all shares
of Common Stock issued (or, pursuant to Section B.3.d. (iii),
deemed to be issued) by the Corporation after the Original Issue
Date, other than shares of Common Stock issued or issuable:
(A) upon conversion of shares of Preferred Stock;
(B) to officers, directors or employees of, or
consultants to, the Corporation pursuant to stock
option or stock purchase plans or agreements on terms
approved by the Board of Directors, but not exceeding
13,290,000 shares of Common Stock (net of any repurchases of
such shares or cancellations or expirations of options),
subject to adjustment for all subdivisions and combinations;
(C) to C-Cube Microsystems, but not exceeding 1,372,000
shares of Common Stock;
(D) as a dividend or distribution on Preferred Stock; or
(E) for which adjustment of the Conversion Price is made
pursuant to Section B.3.e.
(ii) NO ADJUSTMENT OF CONVERSION PRICE. Any provision herein to
the contrary notwithstanding, no adjustment in the Conversion Price
for Series A Stock or Series B Stock shall be made in respect of the
issuance of Additional Shares of Common Stock unless the
consideration per share (determined pursuant to Section B.3.d. (v)
hereof) for an
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<PAGE>
Additional Share of Common Stock issued or deemed to be issued by the
Corporation is less than the Conversion Price for such Series A Stock
or Series B Stock in effect on the date of, and immediately prior to,
such issue.
(iii) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. In the
event the Corporation at any time or from time to time after an
Original Issue Date shall issue any Options or Convertible Securities
or shall fix a record date for the determination of holders of any
class of securities then entitled to receive any such Options or
Convertible Securities, then the maximum number of shares (as set
forth in the instrument relating thereto without regard to any
provisions contained therein designed to protect against dilution) of
Common Stock issuable upon the exercise of such Options or, in the
case of Convertible Securities and Options therefor, the conversion
or exchange of such Convertible Securities and Options therefor,
shall be deemed to be Additional Shares of Common Stock issued as of
the time of such issue or, in case such a record date shall have been
fixed, as of the close of business on such record date, provided that
in any such case in which Additional Shares of Common Stock are
deemed to be issued:
(1) no further adjustments in the Conversion Price shall be
made upon the subsequent issue of Convertible Securities or
shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(2) If such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase
or decrease in the consideration payable to the Corporation, or
decrease or increase in the number of shares of Common Stock
issuable, upon the exercise, conversion or exchange thereof, the
Conversion Price computed upon the original issue thereof (or
upon the occurrence of a record date with respect thereto), and
any subsequent adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed to reflect
such increase or decrease insofar as it affects such Options or
the rights of conversion or exchange under such Convertible
Securities (provided, however, that no such adjustment of the
Conversion Price shall affect Common Stock previously issued upon
conversion of the Series A Stock or Series B Stock);
(3) upon the expiration of any such Options or any rights of
conversion or exchange under such Convertible Securities which
shall not have been exercised, the Conversion Price computed upon
the original issue thereof (or upon the occurrence of a record
date with respect thereto), and any subsequent adjustments based
thereon, shall, upon such expiration, be recomputed as if:
(A) in the case of Convertible Securities or Options for
Common Stock, the only Additional Shares of Common
Stock issued were the shares of Common Stock, if any,
actually issued upon the exercise of such Options or the
conversion or exchange of such Convertible Securities and the
consideration received therefor was the consideration
actually received by the Corporation for the issue of all
such Options, whether or not exercised, plus the
consideration actually received by the Corporation upon such
exercise, or for the issue of all such Convertible Securities
which were actually converted or exchanged, plus the
additional consideration, if any, actually received by the
Corporation upon such conversion or exchange; and
(B) in the case of Options for Convertible Securities,
only the Convertible Securities, if any, actually
issued upon the exercise thereof were issued at the time of
issue of such Options, and the consideration received by the
Corporation for the Additional Shares of Common Stock deemed
to have been then issued was the consideration actually
received by the Corporation for the issue of all such
Options, whether or not exercised, plus the consideration
deemed to have
C-5
<PAGE>
been received by the Corporation (determined pursuant to
Section B.3.d.) upon the issue of the Convertible Securities
with respect to which such Options were actually exercised;
(4) no readjustment pursuant to clause (2) or (3) above shall
have the effect of increasing the Conversion Price to an amount
which exceeds the lower of (a) the Conversion Price on the
original adjustment date, or (b) the Conversion Price that would
have resulted from any issuance of Additional Shares of Common
Stock between the original adjustment date and such readjustment
date.
(iv) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL
SHARES OF COMMON STOCK. In the event this Corporation at any time
after the Original Issue Date shall issue Additional Shares of Common
Stock (including Additional Shares of Common Stock deemed to be
issued pursuant to Section B.3.d.(iii)) without consideration or for
a consideration per share less than the Conversion Price with respect
to Series A Stock or Series B Stock in effect on the date of an
immediately prior to such issue, then and in such event, the
Conversion Price for such Series A Stock or Series B Stock shall be
reduced, concurrently with such issue, to a price (calculated to the
nearest cent) determined by multiplying such Conversion Price by a
fraction, the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issue plus the
number of shares of Common Stock which the aggregate consideration
received by the Corporation for the total number of Additional Shares
of Common Stock so issued would purchase at such Conversion Price in
effect immediately prior to such issuance, and the denominator of
which shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of such Additional
Shares of Common Stock so issued. For the purpose of the above
calculation, the number of shares of Common Stock outstanding
immediately prior to such issue shall be calculated on a fully
diluted basis, as if all shares of Preferred Stock and all
Convertible Securities had been fully converted into shares of Common
Stock immediately prior to such issuance and any outstanding
warrants, options or other rights for the purchase of shares of stock
or convertible securities had been fully exercised immediately prior
to such issuance (and the resulting securities fully converted into
shares of Common Stock, if so convertible) as of such date, but not
including in such calculation any additional shares of Common Stock
issuable with respect to shares of Preferred Stock, Convertible
Securities, or outstanding options, warrants or other rights for the
purchase of shares of stock or convertible securities, solely as a
result of the adjustment of the respective Conversion Prices (or
other conversion rations) resulting from the issuance of Additional
Shares of Common Stock causing such adjustment.
(v) DETERMINATION OF CONSIDERATION. For purposes of this Section
B.3.d., the consideration received by the Corporation for the issue
of any Additional Shares of Common Stock shall be computed as
follows:
(1) CASH AND PROPERTY. Such consideration shall:
(A) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Corporation;
(B) insofar as it consists of property other than cash,
be computed at the fair value thereof at the time of
such issue, as determined in good faith by the Board; and
C-6
<PAGE>
(C) in the event Additional Shares of Common Stock are
issued together with other shares or securities or
other assets of the Corporation for consideration which
covers both, be the proportion of such consideration so
received, computed as provided in clauses (A) and (B) above,
as determined in good faith by the Board.
(2) OPTIONS AND CONVERTIBLE SECURITIES. The consideration per
share received by the Corporation for Additional Shares of Common
Stock deemed to have been issued pursuant to Section B.3.d.
(iii), relating to Options and Convertible Securities shall be
determined by dividing:
(A) the total amount, if any, received or receivable by
the Corporation as consideration for the issue of
such Options or Convertible Securities, plus the minimum
aggregate amount of additional consideration (as set forth in
the instruments relating thereto, without regard to any
provision contained therein designed to protect against
dilution) payable to the Corporation upon the exercise of
such Options or the conversion or exchange of such
Convertible Securities, or in the case of Options for
Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such
Convertible Securities by
(B) the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without
regard to any provision contained therein designed to protect
against the dilution) issuable upon the exercise of such
Options or conversion or exchange of such Convertible
Securities.
e. ADJUSTMENTS TO CONVERSION PRICES FOR STOCK DIVIDENDS AND FOR
COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the event that this
Corporation at any time or from time to time after the Original Issue
Date shall declare or pay, without consideration, any dividend on the
Common Stock payable in Common Stock or in any right to acquire Common
Stock for no consideration, or shall effect a subdivision of the
outstanding shares of Common Stock into a greater number of shares of
Common Stock (by stock split, reclassification or otherwise than by
payment of a dividend in Common Stock or in any right to acquire Common
Stock), or in the event the outstanding shares of Common Stock shall be
combined or consolidated, by reclassification or otherwise, into a lesser
number of shares of Common Stock, then the Conversion Price for Series A
Stock or Series B Stock shall, concurrently with the effectiveness of
such event, be proportionately decreased or increased, as appropriate. In
the event that this Corporation shall declare or pay, without
consideration, any dividend on the Common Stock payable in any right to
acquire Common Stock for no consideration, then the Corporation shall be
deemed to have made a dividend payable in Common Stock in an amount of
shares equal to the maximum number of shares issuable upon exercise of
such rights to acquire Common Stock.
f. ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If the
Common Stock issuable upon conversion of the Series A Stock or Series B
Stock shall be changed into the same or a different number of shares of
any other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of
shares provided for in Section B.3.e. above), the Conversion Price then
in effect shall, concurrently with the effectiveness of such
reorganization or reclassification, be proportionately adjusted so that
the Series A Stock or Series B Stock shall be convertible into, in lieu
of the number of shares of Common Stock which the holders would otherwise
have been entitled to receive, a number of shares of such other class or
classes of stock equivalent to the number of shares of Common Stock that
would have been subject to receipt by the holders upon conversion of the
Series A Stock or Series B Stock immediately before that change.
C-7
<PAGE>
g. NO IMPAIRMENT. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities
or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by
the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section B.3. and in the taking
of all such action as may be necessary or appropriate in order to protect
the Conversion Rights of the holders of the Series A Stock or Series B
Stock against impairment.
h. CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of any Conversion Price pursuant to this
Section B.3., the Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of Preferred Stock a certificate
executed by the Corporation's President or Chief Financial Officer
setting forth such adjustment or readjustment and showing in detail the
facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii)
the Conversion Price for such series of Preferred Stock at the time in
effect, and (iii) the number of shares of Common Stock and the amount, if
any, of other property which at the time would be received upon the
conversion of the Preferred Stock.
i. NOTICES OF RECORD DATE. In the event that the Corporation shall
propose at any time: (i) to declare any dividend or distribution upon its
Common Stock, whether in cash, property, stock or other securities,
whether or not a regular cash dividend and whether or not out of earnings
or earned surplus; (ii) to offer for subscription pro rata to the holders
of any class or series of its stock any additional shares of stock of any
class or series or other rights; (iii) to effect any reclassification or
recapitalization of its Common Stock outstanding involving a change in
the Common Stock; or (iv) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all of its
assets, or to liquidate, dissolve or wind up; then, in connection with
each such event, the Corporation shall send to the holders of Preferred
Stock:
(1) at least twenty (20) days' prior written notice of the date
on which a record shall be taken for such dividend, distribution or
subscription rights (and specifying the date on which the holders of
Common Stock shall be entitled thereto) or for determining rights to
vote, if any, in respect of the matters referred to in (iii) and (iv)
above; and
(2) in the case of the matters referred to in (iii) and (iv)
above, at least twenty (20) days' prior written notice of the date
when the same shall take place (and specifying the date on which the
holders of Common Stock shall be entitled to exchange their Common
Stock for securities or other property deliverable upon the
occurrence of such event).
j. ISSUE TAXES. The Corporation shall pay any and all issue and
other taxes that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of Preferred Stock pursuant hereto;
provided, however, that the Corporation shall not be obligated to pay any
transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion.
k. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect
the conversion of all outstanding shares of the Preferred Stock; and if
at any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the conversion of all then outstanding
shares of the Preferred Stock, the Corporation will take such corporate
C-8
<PAGE>
action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose, including, without
limitation, engaging in best efforts to obtain the requisite stockholder
approval of any necessary amendment to this Certificate.
l. FRACTIONAL SHARES. No fractional share shall be issued upon the
conversion of any share or shares of Preferred Stock. All shares of
Common Stock (including fractions thereof) issuable upon conversion of
more than one (1) share of Preferred Stock by a holder thereof shall be
aggregated for purposes of determining whether the conversion would
result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance
of a fraction of a share of Common Stock, the Corporation shall, in lieu
of issuing any fractional share, pay the holder otherwise entitled to
such fraction a sum in cash equal to the fair market value of such
fraction on the date of conversion (as determined in good faith by the
Board of Directors).
m. NOTICES. Any notice required by the provisions of this Section
B.3. to be given to the holders of shares of Preferred Stock shall be
deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his address appearing on the books
of the Corporation.
4. DIVIDENDS. No dividends shall be paid on any share of Common Stock
unless a dividend is paid with respect to all outstanding shares of
Preferred Stock in an amount for each such share of Preferred Stock equal to
or greater than the aggregate amount of such dividends for all shares of
Common Stock into which each such share of Preferred Stock could then be
converted.
5. RESTRICTIONS AND LIMITATIONS.
a. So long as any shares of Preferred Stock remain outstanding, the
Corporation shall not, without the vote or written consent by the holders
of at least 66 2/3% of the then outstanding shares of the Preferred
Stock:
i) amend the Certificate of Incorporation of the Corporation;
ii) issue any shares of Common Stock if the number of shares of
Common Stock remaining authorized and unissued is less than the
number of shares of Common Stock into which all the shares of
authorized Preferred Stock could be converted immediately before such
issuance; or
iii) effect any sale, lease, assignment, transfer, or other
conveyance of all or substantially all of the assets of the
Corporation or any of its subsidiaries, or any consolidation or
merger involving the Corporation or any of its subsidiaries, or any
reclassification or other change of any stock, or any
recapitalization of the Corporation.
b. So long as any shares of Preferred Stock remain outstanding, the
Corporation shall not, without the vote or written consent by the holders
of at least 66 2/3% of the then outstanding shares of stock of the
Corporation, voting together as a single class, elect to dissolve the
Corporation.
6. NO REISSUANCE OF PREFERRED STOCK. No share or shares of Preferred
Stock acquired by the Corporation by reason of redemption, purchase,
conversion or otherwise shall be reissued, and all such shares shall be
cancelled, retired and eliminated from the shares which the Corporation
shall be authorized to issue.
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V. BYLAWS.
FIFTH: In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors shall have the power, both before and after
receipt of any payment for any of the Corporation's capital stock, to adopt,
amend, repeal or otherwise alter the Bylaws of the Corporation without any
action on the part of the stockholders; provided, however, that the grant of
such power to the Board of Directors shall not divest the stockholders of nor
limit their power, subject to the provisions of Section B.6. of Article FOURTH,
to adopt, amend, repeal or otherwise alter the Bylaws.
VI. ELECTION OF DIRECTORS.
SIXTH: Elections of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.
VII. RESERVATION.
SEVENTH: The Corporation reserves the right to adopt, repeal, rescind or
amend in any respect any provisions contained in this Certificate of
Incorporation in the manner now or hereafter prescribed by applicable law and in
this Certificate of Incorporation, and all rights conferred on stockholders
herein are granted subject to this reservation.
VIII. DIRECTOR LIABILITY.
EIGHTH: A director of the Corporation shall, to the full extent permitted by
the Delaware General Corporation Law as it now exists or as it may hereafter be
amended, not be liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director. Neither any amendment nor
repeal of this Article EIGHTH, nor the adoption of any provision of this
Certificate of Incorporation inconsistent with this Article EIGHTH, shall
eliminate or reduce the effect of this Article EIGHTH, in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article
EIGHTH, would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C> <C>
I. NAME........................................................................................... C-1
II. REGISTERED AGENT............................................................................... C-1
III. PURPOSE........................................................................................ C-1
IV. STOCK.......................................................................................... C-1
1. Liquidation Preference.............................................................. C-1
2. Voting Rights; Directors............................................................ C-2
3. Conversion.......................................................................... C-3
a. Right to Convert......................................................... C-3
b. Automatic Conversion..................................................... C-3
c. Mechanics of Conversion.................................................. C-3
d. Adjustments to Conversion Price for Certain Diluting Issues.............. C-4
C-7
e. Adjustments to Conversion Prices for Stock Dividends and for Combinations
or Subdivisions of Common Stock..........................................
f. Adjustments for Reclassification and Reorganization...................... C-7
g. No Impairment............................................................ C-8
h. Certificates as to Adjustments........................................... C-8
i. Notices of Record Date................................................... C-8
j. Issue Taxes.............................................................. C-8
k. Reservation of Stock Issuable Upon Conversion............................ C-8
l. Fractional Shares........................................................ C-9
m. Notices.................................................................. C-9
4. Dividends........................................................................... C-9
5. Restrictions and Limitations........................................................ C-9
6. No Reissuance of Preferred Stock.................................................... C-9
V. BYLAWS......................................................................................... C-10
VI. ELECTION OF DIRECTORS.......................................................................... C-10
VII. RESERVATION.................................................................................... C-10
VIII. DIRECTOR LIABILITY............................................................................. C-10
</TABLE>
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act. Article
VIII of the Registrant's Bylaws (Exhibit 3.2 hereto) provides for
indemnification of its directors, officers, employees and other agents to the
maximum extent permitted by the Delaware Law. In addition, the registrant has
entered into Indemnification Agreements (Exhibit 10.1 hereto) with its officers
and directors.
The Reorganization Agreement (Exhibit 2.1 hereto) provides that each party
agrees to indemnify and hold harmless the other party (including such party's
directors, officers, employees and agents) against, and with respect to, any
liability, damages, losses, expenses or costs arising from or by virtue of any
material misstatement by such party or omission to state any fact which is
required to be disclosed by such party for purposes of the inclusion of such
information in any regulatory filing made on behalf of the parties for the
purpose of effecting the terms of the Reorganization Agreement, including, but
not limited to, this Registration Statement and any amendments hereto.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Amended and Restated Agreement and Plan of Reorganization among registrant,
C-Cube Acquisition Corp., DiviCom Inc., SAGEM S.A., SAGEM International, Tregor Electronique S.A. and
Iena International S.A. dated as of May 28, 1996, as amended. (1)
3.1 Registrant's Restated Certificate of Incorporation, as amended April 18, 1996.
3.2 Registrant's Bylaws, as amended May 18, 1996.
4.1 Form of Registration Rights Agreement among registrant, DiviCom Inc., SAGEM S.A., SAGEM International,
Tregor Electronique S.A. and Iena International S.A.
4.2 Specimen of Common Stock Certificate. (2)
4.3 Restated Registration Rights and Shareholder Rights Agreement dated December 18, 1992. (3)
5.1 Legal Opinion of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, counsel to the
registrant.
8.1 Tax Opinion of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, counsel to the registrant.
8.2 Form of Tax Opinion of Fenwick & West LLP, a Professional Corporation, counsel to DiviCom Inc.
10.1 Form of Indemnity Agreement for directors and officers. (4)
10.2 Form of Affiliate Agreement among C-Cube Microsystems, Inc., SAGEM S.A., SAGEM International S.A.,
Tregor Electronique S.A., and Iena International S.A. dated as of May 28, 1996.
10.3 Form of Affiliate Agreement among C-Cube Microsystems Inc., DiviCom Inc. and certain stockholders of
DiviCom Inc.
10.4 Form of Voting Agreement among C-Cube Microsystems Inc., SAGEM S.A, SAGEM International S.A. Tregor
Electronique S.A. and Iena International S.A. dated as of May 28, 1996.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.5 1990 Stock Plan and forms of agreements thereunder. (4)
10.6 Employee Stock Option Plan and form of agreements thereunder. (4)
10.7 Series A Preferred Stock Purchase Agreement dated July 25, 1988 and January 20, 1989. (4)
10.8 Series B Preferred Stock Purchase Agreement Dated October 1989, January 26, 1990 and May 30, 1990. (4)
10.9 Series C Preferred Stock Purchase Plan Agreements dated March 15, 1991, December 16, 1991 and December
18, 1992. (4)
10.10 Common Stock Purchase Agreement dated December 18, 1992. (4)
10.11 Loan and Security Agreement and Promissory Note with Comerica Bank -- California dated December 27,
1993. (4)
10.12 Joint Venture Agreement dated July 11, 1990 and First Amendment to and Restatement of Joint Venture
Agreement dated December 18, 1992 with Kubota Corporation. (4)
10.13 Strategic Relationship Agreement dated July 5, 1988, First Amendment to and Restatement of Strategic
Relationship Agreement dated July 11, 1990 and Second Amendment to and Restatement of Strategic
Relationship Agreement dated December 18, 1992 with Kubota Corporation and Kubota C-Cube, Inc. (4)
10.14 Stock Exchange Agreement and License and Purchase Agreement each dated December 18, 1992, with Kubota
Corporation and Kubota C-Cube, Inc. (4)
10.15 Warrant Agreement dated December 18, 1992 with Kubota Corporation. (4)
10.16 Financial Support Agreement dated December 18, 1992 and form of Amendment to Financial Support Agreement
with Kubota Corporation and Kubota C-Cube, Inc. (4)
10.17 Agreement Regarding Collateral dated December 20, 1993 with Kubota Corporation. (4)
10.18 Letter of Intent dated December 15, 1992 with Advanced Micro Devices, Inc. (4),(5)
10.19 Technology License and Wafer Foundry Agreement dated December 22, 1992 with Texas Instruments
Incorporated. (4),(5)
10.20 Development Agreement and Agreement on CL450A Procurement, each dated June 30, 1993 and Amended
Agreement on CL450A Procurement dated September 1, 1993 with Victor Company of Japan, Limited. (4),(5)
10.21 Secured Promissory Note dated February 17, 1993 by William J. O'Meara. (4)
10.22 Secured Promissory Note dated October 21, 1993 by James G. Burke. (4)
10.23 Standard Industrial Lease -- Multi-Tenant dated August 1991 with San Bernardino County Employees
Retirement Association, as amended October 19, 1992, January 8, 1993, June 15, 1993 and December 9,
1993. (4)
10.24 Oxford Financial Services Corporation Master Lease Agreement dated as of May 31, 1994. (6)
10.25 Agreement dated June 29, 1994 with Donald T. Valentine. (6)
10.26 Revolving Credit Loan Agreement with Comerica Bank -- California dated August 18, 1994. (7)
10.27 Manufacturing and Sales Agreement between C-Cube Microsystems Inc. and Matsushita Electronics
Corporation. (8),(5)
10.28 Sublease agreement with Atari Games Corporation dated October 4, 1995. (9)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.29 Agreement and Plan of Merger By and Among C-Cube Microsystems Inc., MCT Acquisition Corporation, Media
Computer Technologies, Inc., Dhimant Bhayani and Hemant Bhayani dated November 17, 1995. (10)
10.30 Supplemental Stock Option Plan. (11)
10.31 Amendment to Revolving Credit Loan Agreement dated January 3, 1996. (11)
10.32 Option Agreement dated May 18, 1996 with Taiwan Semiconductor Manufacturing Co., Ltd. (12)
10.33 1994 Employee Stock Plan and form of agreement thereunder. (13)
10.34 1994 Outside Directors Stock Option Plan and form of agreement thereunder. (14)
10.35 1994 Employee Stock Purchase Plan. (15)
11.1 Statement regarding computation of net income per share. (16)
23.1 Consent of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation.
23.2 Consent of Deloitte & Touche LLP, independent auditors.
23.3 Consent of Coopers & Lybrand L.L.P., independent auditors.
24.1 Power of Attorney (included herein on page II-6).
27.1 Financial Data Schedule.
99.1 Form of Transition Agreement among registrant, DiviCom Inc., SAGEM S.A. and Nolan Daines.
99.2 Form of Proxy Card to be mailed to the stockholders of DiviCom Inc.
</TABLE>
- ------------------------
(1) The Agreement and Plan of Reorganization dated May 28, 1996 is included
herein as Annex A to the Prospectus/Proxy Statement forming a part of this
Registration Statement. Certain schedules to such Agreement and Plan of
Reorganization which are listed in Annex A have not been included herein in
reliance upon the rules and regulations of the Commission. The registrant
will supplementally furnish a copy of any such omitted schedule to the
Commission upon request.
(2) Incorporated by reference to Exhibit 4.1 previously filed as an Exhibit to
registrant's Registration Statement on Form S-1 filed March 4, 1994, as
amended (File No. 33-76082).
(3) Incorporated by reference to Exhibit 4.2 previously filed as an Exhibit to
registrant's Registration Statement on Form S-1 filed March 4, 1994, as
amended (File No. 33-76082).
(4) Incorporated by reference to the corresponding Exhibit of the same number
previously filed as an Exhibit to registrant's registration statement on
Form S-1 filed March 4, 1994, as amended (File No. 33-76082).
(5) Confidential treatment has been granted as to a portion of this Exhibit.
(6) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to registrant's Form 10-Q filed August 5, 1994 (File No.
0-23596).
(7) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to registrant's Form 10-Q filed October 28, 1994 (File No.
0-23596).
(8) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to registrant's Form 10-K filed March 21, 1995 (File No.
0-23596).
(9) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to registrant's Form 8-K filed November 14, 1995 (File No.
0-23596).
II-3
<PAGE>
(10) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to registrant's Form 10-K filed March 15, 1996 (File No.
0-23596).
(11) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to registrant's Form 10-Q filed May 10, 1996 (File No. 0-23596).
(12) To be filed by amendment as Exhibit 10.32 to registrant's Form 10-Q filed
July 27, 1996 (File No. 0-23596). Confidential treatment will be requested
as to certain portions of this exhibit.
(13) Incorporated by reference to Exhibit 10.2 previously filed as an Exhibit to
registrant's Registration Statement on Form S-1 filed March 4, 1994, as
amended (File No. 33-76082).
(14) Incorporated by reference to Exhibit 10.3 previously filed as an Exhibit to
registrant's Registration Statement on Form S-1 filed March 4, 1994, as
amended (File No. 33-76082).
(15) Incorporated by reference to Exhibit 10.4 previously filed as an Exhibit to
registrant's Registration Statement on Form S-1 filed March 4, 1994, as
amended (File No. 33-76082).
(16) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to registrant's Form 10-Q filed July 27, 1996 (File No. 0-23596).
(b) FINANCIAL STATEMENT SCHEDULES
Not applicable.
(c) REPORTS, OPINIONS OR APPRAISALS
Not applicable.
ITEM 22. UNDERTAKINGS
(1) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
undersigned registrant undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment 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.
(3) Insofar as the indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, 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 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, 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.
II-4
<PAGE>
(4) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(5) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
(6) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
(7) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement 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.
(8) The undersigned registrant hereby undertakes: (i) To file, during any
period in which offers or sales are being made, a post-effective amendment to
this registration statement: (a) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933; (b) To reflect in the prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total value of securities
offered would not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and (c) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement, (ii) That, for purposes of
determining any liability under the Securities Act of 1933, each such
post-effective amendment 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, (iii)
To remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Milpitas,
State of California, on the 21st day of June, 1996.
C-CUBE MICROSYSTEMS INC.
By: /s/ JAMES G. BURKE
----------------------------------
James G. Burke
Vice President of Finance and
Administration, Chief Financial
Officer
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints, jointly and severally, Alexandre A.
Balkanski and James G. Burke, and each of them acting individually, as his
attorney-in-fact, each with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this Registration Statement, and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by our said attorney to any and
all amendments to said Registration Statement.
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>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------------ -------------------
<C> <S> <C>
/s/ DONALD T. VALENTINE
--------------------------------- Chairman of the Board June 20, 1996
Donald T. Valentine
/s/ ALEXANDRE A. BALKANSKI
--------------------------------- President, Chief Executive Officer and Director June 20, 1996
Alexandre A. Balkanski (PRINCIPAL EXECUTIVE OFFICER)
/s/ JAMES G. BURKE Vice President of Finance and Administration,
--------------------------------- Chief Financial Officer and Secretary June 20, 1996
James G. Burke (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
--------------------------------- Director
William O'Meara
/s/ BARYN FUTA
--------------------------------- Director June 21, 1996
Baryn Futa
/s/ T. J. RODGERS
--------------------------------- Director June 20, 1996
T. J. Rodgers
--------------------------------- Director
Gregorio Reyes
</TABLE>
II-6
<PAGE>
EXHIBIT 5.1
FORM OF LEGAL OPINION OF COUNSEL TO PARENT
August ____, 1996
DiviCom Inc.
1708 McCarthy Boulevard
Milpitas, CA 95035
Ladies and Gentlemen:
Reference is made to the Agreement and Plan of Reorganization dated May
28, 1996, as amended, among C-Cube Microsystems Inc. a Delaware corporation
("Parent"), C-Cube Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of Parent ("Merger Sub"), DiviCom Inc., a Delaware
corporation (the "Company"), and Sagem S.A., Sagem International and Tregor
Electronique S.A., each a company organized under the laws of France, and
Iena International S.A., a company organized under the laws of Luxembourg
(collectively, "Seller") (the "Reorganization Agreement"). The
Reorganization Agreement provides for the acquisition of the Company by
Parent (the "Merger") pursuant to a statutory merger of the Company with and
into Merger Sub on the terms and conditions set forth in the Reorganization
Agreement. This opinion is rendered to you pursuant to Section 6.2(d) of the
Reorganization Agreement, and all capitalized terms used herein have the
meanings defined for them in the Reorganization Agreement unless otherwise
defined herein.
We have acted as counsel for Parent in connection with the negotiation
of the Reorganization Agreement and the effectuation of the Merger. As such
counsel, we have made such legal and factual examinations and inquiries as we
have deemed advisable or necessary for the purposes of rendering this
opinion. In addition, we have examined originals or copies of documents,
corporate records and other writings which we consider relevant for the
purposes of this opinion. In such examination, we have assumed the
genuineness of all signatures on original documents, the conformity to
original documents of all copies submitted to us and the due execution and
delivery of all documents by any party other than Parent and Merger Sub where
due execution and delivery are a prerequisite to the effectiveness thereof.
As used in this opinion, the expression "to our knowledge" with reference
to matters of fact means that, after an inquiry of attorneys within our firm who
have performed legal services for Parent in connection with the Merger,
examination of documents made available to us by Parent and
<PAGE>
DiviCom Inc.
August __, 1996
Page 2
inquiries of officers of Parent, we find no reason to believe that the
opinions expressed herein are factually incorrect; but beyond that we have
made no independent factual investigation for the purpose of rendering this
opinion.
The opinions hereinafter expressed are subject to the following
qualifications:
(a) We express no opinion as to the effect of rules of law governing
specific performance, injunctive relief or other equitable remedies;
(b) We express no opinion as to the effect of applicable bankruptcy and
other similar laws affecting the rights of creditors generally;
(c) We express no opinion as to compliance with the antifraud
provisions of state and federal laws, rules and regulations concerning the
issuance of securities. To the extent this opinion addresses applicable
state securities laws other than those of the State of California, we have
not retained or relied upon opinions of counsel admitted to the bar of such
states, but rather have relied upon compilations of the securities laws of
such states contained in looseleaf reporting services currently available to
us;
(d) Except as specifically provided herein, we express no opinion as to
the enforceability of any of the agreements attached as exhibits to the
Reorganization Agreement;
(e) We are members of the Bar of the State of California and we are not
expressing any opinion as to any matter relating to laws of any jurisdiction
other than the Federal laws of the United States of America and the Delaware
General Corporation Law.
Based upon and subject to the foregoing, we are of the opinion that:
1. Each of Parent and Merger Sub is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its business as now being
conducted.
2. Each of Parent and Merger Sub had and has all requisite corporate
power and authority to enter into the Reorganization Agreement and the
Certificate of Merger and to consummate the transactions contemplated
thereby. The execution and delivery by Parent and Merger Sub of the
Reorganization Agreement and the Certificate of Merger and the consummation
of the transactions contemplated thereby have been duly authorized by all
necessary corporate action on the part of Parent and Merger Sub. The
Reorganization Agreement and the Certificate of Merger have been duly
executed and delivered by Parent and Merger Sub and constitute valid and
binding obligations of Company and Merger Sub, enforceable against each of
them in accordance with their respective terms.
<PAGE>
DiviCom Inc.
August __, 1996
Page 3
3. To our knowledge, no consent, approval, order or authorization of,
or registration, declaration or filing with, any Governmental Entity is
required by or with respect to Parent or Merger Sub in connection with the
execution and delivery of the Reorganization Agreement and the consummation
by Parent and Merger Sub of the transactions contemplated thereby, other than
(i) the filing of a premerger notification report by Parent and Merger Sub
under the HSR Act, (ii) those required to be made or obtained by Parent or
any of its affiliates as are required in connection with the transactions
contemplated by the Reorganization Agreement, (iii) the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware
and appropriate documents with the relevant authorities of other states in
which the Company is qualified to do business, and (iv) such other consents,
authorizations, filings, approvals and registrations which if not obtained or
made would not have a material adverse effect on Parent.
4. The shares of Parent Common Stock to be issued to the stockholders
of the Company pursuant to the Reorganization Agreement, when issued in the
manner contemplated by the Reorganization Agreement and the Registration
Statement referred to below, will be duly and validly authorized, fully paid,
non-assessable and free of preemptive rights or any right of first refusal.
The issuance of the Parent Common Stock has been registered under the
Securities Act and the rules and regulations thereunder.
5. The Registration Statement on Form S-4 (No. 333-6653) filed with
the SEC on June 24, 1996, as amended (the "Registration Statement"), became
effective under the Securities Act at ____ p.m. Eastern Daylight Time on August
_____, 1996. To our knowledge, no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose have been instituted or threatened under the Securities Act. The
Registration Statement complies as to form in all material respects with the
applicable rules and regulations of the SEC, it being understood that we
express no opinion whatsoever with respect to the accuracy or completeness of
the factual or financial matters disclosed in the Registration Statement or
the description of the business of Parent or the Company.
6. To our knowledge, no legal proceedings have been commenced with
respect to the Merger seeking an injunction of the consummation of the Merger
or the imposition of a material liability upon such consummation.
This opinion is solely for your benefit and is not to be made available
to or relied upon by any other person without our express prior written
consent.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
EXHIBIT 8.1
FORM OF TAX OPINION OF COUNSEL TO PARENT
August __, 1996
C-Cube Microsystems Inc.
1778 McCarthy Blvd.
Milpitas, California 95035
Ladies and Gentlemen:
We have acted as counsel for C-Cube Microsystems Inc., a Delaware
corporation ("C-Cube") in connection with the preparation and execution of
the Agreement and Plan of Reorganization dated as of May __, 1996, as amended
on July 25, 1996, and July 26, 1996 (the "Reorganization Agreement") by and
among C-Cube, C-Cube Acquisition Corp., a wholly-owned subsidiary of C-Cube
incorporated in Delaware ("Merger Sub"), and DiviCom Inc., a Delaware
corporation ("DiviCom"). Pursuant to the Reorganization Agreement, DiviCom
will merge with and into Merger Sub (the "Merger"). Unless otherwise
defined, capitalized terms referred to herein have the meanings set forth in
the Reorganization Agreement. All section references, unless otherwise
indicated, are to the Internal Revenue Code of 1986, as amended (the "Code").
You have requested our opinion regarding certain United States federal
income tax consequences of the Merger. In delivering this opinion, we have
reviewed and relied upon the facts, statements, descriptions and
representations set forth in the Reorganization Agreement (including
Exhibits) and such other documents pertaining to the Merger as we have deemed
necessary or appropriate. We have also relied upon certificates of officers
of C-Cube and DiviCom included as exhibits to the Reorganization Agreement
(the "Officers' Certificates") and representations made by certain
shareholders of DiviCom in "Affiliate Agreements."
In connection with rendering this opinion, we have also assumed (without
any independent investigation) that:
1. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and there has
been (or will be by the Effective Time) due execution and delivery of all
documents where due execution and delivery are prerequisites to effectiveness
thereof;
2. Any statement made in any of the documents referred to herein,"to
the best of the knowledge" of any person or party is correct without such
qualification;
3. All statements, descriptions and representations contained in any
of the documents referred to herein or otherwise made to us are true and
correct in all material respects and no actions have been (or will be) taken
which are inconsistent with such representations;
4. The Merger will be reported by C-Cube and DiviCom on their
respective federal income tax returns in a manner consistent with the opinion
set forth below;
<PAGE>
C-Cube Microsystems Inc.
August __, 1996
Page 2
5. The Merger will be consummated pursuant to the Reorganization
Agreement and will be effective under the law of the State of Delaware;
6. At the Effective Time of the Merger, the aggregate fair market
value of the C-Cube Common Stock to be received in the Merger will be no less
than forty-five percent (45%) of the aggregate fair market value of all of
the capital stock of DiviCom outstanding immediately prior to the Merger.
7. There is no plan or intention on the part of the stockholders of
DiviCom to sell, exchange, or otherwise dispose of a number of shares of
C-Cube Common Stock to be received in the Merger that would reduce the
DiviCom stockholders' ownership of C-Cube Common Stock to a number of shares
having an aggregate fair market value, as of the Effective Time, of less than
forty-five percent (45%) of the aggregate fair market value of all of the
capital stock of DiviCom outstanding immediately prior to the consummation of
the Merger. Shares of the DiviCom capital stock (a) with respect to which
dissenters' rights are exercised in the Merger, (b) which are exchanged for
cash in lieu of fractional shares of C-Cube Common Stock or (c) which are
sold, redeemed or disposed of in a transaction that is in contemplation of or
related to the Merger, shall be considered shares of capital stock of DiviCom
which are exchanged in the Merger for shares of C-Cube Common Stock which are
then disposed of pursuant to a plan; and
8. DiviCom will have received an opinion of Fenwick & West
substantially identical in form and substance to this opinion.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we
are of the opinion that, if the Merger is consummated in accordance with the
Reorganization Agreement (and without any waiver, breach or amendment of any
of the provisions thereof) and the statements set forth in the Officers'
Certificates and the Affiliate Agreements are true and correct as of the
Effective Time, then for federal income tax purposes:
(a) The Merger will constitute a reorganization within the meaning
of Section 368(a) of the Code.
(b) The discussion entitled "Certain Federal Income Tax
Considerations" in the Prospectus constituting a part of the Registration
Statement, insofar as it related to statements of law or legal conclusions,
states the opinion of this firm.
This opinion represents and is based upon our best judgment regarding
the application of federal income tax laws arising under the Code, existing
judicial decisions, administrative regulations and published rulings and
procedures. Our opinion is not binding upon the Internal Revenue Service or
the courts, and there is no assurance that the Internal Revenue Service will
not successfully assert a contrary position. Furthermore, no assurance can
be given that future legislative, judicial or administrative changes,
<PAGE>
C-Cube Microsystems Inc.
August __, 1996
Page 3
on either a prospective or retroactive basis, would not adversely affect the
accuracy of the conclusions stated herein. Nevertheless, we undertake no
responsibility to advise you of any new developments in the application or
interpretation of the federal income tax laws occurring subsequent to the
date of this opinion.
This opinion addresses only the classification of the Merger as a
reorganization under Section 368(a) of the Code, and does not address any
other federal, state, local or foreign tax consequences that may result from
the Merger or any other transaction (including any transaction undertaken in
connection with the Merger).
No opinion is expressed as to any transaction other than the Merger as
described in the Reorganization Agreement or to any transaction whatsoever,
including the Merger, if all the transactions described in the Reorganization
Agreement are not consummated in accordance with the terms of such
Reorganization Agreement and without waiver or breach of any material
provision thereof or if all of the representations, warranties, statements
and assumptions upon which we relied are not true and accurate at all
relevant times. In the event any one of the statements, representations,
warranties or assumptions upon which we have relied to issue this opinion is
incorrect, our opinion might be adversely affected and may not be relied upon.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement filed on Form S-4 with the Securities and Exchange
Commission and we further consent to all references to us in the Registration
Statement.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
August XX, 1996
DiviCom Inc.
1708 McCarthy Boulevard
Milpitas, California 95035
Ladies and Gentlemen:
We have acted as counsel for DiviCom Inc., a Delaware corporation
("DiviCom") in connection with the preparation and execution of the Agreement
and Plan of Reorganization dated as of May 28, 1996, as amended, (the
"Reorganization Agreement") by and among C-Cube Microsystems Inc., a
Delaware corporation ("C-Cube"), C-Cube Acquisition Corp., a wholly-owned
subsidiary of C-Cube incorporated in Delaware ("Merger Sub"), and DiviCom.
Pursuant to the Reorganization Agreement, DiviCom will merge with and into
Merger Sub (the "Merger"). Unless otherwise defined, capitalized terms
referred to herein have the meanings set forth in the Reorganization
Agreement. All sections references, unless otherwise indicated, are to the
Internal Revenue Code of 1986, as amended (the "Code").
You have requested our opinion regarding certain United States federal
income tax consequences of the Merger. In delivering this opinion, we have
reviewed and relied upon the facts, statements, descriptions and
representations set forth in the Reorganization Agreement (including
Exhibits) and such other documents pertaining to the Merger as we have deemed
necessary or appropriate. We have also relied upon certificates of officers
of C-Cube and DiviCom delivered pursuant to the Reorganization Agreement (the
"Officers' Certificates") and representations made by certain shareholders of
DiviCom in "Affiliate Agreements."
In connection with rendering this opinion, we have also assumed (without
any independent investigation) that:
1. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and there has
been (or will be by the Effective Time) due execution and delivery of all
documents where due execution and delivery are prerequisites to effectiveness
thereof;
2. Any statement made in any of the documents referred to herein, "to the
best of the knowledge" of any person or party is correct without such
qualification;
<PAGE>
DiviCom Inc.
August XX, 1996
Page 2
3. All statements, descriptions and representations contained in any of
the documents referred to herein or otherwise made to us are true and correct
in all material respects and no actions have been (or will be) taken which
are inconsistent with such representations;
4. The Merger will be reported by C-Cube and DiviCom on their respective
federal income tax returns in a manner consistent with the opinion set forth
below;
5. The Merger will be consummated pursuant to the Reorganization
Agreement and will be effective under the law of the State of Delaware;
6. At the Effective time of the Merger, the aggregate fair market value
of the C-Cube Common Stock to be received in the Merger will be no less than
forty-five percent (45%) of the aggregate fair market value of all of the
capital stock of DiviCom outstanding immediately prior to the Merger;
7. There is no plan or intention on the part of the stockholders of
DiviCom to sell, exchange, or otherwise dispose of a number of shares of
C-Cube Common Stock to be received in the Merger that would reduce the
DiviCom stockholders' ownership of C-Cube Common Stock to a number of shares
having an aggregate fair market value, as of the Effective Time, of less than
forty-five percent (45%) of the aggregate fair market value of all of the
capital stock of DiviCom outstanding immediately prior to the consummation of
the Merger. Shares of the DiviCom capital stock (a) with respect to which
dissenters' rights are exercised in the Merger, (b) which are exchanged for
cash in lieu of fractional shares of C-Cube Common Stock or (c) which are
sold, redeemed or disposed of in a transaction that is in contemplation of or
related to the Merger, shall be considered shares of capital stock of DiviCom
which are exchanged in the Merger for shares of C-Cube Common Stock which are
then disposed of pursuant to a plan; and
8. C-Cube will have received an opinion of Wilson, Sonsini, Goodrich &
Rosati substantially identical in form and substance to this opinion.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we
are of the opinion that, if the Merger is consummated in accordance with the
Reorganization Agreement (and without any waiver, breach or amendment of any
of the provisions thereof) and the statements set forth in the Officers'
Certificates and the Affiliate Agreements are true and correct as of the
Effective Time, then for federal income tax purposes:
(a) the Merger will qualify as a "reorganization" as defined in Section
368(a) of the Code.
(b) the discussion entitled "Certain Federal Income Tax Considerations"
in the Prospectus constituting a part of the Registration Statement, insofar
as it relates to statements of law or legal conclusions states the opinion of
this firm.
<PAGE>
DiviCom Inc.
August XX, 1996
Page 3
This opinion represents and is based upon our best judgment regarding the
application of federal income tax laws arising under the Code, existing
judicial decisions, administrative regulations and published rulings and
procedures. Our opinion is not binding upon the Internal Revenue Service or
the courts, and there is no assurance that the Internal Revenue Service will
not successfully assert a contrary position. Furthermore, no assurance can
be given that future legislative, judicial or administrative changes, on
either a prospective or retroactive basis, would not adversely affect the
accuracy of the conclusions stated herein. Nevertheless, we undertake no
responsibility to advise you of any new developments in the application or
interpretation of the federal income tax laws occurring subsequent to the
date of this opinion.
This opinion addresses only the classification of the Merger as a
reorganization under Section 368(a) of the Code, and does not address any
other federal, state, local or foreign tax consequences that may result from
the Merger or any other transaction (including any transaction undertaken in
connection with the Merger).
No opinion is expressed as to any transaction other than the Merger as
described in the Reorganization Agreement or to any transaction whatsoever,
including the Merger, if all the transactions described in the Reorganization
Agreement are not consummated in accordance with the terms of such
Reorganization Agreement and without waiver or breach of any material
provision thereof or if all of the representations, warranties, statements
and assumptions upon which we relied are not true and accurate at all
relevant times. In the event any one of the statements, representations,
warranties or assumptions upon which we have relied to issue this opinion is
incorrect, our opinion might be adversely affected and may not be relied upon.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement filed on Form S-4 with the Securities and Exchange
Commission and we further consent to all references to us in the Registration
Statement.
Very truly yours,
FENWICK & WEST LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
We hereby consent to the filing of our legal opinion as an exhibit to the
Registration Statement including all amendments thereto filed on Form S-4 with
the Securities and Exchange Commission and we further consent to all references
to us in the Registration Statement including all amendments thereto.
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
Palo Alto, CA
August 7, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-6653 of C-Cube Microsystems Inc. on Form S-4 of our reports dated January
17, 1996, appearing in the Prospectus/Proxy Statement, which is part of this
Registration Statement and to the reference to us under the heading "Experts" in
such Prospectus/Proxy Statement.
DELOITTE & TOUCHE LLP
San Jose, California
August 6, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of
our report dated February 12, 1996, except for Note 10, as to which the date is
May 7, 1996 on our audits of the financial statements of DiviCom, Inc. We also
consent to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
San Jose, California
August 6, 1996
<PAGE>
DIVICOM INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON AUGUST 28, 1996
The undersigned stockholder of DIVICOM INC. ("DiviCom"), a Delaware
corporation, hereby acknowledges receipt of the Notice of Special Meeting of
Stockholders and accompanying Prospectus/Proxy Statement, each dated August 8,
1996, and hereby appoints Nolan Daines and Thomas Lookabaugh and each of them
acting individually, as proxies and attorneys-in-fact, with full power to each
of substitution, on behalf and in the name of the undersigned, to represent the
undersigned at the Special Meeting of Stockholders of DiviCom, to be held on
Wednesday, August 28, 1996 at 9:00 a.m., local time at DiviCom's facility at
1585 Barber Lane, Milpitas, California 95035 and any adjournment(s) thereof, and
to vote all shares of Common Stock and Preferred Stock which the undersigned
would be entitled to vote if then and there personally present, as follows:
1. To approve and adopt the Agreement and Plan of Reorganization, dated as of
May 28, 1996, as amended, among C-Cube Microsystems Inc., its wholly-owned
subsidiary, C-Cube Acquisition Corp. ("Merger Sub"), DiviCom and certain
principal stockholders providing for the merger of DiviCom with Merger Sub
(the "Merger").
/ / FOR / / AGAINST / / ABSTAIN
With respect to my vested DiviCom Common Stock, I elect to receive
solely C-Cube Common Stock determined by the exchange ratio for
Unvested DiviCom Common Stock.
/ / FOR / / AGAINST
2. To approve and adopt an amendment of Article IV(A)(1)(c) of DiviCom's
Certificate of Incorporation to provide that an acquisition shall not be
treated as a liquidation entitling the holders of the DiviCom Preferred
Stock to their liquidation preference.
/ / FOR / / AGAINST / / ABSTAIN
3. To approve and adopt an amendment of DiviCom's Certificate of Incorporation
to delete Article IV(A)(4) which provides the right to the holders of the
Series A Preferred Stock to purchase a significant portion of such
technology for $1.00, and other DiviCom assets at fair market value.
/ / FOR / / AGAINST / / ABSTAIN
4. To approve and adopt an amendment of DiviCom's Certificate of Incorporation
to delete Article V which provides a preemptive right to the holders of more
than 5% of DiviCom's outstanding shares to acqure a pro rata share of any
new securities offered by DiviCom.
/ / FOR / / AGAINST / / ABSTAIN
THIS PROXY WILL BE VOTED AS DIRECTED AND AS TO OTHER MATTERS THE UNDERSIGNED
HEREBY CONFERS DISCRETIONARY AUTHORITY UPON SAID PROXIES. IF NO DIRECTION IS
INDICATED, IT WILL BE VOTED FOR THE APPROVAL AND ADOPTION OF THE AGREEMENT AND
PLAN OF REORGANIZATION AND THE TRANSACTIONS CONTEMPLATED THEREIN, AS WELL AS FOR
THE APPROVAL AND ADOPTION OF THE AMENDMENTS TO THE CERTIFICATE OF INCORPORATION
OF DIVICOM. IF NO ELECTION IS MADE WITH RESPECT TO CONSIDERATION TO BE RECEIVED
FOR VESTED DIVICOM COMMON STOCK BY THE SPECIAL MEETING, THE HOLDER OF VESTED
DIVICOM COMMON SHARES WILL RECEIVE CASH AND C-CUBE COMMON STOCK DETERMINED BY
THE VESTED EXCHANGE RATIO.
<PAGE>
Both of such attorneys-in-fact or substitutes (if both are present and
acting at said meeting or any adjournment(s) thereof, or, if only one shall be
present and acting, then that one) shall have and may exercise all of the powers
of said attorneys-in-fact hereunder.
The undersigned hereby revokes any prior proxy to vote said shares
heretofore given.
Dated: ---------------------------------- , 1996
--------------------------------------------------
Signature
--------------------------------------------------
Signature
NOTE: This Proxy should be marked, dated, signed
by the stockholder(s) exactly as his or her name
appears hereon, and returned promptly in the
enclosed envelope. Persons signing in a fiduciary
capacity should so indicate. If shares are held by
joint tenants or as community property, both
should sign.
PLEASE VOTE, SIGN, DATE AND PROMPTLY RETURN THIS PROXY
USING THE ENCLOSED ENVELOPE.
